Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Wartsila's theme call. My name is Maija Hongas, and I'm a Senior Manager at Wartsila's Investor Relations team. Typically, we have Hanna-Maria Heikkinen, the Head of IR here in the stage, but unfortunately, she was unable to join us today, so I will host the meeting instead of her. On Monday, we announced the conclusion of the strategic review of our energy storage and optimization business. And as a consequence, we announced that the energy business will be divided in 2, and we also announced new financial targets. Today, our President and CEO, Hakan Agnevall; and our CFO, Arjen Berends, will discuss these outcomes in more detailed level. I would like to remind you that at the end of the presentation, we have reserved time for questions. But let's get forward. Please, Hakan, the stage is yours.

Thanks a lot. Thank you. And a warm welcome, everybody, to this extraordinary theme call. And it's, of course, about the conclusion of the strategic review of Energy Storage, but it's also about our new financial targets. So to sum it up, we are concluding the strategic review, setting new financial targets. We made the decision to keep and develop Energy Storage. We assessed the option to accelerate profitable growth and value creation for the shareholders. That was actually the starting point for the whole strategic review. During the review, we have done assessments of different type of potential ownership structures. However, at the end of the day, when we have looked at all different type of alternatives to grow and ownership, et cetera, the conclusion has been that the best way to create shareholder value for Wartsila shareholders is to keep and develop the business. There are ample growth opportunities, and we're going to focus our strategy on selective profitable growth. Capital-light business, that is also a positive one, which is capable to grow with limited additional capital needs. As we have taken the decision to keep and develop Energy Storage, we have also decided to separate energy into 2 independent reporting segments. And energy in the future will be basically the energy power plants business and, of course, the related life cycle services. And then we move from Energy Storage and optimization to simply energy storage, which will be our utility scale battery Energy Storage business and its related life cycle service business. If you compare energy, the new Energy and Energy Storage, they face very different market dynamics, different business profiles. And we have learned through the years that there are limited operational synergies between Energy and Energy Storage. We are also really glad to appoint a new leader for Energy Storage, Tamara de Gruyter, who has been a member of Board of Management, but will continue also to be a member of the Board of Management in her new role. We are also thanking Andy for his great services with energy storage. As we now transition the business, we also do a transition of leadership. Now the third one, and I would say a very important one, is also that we are setting new financial targets. Marine & Energy continue to improve operational and financial performance, which is, of course, very encouraging. Marine & Energy have similar growth and profitability trajectories with strong operational synergies. So we are setting the new financial targets for Marine & Energy combined as a sum. Then for Energy Storage, as it becomes a separate reporting segment, it will also have its own financial targets. And on the group level, we continue with group targets for dividend and gearing and the targets remain the same. So let's look at a little bit at the numbers, Arjen, the new financial targets.

Thank you, Hakan. So last Monday, as said, we introduced new financial targets. Key driver behind that is the improved profitability of Marine & Energy combined and also to better reflect the new organizational structure based on, let's say, different market dynamics, but also different business profiles, as Hakan just mentioned, because Energy & Marine combined versus Energy Storage are very different in those elements. If we look at the old financial targets, I'm sure you remember, 5% organic growth, 12% operating margin, gearing below 0.5 and at least 50% of EPS paid out as dividend. If we look at the new financial targets, which are here on the screen, basically, Marine & Energy combined, 5% annual organic growth and 14% operating margin. And for Energy Storage, low double-digit annual organic growth and 3% to 5% operating margin as a target. The group financial targets for gearing and dividend, they remain the same. Key driver for lifting the Marine & Energy combined target on profitability is the strong profitability improvement that we have seen over the past years. It's only 2 years back that, let's say, the numbers were quite different. Let's say, clearly, on the Marine & Energy combined result, what we now see as 12.7% and 12.8%, both were actually well below 10% and storage was loss-making. Last year, we realized, let's say, these numbers, and we believe this is just a milestone in the journey. We believe we can do more than this, and that's also why we lifted the targets. Back to you, Hakan.

