Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Hi all and welcome to this call. Happy to see so many of you here. My name is Hanna-Maria Heikkinen. I'm in charge of the Investor Relations. Since the beginning of this year, Wartsila has 2 segments, Marine and Energy and today the focus is on Marine. Roger Holm has worked with Wartsila since '97. And I just calculated that it equals 108 quarters. In our Capital Market Day, November, you said that this is the most exciting time of your career than you have seen many times. So today we are pleased to hear what are the key opportunities in Marine and how Wartsila will capitalize those opportunities. On the call, we have also our CFO, Arjen Berends and Arjen has been in the company for 36 years. I calculated that it equals 144 quarters and meaning that you have seen so many very many cycles. So at the end of this presentation, there is opportunity to ask questions, but Roger, please start.

Thank you, Hanna-Maria and good afternoon, also from my side. And I have to say this is the first time I have been calculating in quarters how many, many quarters I have been in Wartsila, but first time for everything. So thank you for calculating that. So today, we will talk about decarbonization and how decarbonization drives profitable growth in Marine. And if we -- thank you. If we move to the next page here. We are in a growth mode. So we are growing both in sales and profitability as well as in order intake. And one note to make here because we will come back to a few similar slides during the presentation that all these numbers are not comparable due to the organizational changes. So now the last 2 are here related to the Marine as we have started to report according to since 1st of January this year. Today, I will structure the presentation in 3 parts. First, a bit about the market, then about equipment and last about services and then we will wrap up in the end and then come back to Q&A as well. So first, starting from the market point of view. So the marine market is growing and decarbonization is transforming the industry in a way that at least during my quarters in Wartsila, I have never seen before. So it's a massive transformation. And I will come back to why is this a massive transformation. On top of that, we see also that our core segments will grow significantly. So from that point of view, we are in a good place from a market positioning point of view. If I start from the regulations and let's open up a bit where we are. And on the left-hand side, you have here the global IMO-related regulations. And on the right-hand side, you have EU-related regulations. And I will talk a bit about both of these. If we start from the global regulations. July last year, IMO upgraded their targets for 2050, so which is now to get to net zero by 2050. So we have a significant increase in the speed of the decarbonization journey on a global scale. Then when we talk about 2050, many might say that sounds like a long time. In shipping, this is the same as one vessel lifetime. Already today, ships are being ordered that will operate in 2050. So the fact that you will take the whole global shipping to net zero during one vessel lifetime, that's a massive transformation. To put it in perspective, it would be the same as we would have every single passenger car on -- around the whole globe that will be net zero in 12 years' time. That's the same transformation that shipping is targeting to do here, which means that we need to talk about both what happens from a newbuild perspective as well as what will happen from a retrofit side. And then what is also important to note here when you look at it is that you will have a lot of tools to get here, but you will not be able to make it without going for green fuels. To get to these numbers, you need to get to green fuels. Then what is still pending for the IMO regulations is to be more accurate than what we are today, what does this mean from a financial perspective? I'll come back to that one. I'll talk a bit about the EU regulations first because EU regulations are very clear what it means from a financial impact point of view. So when you look at the EU regulations now with the EPS cost coming into play and then later on the [ fully ] maritime penalty, it means that we will see a growing cost for using fossil fuels within EU waters. And this is around 15% of the global shipping is moving in EU waters. And this means that if you operate in EU waters by 2030, you would have a double fuel bill and we estimate that around 2035, you would have a level playing field between fossil fuels and green fuels, meaning that in EU waters by that time, you would have the same fuel cost for both of these. And if you look at the curve after 2035, you will also see that the random on fossil fuels after 2035, you will see a significant increase in your cost levels, which will also mean that we will start to see over this time period clearly a push for using more green fuels within the EU waters. EU has also put in place a way to make sure that if you are not paying for the [ ETS ] and you are not meeting the targets, there will be penalties to pay. And this will be monitored by the different member states. Also the ones not following the regulations will be published. So that means also that it will be public information if you are not meeting the regulations. And on top of that, if you do it for too long time, you will be banned to enter into EU ports. So from an EU perspective, you will have very clear rules of what -- and consequences as well if you are not meeting the EU regulations. This means that already today, as a shipowner, you can with certain estimations of course, you can make estimates on your impact of your fuel choices. What we expect now if I move back to the left-hand side and talk about IMO again, what we expect during 2025 is that IMO will clarify more the rules about what this will also mean from a financial perspective. And if that is happening in '25, these are most likely enforced in 2027. So IMO is moving in the same direction as EU is where we will see more clear connections between the money and the emission reductions. What you have today on IMO level is from a CII index perspective is that if you have the lowest classes of CII in the carbon intensity index, you need to make a plan how to bring back your vessel on track for this index and then you can continue operating. This is, of course, also driving the carbon reduction, but it's less clear from a money perspective. But also on a global scale, we already see today that you have, for example, a lot of vessel charterers that will only go with certain CII index vessels for their charter. So it's already today driving a lot of decisions in shipping. So this is the framework that we are talking about and I want to emphasize again what I said earlier, all of this happening in one vessel lifetime is a massive transformation for the global marine industry. And what does this then mean