Thank you Arjen. If we take a step back and if we talk about Wartsila overall, we continue with the same purpose. It's all about enabling sustainable societies through innovation in technology and services. And we have continued to have our 2 strategic themes, the transform, which is all about leveraging the decarbonization journey, the transformation to create growth opportunities and the perform, which is the continuous improvement of our financial profitability or financial performance. And if we look at Marine & Energy combined, it's very much a steady hand on the tiller. We continue to execute our earlier communicated strategies with a clear path to reach the updated financial targets. And if we look at the transform theme, we have the industry-leading technology portfolio. We are a market leader in 4-stroke medium-speed main engines. We are market leader in energy power plants and marine hybrid solutions. We are also a technology leader in the future green fuels, and we are a pioneer in marine, carbon capture and storage. Services has certainly been a great journey for us the last years, 25% growth in services since 2022. And going out of 2024, we also had an all-time high order book for Marine & Energy combined at EUR 5.7 billion. If we look at the perform, Services continues to be a major contributor to our continued profitability improvement. For Marine & Energy combined, now services represents actually more than 60% of our net sales for 2024. We are moving up. We continue to move up the service value ladder and our book-to-bill continues to be well above 1. We continue the strong focus on the quality of our revenues. We have improved our new build order margins. And Energy also continued its journey to focus on equipment deliveries instead of EPC. Now with growing volumes, we start also to see improving capacity utilization. We will continue to address footprint and cost structure wherever and whenever needed. On the positive side is also that we have -- we see limited additional CapEx need to facilitate the further profitable growth. And we have really revitalized our work on continuous improvement, and there is a lot of things going on in Wartsila right now. And all this together, we have a very clear path to reach our new financial targets, 5% annual organic growth and 14% operating margin for Marine & Energy combined. Now a special little deep dive on the services side. So as I said, for Marine & Energy combined, services was more than 60% of our net sales in 2024, and we have a solid foundation for future growth. Come back to this graph, we like this one, book-to-bill on the Y-axis, you see the time element. The big -- and you see the 1, which is basically book-to-bill above 1 and below 1. You see that we are well above line -- well above 1 with a thick line, which is the total. But you also see that in all the 4 service disciplines, spare parts, field service, service agreement and retrofits, all of them are well above 1. We have also wanted to visualize it our service growth in this way because you see some elements that go a little bit up and down. They are a little bit cyclical quarter-on-quarter, and sometimes that raises questions from your side. So that's why we are visualizing. But you can see the total is well above 1. EUR 3.2 billion of service net sales in 2024, future growth opportunities as 30% of our installed base is covered by some kind of service agreement. So of course, the theoretical limit is 100%. We will not get to 100%, but we have still growth opportunities clearly. And also the 90%, which we are really happy and proud about, we have a 90% renewal rate of our service agreement. And that for me is one of the ultimate proof points that we are creating value for our customers because otherwise, they wouldn't renew the service contracts. Now in Marine & Energy combined, I mean, the decarbonization and services, they are the key drivers in achieving our financial targets. So this is how we are trying to visualize our bridges for net sales growth and later for profitability. So the drivers of net sales growth, it is really about marine new build, driven by decarbonization, where we see the decarbonization driving fuel efficiency improvements and fleet renewals. And it's really of uptake of solutions ready for sustainable fuels. Fuel efficiency, fuel flexibility are really the key going forward. We continue to move up the service value ladder. We talked about that a lot, and we do see growth in all service revenue streams. Energy. Energy new build is driven both by balancing and baseload. I mean the narrative of balancing remains the same. There is a gradual shift to renewables and then balancing power is needed to keep the power system stable. We will continue to focus on offering equipment rather than EPC. That if you look on one single project, it decreases the revenues, but we still continue to grow the top line with more projects, but with a better risk profile and therefore, better profitability. And now for baseload, we do see data centers as a potential exciting opportunity going forward. If we do a similar walk-through on the key drivers of improving our profitability, once again, moving up the service value ladder in Marine and it's a major driver of profitability. Marine new build driven by decarb also. Energy new build by balancing and baseload both. Improving capacity utilization. We do see now with increasing volumes and with the rationalization that we have done of our manufacturing footprint, we see improving capacity utilization. And as I mentioned before, we have revitalized our work on continuous improvement, and there is a lot of exciting things going on in Wartsila these days. Now so let's shift gears. So that was Marine & Energy combined. Now let's focus a bit more on Energy Storage. And let's start where were we in 2024. That was kind of the starting point. So EUR 800 million in sales, over EUR 1 billion in order intake and 4% operating margin. We have continued to be profitable. Order book above EUR 1 billion and annual recurring revenues of about -- a little bit more than EUR 20 million and a capital-light business with positive cash flow, which makes it possible to continue to grow the business with limited additional capital allocation. Now if we look -- start at the market, we see our target market growing with 13% per annum from now until 2030. And here, it's very important to highlight. This is our target market because we continue to have a selective approach. So here, we are really focusing on -- the numbers here are focusing on our target markets. Key takeaways from the strategic review, the need for energy storage systems has grown rapidly and is expected to further increase driven by the energy transition. Energy storage is critical to meeting the need for energy flexibility. It's one very important tool in the balancing toolbox, so to say. We have both. We have the thermal and battery storage, and they complement each other. Wartsila, our energy storage current key markets, they include Australia, U.K. and the U.S. And now what we will do going forward is that we will have -- do selective market expansion and targeting new geographies. Wartsila, we remain among the top 5 players, but we do see new players coming into the system integration market and the competition in the market is increasing. So we will continue to focus on selective profitable growth. If we look at the transform and growing, the selective approach is focusing really on our strength. And one of our key strengths is project execution, executing on time with the right quality and with happy customers. They really feel that they can trust us in delivering on our equipment because the equipment -- with the equipment, our customers can create a lot of value. We have the industry-leading solution performance. We have the industry-leading thermal safety. I mean, when you really look at how our installations work in reality, in real life, how they keep up the nominal capacity, how they support the power system, the customer feedback that we are getting is really strong. GEMS, great software and software platform and the algorithms. We really will use them. We have used them. We will continue to leverage them for optimized energy management, both for single installation fleets and for microgrids. Multisourcing, we have implemented for key components. So we have the ability to provide a product not made in China. Growth in recurring revenues, primarily through a long-term service agreement and also a leverage in GEMS in providing those services. And then also in Energy Storage, continuous improvement. We have a modularized hardware and software platform, and we continue to improve that LEGO box to create shareholder value. Now if we look at our profitability, strong focus on the quality of our revenues, supported by our project execution skills. The team is solid, performing, managing the projects with positive rather than negative deviations, really strong. We have a strong risk management in place, focusing on equipment delivery. We have -- last couple of years, we have not entered into EPC in storage either. And we now want to do a selective market expansion to new geographies. And we have also been clear that since we are doing this, the related investments, that is expected to burden storage profitability short-term, so to say. Also helping us on our profitability journey is, of course, to diversify the supply base. Similar to Marine & Energy combined, addressing the cost structure wherever and whenever needed, capital-light business with a positive cash flow, good to kind of fuel the further growth. We also highlight, and we have seen that, for instance, Q3 last year, this is a project business with rather big projects. And that means that depending on the periodization of projects, we will have volatility also going forward, both in revenues and operating margin. But having said all that, we think that we can -- we are really on a solid path to deliver on low double-digit annual organic growth and the 3% to 5% operating margin target. So these are the strategic priorities of the Energy Storage management team going forward to reach the financial targets. So it's to capture profitable growth in selected target markets. It's to continuously drive product cost reduction through hardware and software development, capture growth in recurring revenues. We can do more there. Excel in our multisourcing strategy and also strengthen our regional supply chain, continuously improve our project execution. I think this is -- has developed one of our strengths, but we can always continue this journey. And then, of course, the foundation of it all people, we need to attract, hire and retain high-performing talent. So with that, we also wanted to make a quick update on portfolio business. Arjen?