from a fuel perspective? As we have already said earlier, we see 2 green fuel developments coming in and that's methanol and ammonia. And the reason for this is that it's a good compromise from the space need that we see in the vessel. So if you, on the left-hand side, have the more or less standard fuels today, the low sulfur fuel oil, when you go to methanol, you will have a gross tank size factor of 1.7 and for ammonia 3.9x. And these are still acceptable numbers. If you go to hydrogen, it's a much more complex fuel to use in maritime. And when you go to compressed hydrogen here, close to 20x the space is too much. You will not be able to run vessels with that much space needed for the fuel. So this is the reason why we see that methanol and ammonia are the other likely fuels to be used. And methanol ramp up we already see happening and ammonia is clearly following. At the same time, we go from a fairly single fuel environment to a multi-fuel environment. And these are the discussions we have with every customers that we meet that what will be the fuels of the global maritime environment. And our comment is that we are moving in the multi-fuel environment for sure. Then if we look at the alternative fuels uptake to be noted here that alternative fuels includes, in this case, also LNG. So even if it's a fossil fuel, we see LNG playing a significant role for quite some time to come. It's still an improvement to the other conventional fuels. So it's a step in the right direction, even if it's not the final solution in the long run. And when you look at it, we see that if you look at the total order book today and around half of the order book today, looking at gross tonnage of ships is already going for alternative fuels. LNG still being the biggest one, but we also see clear uptake on methanol already and we estimate that ammonia will follow. And for example, on the containership side, 60% of containership contracted in '23, '24 are set to run on methanol. So here we see a segment already that is clearly making big steps forward on the green fuel utilization. Our focus is on the most high-value performance-driven segments. And here, we have lined up a bit of typical offerings. Of course, you will see big deviations here depending on vessels, but to generalize a bit what we are offering for these key segments. So here, you can see cruise ferry offshore being very strong segments for us. You'll see a bit the potential offering that we have from a cruise ship around EUR 15 million up to EUR 40 million offering on a newbuild. But this also depends a lot on the size of the cruise ships ranging from small to very large cruise ships. And then you see the corresponding numbers for other segments. We have, in the past, talked also about quite a lot about LNG carriers. On the right-hand side, you can see under merchant, you see a standard LNG carrier, which is, in our case, then can be equipped with our auxiliary engines, but we have launched a new concept, what we call hybrid electric, where you can have an engine room configuration based on 4-stroke main engines instead of a 2-stroke main engine and some auxiliary engines. And this is receiving a lot of positive interest in the market. And in that kind of configuration, our business potential will be clearly higher as a hybrid electric LNG carrier versus a standard 2-stroke, 4-stroke LNG carrier. If you then look at the key segments for us and this is now based on Clarkson forecast from -- latest from March this year. So newbuild ordering of 4-stroke medium-speed main engines in megawatts, we see a clear growth and a 13% CAGR during this decade on this segment. And this is really our sweet spot when we talk about 4-stroke medium-speed main engines. You can also see on the right-hand side, you see the market shares we have 85% in cruise, 65% in ferries and 55% in offshore. So the fact that these segments are estimated to grow during this decade are very positive for our business development. On top of that, if we take one of our key segments being cruise, this is from CLIA estimates. The global cruise capacity is forecasted to grow over 10% from '24 to '28, if we look at berths of cruise capacity. At the same time, we have seen cruise travel reached 107% of 2019 levels. And this means that it has developed much better than general tourism. And we are seeing also forecasts on the cruise side, where we'll see continuous growth on passengers during the coming 5 years as well. And we have also seen now the large cruise ships coming back from a ordering perspective. We have had some years during and after COVID of no cruise ship orders. But now recently, we started to see again new orders coming back. And this is, of course, thanks to good development of the cruise business for our customers. If I then move to the equipment side. And here, decarbonization is definitely strengthening our market position as we want to lead in both the fuel flexibility as well as the fuel efficiency. What is critical now to remember is both on the equipment side as well as on the service side, we need to rethink the focus on efficiency in the world we are going into because in any scenario, the fuel bill will increase clearly and it's a significant increase, which means that the value of efficiency, both from a newbuild perspective as well as on the service side is going to increase a lot. We will see payback of, for example, retrofits that will be significantly shorter than what it has been before. And we will see new solutions coming in because it's worth to invest in them, which would not have been the case in the past due to the increased fuel cost. And this is really positive for Wartsila, because we have always had the efficiency as a core for us when developing both new engines, but also when we look at the retrofits and the service side. So our equipment order intake has been developing positively. And our alternative fuel capable engines account now for more than 60% of megawatts ordered in 2023. So this is very much in line with what we showed as a market development, but also for us, the megawatt developments going for the alternative fuels are developing in the same way. When we look at the latest development on the sales side, this is more a timing issue as we have in all project businesses, some quarters are a bit higher, some are a bit lower. But in general, we are on a positive trend also from a sales perspective. And as we can see already, we are growing clearly also on the order intake side. And this is based a lot on our fuel flexibility, fuel efficiency and above all the fuel experience that we have. So we have the most comprehensive offering for alternative fuels in the industry. We have also the most experience. If we start from LNG, we have more than 15 years of experience in the field in marine and even longer on land-based applications. And what you see here on the left-hand side, when we say LNG and diesel, these are all then either dual or multi-fuel engines, so you can run either on LNG or a diesel with these engines. And this gives also the flexibility. And this is the benefit in the transformation we are talking about happening during one vessel lifetime that you have the engine technology being very flexible. You can have an engine that is capable of running on several fuels, but you can also, in a fairly easy way retrofit the engine to another fuel and that gives the flexibility to do something during the lifetime of the vessel. The key here is more that you have tank space, et cetera, on the vessel side. It's not necessarily the engine itself. Methanol has grown clearly faster than what we could have expected a few years back. We have a long experience of methanol. First retrofit will be with standalone already in 2015. And then we launched the new 32 methanol in 2022 and we have had the first deliveries in 2023. And this has been really a growing development much faster than what we would have thought originally. Very much thanks to the container segment, but also we have seen in other segments with the 32 as main engines where we have also seen good developments. Many customers is buying methanol installation also partly as an insurance, they might not have access to green methanol today, but they see this as a fairly cheap insurance for the future that you might run on existing fuels today and switch to methanol at a later stage. But that means you have an installation that is ready for green fuel usage. Ammonia, we launched the first engine, the 25 engine last year. We expect the first delivery of this one to take place early next year. Here, the interest has also been quite significant and we are working on several deals at the moment, both on the retrofit as well as on the newbuild side. And we expect the ammonia also to pick up over the coming years, clearly based on the development we see so far. Hydrogen, we are developing as well more than for land-based use. As I said earlier, we don't see hydrogen playing a significant role in shipping, but we will have that capability as well and we will have the technology concept for hydrogen ready in 2025. And looking a bit about on our market shares, we see the value as well of being the frontrunner on future fuels and alternative fuels. On the left-hand side, you have the medium-speed main engines, which is really our sweet spot where we are the market leader with around 45% market share. But we see when you go to the outer -- sorry, the inner circle, where we look at the alternative fuel market shares, we have a clearly higher market shares when we go into this part. And this we already see today when we talk to customers that you have to consider in your choices that who will be there in the long term, who will have the best technology long term and be there when I most probably have to upgrade my installation during the lifetime from an existing fuel to a future fuel. So this will also more and more coming into play when making decisions. But how do you make the selection that is also maintaining the asset value of your ship. And then we see the same on the auxiliary engine market share side. This is more -- a much more fragmented market where we have a lower market share compared to main engines, but also here, we see the same trend that when we go into alternative fuels, there we have a higher market share also in this segment. Then to put a few concrete examples on the table when we talk about these things. We picked out a few here. One is CMA CGM has chosen Wartsila for auxiliary engines for the first containerships of methanol, so for 6 vessels built at Dalian shipbuilding. These will be delivered the vessels 2025. So here, we talk about the 32 methanol auxiliary engines. On the right-hand side, you will see Stena's RoRo vessel will be powered by 32 methanol main engines and we will -- you also see here Wartsila propulsion systems and navigation as well as an integrated hybrid system in these vessels. In addition to the fuels, I wanted to lift up as well carbon capture, which is in the development phase. But we see that carbon capture and storage can be a significant market also during the coming decade. And this is also a way to drive the decarbonization journey and will support as well one of the challenges that there is today that there is not going to be enough of the green fuels. So instead, you use this with carbon-based fuels and then you capture it on board. We have had good developments in our facility in Norway and we will do the first full-scale installation in Q4 this year and the targeted commercial release for carbon capture into the market is 2025. Then in addition to this, we have also a strong position when we talk about hybrid installations. So even from a full electric, if we start from the left-hand side, we will power the Buquebus new ferry, largest ever built battery electric ship, built in Incat Tasmania, delivery '25. So here, it is with our fully integrated battery electric power system, 40 megawatt-hour battery modules, including the Wartsila water jets as well. And on the right-hand side, you see 3 vessels for Aasen Shipping with our 25 engines plus an integrated hybrid system as well as our propulsion system. So these are good examples of what we can do in the hybrid and electrical space as well. Then if we go to services. So what's driving our development here is, first of all, moving up the service value ladder. But at the same time, we also see retrofit activities that are driven by the decarbonization and that is driving our service business growth. As I said earlier, we will see different calculations than before when we look at the payback due to the fact that the fuel cost will increase and this means that the interest for different retrofit solutions will clearly grow. So here in the service business, we are growing supported by a solid installed base, uptake of agreements and merging the car-driven retrofit markets and we see growth in all of these parts. If I start with the installed base, depending on the lifetime of the vessel, but the up to 30 years of revenues can be generated from the installed base. And we have seen an installed base growth in 4-stroke engines, 9% since 2019. And this is also, in addition, driven by the fact that we are actually having more buying customers also since 2019. So we have also seen a development that customers want to partner up with OEM provider even more than before. In addition to that, the more complex environment that we see today, first to move to LNG as a fuel, but in the future also to move to different green fuels, the complexity is also driving our value proposition on the agreement side. So what we are doing and planning together with our customers is how we can support them even more through the agreement business. So starting from a lower level, fairly simple agreements going up through the value ladder until we come to guaranteed asset performance agreements where we use our AI-based tools, our detailed knowledge about our offering and the marine market and can then promise to our customers, depending on their needs, it can be uptime. It can be fuel consumptions. And I see more and more as well going towards a mission-driven performance agreements as well in the future. And installations under agreement has been growing 38% since 2019 and we have a healthy around 90% renewal rate. And we have also seen growth in the more performance-based agreement setups, which is positive. We see a movement on the value ladder. And the more we go to the right-hand side of the ladder and to the bottom hand side here of this picture, the guaranteed asset performance agreements, the more value we can give to the customers depending on what they have as a need. So the growth has continued here and we expect this to continue as well in the more multi-fuel environment that we are going to. If I then go to the retrofit side, tightening regulation and increasing fuel and emission costs will boost the demand for retrofits. If you look at the left-hand side here, estimate here is that 53% of the fleet is not CII-compliant. What this will mean is many different things. One of the simplest thing can be that you just reduce speed to become more CII-compliant, but we will also start to see more and more developments of different retrofit solutions. I picked some examples here of what we are doing. And -- but to start with, we can start from the Clarkson estimate that the total investments in retrofit are estimated to be EUR 15 billion to EUR 20 billion over the next decade. This is from Clarkson. And this is driven by the fuel cost increase and the efficiency needs that needs to be made. If I look at what we have done here is if I start from propulsion efficiency upgrades, here, you look at different propulsion upgrades, can be fairly small ones up to even a propeller retrofit. And these are in the range of EUR 20,000 up to EUR 1 million per ship set. And here, we have more than 700 vessels overly contracted over actually several years. Then alternative fuel conversions, here we come to engine retrofits to run on alternative fuels on top of conventional diesel. Here, we have more than 10 vessels contracted depending a bit of what type of vessels we talk about, this can be typically EUR 3 million to EUR 8 million per ship set scope deals. Then we have also one thing that no one else in the industry have done. This is what is the radical power derating. So it's a 2-stroke power output reduction and I will come back soon with an example, customer case, where you actually reduce the board size of the cylinder and you more or less rebuild engine on board the vessel and you have a significant reduction of fuel consumption and emission and actually an engine that is better fitting to the speed need of the vessels that we have today. We have more than 30 vessels contracted for this and in average, these are EUR 5 million to EUR 8 million range per ship set. The last one example then is electrification projects. So this can be electrical system upgrades can be hybrid, can be shaft generators. And the driver here is to improve the OpEx and through that, also the emission reductions. 30-plus vessels delivered in general, these are EUR 3 million to EUR 8 million per ship set. So these are the typical examples of what we can do for the customer on the retrofit side. On top of this, we have, of course, also, for example, digital solutions when we talk about route optimization, et cetera. So this is not full complete lease but gives a good example range of what can be provided to a customer when they look at their fleet. And what we are doing quite a lot today is that we are evaluating either vessels or fleets together with the customers to suggest that what do we suggest to be done and when because we come back to what is critical in this environment that if you are too fast and overinvest, you might not do a good business. But also if you are too slow, you might not do a good business. You might actually get out of business if you are too slow because if you go back to the EU regulation and the curve for the cost of fossil fuels that you could see in the beginning of the presentation, that might mean that you are actually in having big challenges if you are too late. So the key will be how do you optimize the speed of decarbonization with the financial feasibility. And this is where we can help the customer. And our unique offering is that we have a much broader offering than any of our competitors. So it means that we can look at a broad range of solutions for our customers and optimize the speed, optimize the speed of the decarbonization journey that they have. And this is our key value when we talk to customers around the globe. So then 2 examples here on the service side. If I start on the left-hand side with CDWE, we signed an agreement to maximize uptime of a new wind farm installation vessel. What is special here is that thanks to our agreement and our propulsion maintenance, this vessel can operate with a 7.5 years dry-docking interval instead of the normal 5 years. And this has a massive value for the customer. So the fact that this can be done is generating a lot of value for the customer and the perfect selection criteria for signing an agreement with Wartsila in this case. On the right-hand side, I'll go back to what I mentioned on the previous page, Maersk have ordered the 2-stroke radical derating for 8 of their container vessels. So where we take down the board size from 96 to 72 centimeters on the large 2-stroke engines. And you will get up to 10% -- 15% efficiency savings on the fuel by doing this. And this is seen as a good way to reduce greenhouse gas emissions, extend CII compliance with several years and through that, the vessel lifestyle in a sustainable way. So to summarize, we have very strong growth opportunities in marine based on -- first of all, the technology leadership to being best in fuel flexibility, future fuel and also efficiency is a key element here. And we are moving up the service value ladder together with our customers. And on top of that, we see a favorable vessel contracting mix coming up during the coming years. So the position we have when we talk to our customers, we have moved from being an equipment supplier in the marine industry to being at the centerpiece of the discussions with our customers related to their strategy. How do we support them in something that is very much core of the strategy, i.e., the decarbonization journey? And here, we have a toolbox. We have the know-how and we have the products that can help our customers to do this transformation, which means that the discussions we are having are much more strategic than what it was, for example, 5 years ago. So with the support from a good development in the market, we see the decarbonization journey continuing. We see also strong growth opportunities going forward, both in the equipment side and in the service side. So if I stop here and then we can come back to questions.

Thank you, Roger. So now there's plenty of time for questions. So in the case you have a question, please use "raise your hand" functionality. Or in the case you have problems to use this function, you can put those questions to me by Meme. The first question comes from Sven Weier.

First one is, Roger, you talked about market share, how it is high in alternative fuels. Now I guess, is that also including LNG? Or is it based on smaller numbers at the moment? Are you expecting this stay at this elevated level? How long do you think is the kind of edge you have on the technology side? That's the first one.

Yes, it's including LNG as well. So the numbers you see on alternative fuels includes LNG. We haven't published what it is on if you look at methanol or other alternative fuels, but you see the same trend there as well. We see a consolidation in the market due to the fuel happening. You need to invest quite a lot to stay ahead on the green fuel. So we expect this consolidation to continue. So there will be less players in the market. And we at least intend to stay ahead of the game to bring in the best new fuel engines in the market. But of course, the more as we go, we will see followers coming in also on this. So it will be a competitive space over time. But I think we will have -- the frontrunners will have for quite some time, will have a strong leading point here.

And is it then also fair to assume that this is margin-accretive, at least in the first years as long as you have this lead?

Yes, I would say, in general, when we go into future fuel engines since the market competition is slightly less, we will also see some improvements on the margin levels, yes.

The other question I had, if I may, was just on the double-digit growth you talked about at the beginning in the core segments. Just to have the numbers right here, is that kind of a double-digit growth you expect annually or over a certain period of time? And what do you define as the core segments than within marine?

Yes. If we go to the -- I assume you mean in the slide where...

I think it was much at the beginning, yes.

So we talk about the same things here. This is -- what we talk about here is the core 4-stroke, medium-speed main engine segment where you have the bulk is really in cruise, ferries offshore and also, to some extent, merchant and others. And here, you see a level of '23, where we are around 2,500 megawatts up to then coming to a level above 5,000 megawatts then from '27 and onward. So this -- to be very specific, this is the key segments where we talk about 4-stroke being the main engine, which is our sweet spot.

So it applies to the market. But you have not disclosed how much engines are as a percentage of your equipment revenue?

No, no, that we haven't done.

Next question comes from Panu Laitinmaki.

Yes, I have a few questions. Firstly, starting from this IMO regulation, CII and then the ships that are noncompliant. The numbers are quite big. I mean, more than half noncompliant according to your presentation. So what will they do in practice? Is it that they do a slow steaming and they can move it like in the future? Or like -- or are they forced to do some retrofits? Or how does it kind of play out?

Yes, the big volumes are -- and that has all been happening. So the big volumes are doing slow steaming. And there, what we have done during the last few years as well, you can do some smaller upgrades to the automation system to make vessels more efficient and slower speed as well. So those are the small elements you can do. And what happens with the CII is that if you have the 2 lowest meaning the DnD categories, then you need to make an action plan how to get it back to higher levels on CII. And this means that in some cases, then you might do some propulsion efficiency upgrades, for example, or I think fuel retrofits are, you could say, that's maybe the last 3 [ sort ] you come into. And I don't think we are there yet in general. You do different efficiency upgrades that you can do on a vessel and then you will get some more years. And then we will, of course, see newer ships coming in with better efficiency. So it's a development journey that we will see that will accelerate over the decade.

Okay. Then a second question on the payback time. So if the customer is not compliant or even if they are not, but the well cost is going up and then they might do a retrofit. So what kind of payback times are we talking about for things that you provide for them?

It depends quite a lot, but I would give the general guidance in that sense that depending a bit on the vessel age, of course, on what status they are, I think usually what customers expect is maximum 3 years payback from an upgrade that they would do. I think that's a good rule of thumb.

And just finally, if I may. What is the profitability of different segments? So if you take like EUR 100 million in cruise ship orders, is that better for you to take the EUR 100 million in some other ship type of orders, if we talk about like main engines?

We will not comment on different segment parts.

But is there a difference?

I would comment more from the angle to say that what I said earlier in the presentation that the sweet spot is our 4-stroke medium-speed main engines. That's our sweet spot. And I think that's a good comment to you.

Next question comes from Johan Eliason.

I was just wondering a little bit, I mean you seem off to a good start into this fuel transition now to the future fuels here. But obviously, you have a history with the transition to dual fuel in 2-stroke engines back a decade ago. So any lessons learned from that experience and what you are doing better this time around?

Well, actually, if we look at the long-term market for us, the transformation to dual fuel, meaning in that case to LNG and diesel as those being dual fuel, that happened before on the 4-stroke side before it was developed on the 2-stroke side. So we have actually longer experience on the 4-stroke side to do that. And I would say that in general, the benefit is this long, long experience we have on different type of fuels. Is it then LNG? So starting from gas fuels to liquid fuels to biofuels to all kind of different fuels that we have been testing over the years. And the fact that we have been able to do it. Sometimes the land-based energy market has been more advanced on something and sometimes the marine market, the fact that we use the same engines has a big benefit for us. So all this experience is, of course, playing in our hands now when we talk about developing this. So we have a lot of experience of these type of fuels going forward. And that we are utilizing now when we develop the green fuels.

One of the issues, I think, was for the 2 strokes that you had a different technology, a little bit from the [ 1 MA ] proposed. Are there any significant differences in the technologies that you offer in these new fuels today vis-a-vis what others are trying to push out there? Or is it just the same existing technologies, but you do it not equally fast, so to say?

Okay. You refer to the lower pressure, high pressure on the 2-stroke.

Yes.

Now I understand we are coming from. So yes, of course, when we go into methanol, ammonia, we have -- like we have done in the past for other fuels as well. We use a lot of efforts on the efficiency. Sometimes you can see announcements in the market that we run on this fuel. The next question is really how efficient is it? Because one thing is you can run on a fuel. The second thing is how do you run on the fuel. And we know that efficiency in the long run is really paying off. So it's too early to say yet, especially on ammonia side that how will the different technologies develop in the market and will there be big differences. But we also know it's not that easy to develop ammonia as a fuel, which is to our benefit with the experience that we have. So for sure, I think we will see different performance levels going forward as well among the green fuels. But we are in early days still, so still talking about developments here.

Next question comes from Max Yates. We cannot hear you. I believe that you are muted. Okay. It seems like it's working -- let's wait a moment with Max and then Anders Idborg.

So just a -- just get a better understand. When I look at the merchant part of your mix, could you just update us on which vessel types that you have a strong position in terms of both main engine and auxiliary engines?

Yes. There are -- if we take a few areas here on the merchant side. If I start with LNG carriers there as they are so today, they are 2-stroke main engine and 4-stroke auxiliary engines. And there we provide dual fuel engines then as auxiliary engines then to LNG carriers. So that's one segment. Then, of course, we -- as mentioned earlier, we are targeting to change this segment towards more hybrid electric where we would have 4-stroke main engines and this is in the process. Then when we talk container vessels, we have seen clearly growing shares for us in that market, thanks to the methanol boom we have seen on the container vessels where we are then providing the main engines -- sorry, the auxiliary engines. These are 2-stroke main engines, so these are provided by others. Then in the merchant segment, especially if you go to smaller merchants like chemical tankers, so similar, you can have 4-stroke Magna engines as well. So we see in merchant segments, you can see how both auxiliary engines and main engines, but in the big picture, the big volumes are here auxiliary engines. And then to some extent, you have main engines on smaller vessels. So these are a few examples on the content of that.

Okay. Great. And another just to get an update on a subject that was maybe more talked about a few years ago in terms of the legislative environment in China. I mean there was some projections and there was a certain degree of localization being discussed in terms of marine components. Could you just update us if things have been stable basically in terms of what kind of production setup you have to be able to counter any change in that?

As such, there has not been any changes. I would say we are well-positioned in China. We produce quite a lot of our engines for the Chinese market are produced in our factories in China. We have propulsion factories as well in China. So we are well positioned for the biggest shipyard market in the world because we still have around half of the vessels are built in China and we are well positioned for that. But as such, we haven't seen any specific developments from a [ protectionism ] point of view on that. So it has been same as before.

Okay. Good. But in terms of capacity expansions or whatever that you need to do now, do you think those will be primarily directed to China?

Not only. I think we see growth in both our European factories as well as in our Chinese factories and the volumes have been going up in both. And I think we are well set up with our factory infrastructure to cater for that. So I think we are in a good position to handle that.

Next question comes from Sean McLoughlin.

Just a couple of questions. But more broadly, just thinking about the policy backdrop, how will noncompliance be enforced? And how much is this actually maybe holding back customers from making investments into either new engines or retrofits? And secondly, given some of the, I suppose, the toxicity issues around ammonia and methanol, I mean how are you -- what is your role in helping customers kind of get comfortable with usage of these fuels? And well, how comfortable are customers with these new fields?

If I start from the second question first, like in everything else, when you come in with new fuels, it's something that takes time. And as you say, ammonia, for example, is toxic. So we need to be very careful on how to handle ammonia as a fuel. It also needs to come with regulation development and making sure that we train the people that are working with these technologies. So what we are doing, we work very closely with the classification societies that are developing the regulations and the requirements as well. And very much based on our, for example, land-based testing of ammonia, we have learned a lot on how to then put ammonia on a vessel. We are also developing training courses for both internal for our engineers, field service engineers, but also for customers, how to deal with this new fuel vessels. So it's also part of our training offering going to be and more increasing during the future. So it's something that we are very closely collaborating with all stakeholders in the industry. Even with port authorities, et cetera, we collaborate to see that how can we create a safe bunkering infrastructure, et cetera. So many angles of that one. Then the back to question, if I understood it correctly, on the enforcement of the regulation and referring to this picture. I think as I said, it's so much clearer today on the EU side of these regulations and that's driving a lot what the customers are deciding to do. And to be clear, when we talk about EU regulations, these are not driving then only items for EU-owned vessels. It's driving decisions on vessels operating to EU ports because this will impact everyone falling in EU port or operating in EU water. So I have talked to Chinese customers, for example, where they have clearly said that the reason they want to do something now to develop their vessels is related to the EU regulations because they will operate into EU waters. Then we come back to this on the IMO side, that the fact that it's less connected to the money per se is, of course, reducing maybe activities a bit. But the fact that you need to stay in certain CII levels is already driving items quite a lot. And the expectation that we will see more clear rules on this from 2025 decisions will continue to drive this forward. I don't see that IMO came back off of this anyway because to get to net zero in 2050 needs to be very clear from a regulation point of view. And our understanding is that this is clearly on the work to drive it in that direction.

Next question comes from Mikael Doepel.

Firstly, on the carbon capture system, so we talked very briefly about that, but maybe you could elaborate a bit on how you see the competitive environment currently there in that market, obviously developing who's there? How are you positioned in your view?

Yes. I think we are -- what we will see is a development of quite a lot of different competitors over time, but I think we are well on time with our development for the market. It will be existing scrubber suppliers. It will be even some start-ups, potentially even some yard in-house supplies that we will see in this area. And we expect to be among the earlier entry points into this market with our technology and capability.

Okay. And just as a follow-up to that question, I mean, we talked previously a bit about the infrastructure at the ports being one kind of hurdle here as well, what to do with the carbon at the end of the day. What's the latest developments on that side of the things, how is that proceeding now?

Yes, it's like you said, it's still in development. And there are activities to develop these in different places around the globe. But it's definitely like you say, something that needs to continue to be developed for this to have a global infrastructure. So it's creating -- when I talk to customers, it's definitely one of the top interest areas is the carbon capture technology, especially from a retrofit perspective, because this will give a longer -- potentially a longer -- clearly longer lifetime for your vessel if they do it. So from a, let's say, easiness in the big picture point of view, many will see this as a good solution for -- especially for 2-stroke vessels to get along the lifetime for the vessels. But the infrastructure needs to continue to develop. We are only in early phases there.

Okay. And then just finally, briefly, I think you had a slide where you talked about these various retrofit opportunities and you mentioned Clarkson having any expectations of the market size of EUR 15 billion to EUR 20 billion over the next decade or so. Currently, can you give us some indication of what your market share now in terms of the overall retrofit market?

And that's a question that's half impossible to answer because it depends very much with what type of retrofits, et cetera. So we will not give any indication on that. We have many different types of retrofits and it trades from very small different applications to major retrofits like the radical derating of fuel conversions.

And you said that you have widest portfolio, right?

We have the widest portfolio in the industry also on the retrofit side. And this goes back to what I said earlier, the fact that you with the customer can't talk about different solutions, it's not the only tool we have in the toolbox that we come and talk about. We can look at it in a totally different way, but actually does make sense over the timeline for the vessel or for the fleet. And that brings a lot of value in the discussions with the customers.

The next question comes from Antti Kansanen.

I wanted to follow-up on the carbon capture side, a couple of things. First, how would the regulation treat carbon capture as a solutions? Is there any concern that it would somehow kind of slow the uptake on new fuels? Or is it just mainly a retrofit solution that kind of would solve a situation where new fuels wouldn't be applicable anyways? And then the second one is on the technical side. Are there some limitation on which type of vessels or engine types can be installed a carbon capture system going forward?

Now on the rules, like for the green fuels development overall on IMO, there are still decisions to be made, how they handle the whole well-to-take arrangements for both the fuels and also how to treat the carbon capture. I don't expect any challenges from that part, but there are still developments and the regulations to be taken there to be fully clear on what it means on a global scale. Then from vessels that are applicable, this is applicable for all vessels. So there is no restrictions from a vessel type point of view. So this can be done both from a 4-stroke as well as a 2-stroke application point of view. Of course, looking at the global fleet, the biggest opportunity will be on 2-stroke vessels going forward for sure, especially on the retrofit side.

And I was just thinking from a customer perspective, what would be kind of the biggest drawback of investing into this technology? It seems like a no-brainer for an existing fleet to actually do so. Are there any kind of issues that the ship owner would face?

No, I think it's more the infrastructure around it to be able to take care of the capture carbon, but assuming that that will be in place. I agree with you, I think in the environment where we are now today, where the -- one of the biggest challenges we have is lack of green fuel availability. It's not the technology itself, but we will need to see a big, big uptake of green fuel availability in the market. I think this is one tool in the toolbox to decarbonize. And we don't see -- I don't look at this as a competition among technical solutions. We will need every single technical solution to decarbonize shipping one vessel lifetime. Some will do it with green fuel. Some will do it with carbon capture. And as you say, I see carbon capture as a very strong candidate for many retrofit solutions.

And who would be responsible on investing into the storage side of it? Whose business would that be?

I don't think we know that fully yet. Of course, the ship owner, it's a bit same as for the green fuel availability today because the traditional fuel providers are not necessarily the ones providing the green fuel. So we will see changes in the global supply chain of different things around this. And I see the same happening also on the carbon side that we will see new entrants, new players that make a business out of this, so to say. So it's a bit of a challenge that we see today. Now I'm referring it more from a green fuel perspective. But for a ship owner that wants to use green fuels, he can't go to the standard providers today, so to say. So you might need to find new partners in the way that you operate in the future.

Okay. And then a second topic that I would -- I didn't fully understand was that on the equipment side, I mean you mentioned that decarbonization is strengthening your position and strengthening your market share, which I understand are quite strong in your core segments to begin with. So I wanted to understand a little bit better, is this because of your technical capabilities on the alternative engine fuels? Is it your aftermarket capabilities? And if it's a wider portfolio, what would be the concrete examples of that outside of the engine offering?

I would say it starts with our technical capabilities on the different fuel flexibility on our engines. That's a key element when you choose an engine provider today. And the fact that it's not only that you might choose a dual fuel diesel LNG engine today. But then assuming you need to upgrade during the vessel lifetime your vessel for a different fuel, you are also as a customer then thinking, okay, if I now choose Wartsila, will Wartsila be there 10 years from now when I need to upgrade or 50 years from now to a fuel that I don't necessarily know today, is it methanol or is it something else? And that starts to impact decision-making already today because if you choose the wrong supplier that is there 10 years from now or it's not there with the right technology, it will have an impact on your vessel value. So that's clearly one. Then what you said, I think our global service network also impacts decision-making because when we have, by far, the most covering global service network in our industry, it's a value regardless of which fuel you choose today, but I would claim even more when you go to more complex technical solutions because the fact that we are around the globe in all places that you need as a value already when you select your new engine.