Thank you. We have and we will continue to actively manage our business portfolio. As you have for sure, let's say, noticed in the past years through portfolio business, we have divested many, many business units actually. Some examples, Funa with Entertainment Systems and more recently, for example, American Hydro, but also others. Also recently, we signed, let's say, an agreement to divest Automation navigation and Control Systems, also abbreviation ANCS, which we have used many times. Subject to regulatory approvals, we expect this to close in the second half -- sorry, in the second quarter of 2025. The Tamara De Gruyter will move to Energy Storage, heading that business. Bernd Bertram, which is currently running also a Propulsion business in Marine, will also head, let's say, Portfolio business, reporting to Hakan, but not being part of the Board of Management. We still have, let's say, remaining businesses there, which are, let's say, in the process of being divested. Three ones left, Marine Electrical Systems, Gas Solutions and Water and Waste. Hakan to you for the final closure.

Yes. So basically, we have a very strong commitment and a clear path to reach our updated financial targets. I think now during the last years, we have shown that we set targets that are ambitious, but they are realistic. And then we execute and we achieve them over a few years. And this is clearly our ambition also for these targets. So Marine & Energy combined, 5% annual growth and 14% operating margin. And that's the combination. It's not Marine & Energy single. It's the combination, the Marine plus energy. That's the target is for Marine plus energy. And then we have separate financial targets for energy storage with low double-digit annual organic growth and 3% to 5% operating margin. And on group level, we keep the gearing target of less than 0.5% and the dividend of earning target of more than 50%. So that's the summary. And now let's open up for questions.

Thank you, Arjen. And as Hakan mentioned, now it's time for questions. And I'd like to remind you that if you are not able to ask questions via the conference call line, you can send your question for me as an e-mail [email protected]. But let's start with the questions from the conference call line. Thank you.

The next question comes from Daniela Costa from Goldman Sachs.

I have 3 questions. They're quick, hopefully. So -- but the first one -- I'll ask them one at a time. The first one is just to -- I mean, you're clear that like the Marine & Energy margin target is higher, 14%, and you've explained why. But then when we look at integrated for the group, the implied seems to be lower than the 12% you've had before. Is it like your fundamental view on the profitability storage changed throughout this process? Or are we just looking at the math the wrong way, but maybe I'll start there.

So I would say if you look at -- and we haven't done and we will not do it now going forward, a combination of this and give a combined target. We will not give an equivalent to the previous 12%. But if you look at these 2 -- targets for the 2 legs, so to say, I would say that there is higher ambition in this than in the previous. I mean, Arjen, we have made some simulations.

Clearly, let's say -- if you go, let's say, back to 2021 when we set our previous targets, let's say, 5% and 12% targets. And if you -- of course, we need to compare scope on scope. But if you would simulate the same scope as we have today for Marine & Energy combined as well as Energy Storage and you remember, we had Voyage business at that time, we had Marine Systems at that time. So a lot of, let's say, movements to be included. But if you would simulate, let's say, from that moment on, let's say, the 5% growth target with 12% operating margin for the whole business or, let's say, these new targets that are now on the screen, actually, the outcome of the new target is higher. So it's an ambitious target.

Okay. And then in terms of like the process, can you kind of clarify, was there ever a sales process being considered? Or it was just more of all of an internal process of thinking about the pros and cons? Just curious on that.

So -- around the process, so the starting point for the process was really we've grown the business to EUR 1 billion. It's profitable on the very bottom line. How do we continue to fuel the growth? Because we saw and we still see ample growth opportunities, but we wanted to have this dialogue with the Board. As part of that review, and we said that already, then we will look at different ownership alternatives. And this is what we have done. So we have been in discussions with external parties around this. When all the analysis has been done, when everything has been evaluated, we have arrived to that the best path to create shareholder value for Wartsila shareholders is to continue to develop the business and continue to grow it. We will not go into details with whom we have been having those dialogues. I think we are under NDA, et cetera, et cetera. So -- but there have been an external dialogue, but the conclusion is very clear. Now we continue to own and develop the business.

Got it. And then finally, just you mentioned some investment burdens on storage in the short term in the release. Can you elaborate a little bit more about what exactly those are? How should we think about like modeling them?

So basically, you can think about it -- I mean we will enter certain new markets. So that is one of the outcome of the strategic reviews. I will not go into the detail which markets. It's in Europe, in Asia. I'll leave it at that. When we go into a market, there is additional costs related to those market entrants. And those costs will burden the profitability short term.

But you expect to remain profitable?

Yes, absolutely. And in LTM, we certainly expect to remain profitable. So the caveat there, Daniela, is, of course, we underline that this is a project business. The projects are rather big. So it's lumpy. And because of this lumpiness, revenue -- order intake revenues and also profitability can vary. But -- I mean, if you look at the last 12 months, yes, it's going to certainly be profitable.

The next question comes from Sven Weier from UBS.

I have a few follow-up questions on Daniela's. Let me just follow up on the last question regarding storage. I mean when you say you make investments, are we thinking also about price investments, right, that you see more price pressure, you're taking share on price? Or what kind of investments do you have in mind when you say investment? That's the first one.

So -- I mean, it's primarily around staffing, building up. Sometimes you need to be a little bit more aggressive on -- when you want to come into a market, sometimes you don't. I think that is part of normal business. So I think there are all different elements. It's both, you could say, our operational, but also our aggressiveness in the market.

And also the R&D investment needs to stay on a good level.

But it's not that these new markets are more competitive in general than those that you are focusing on right now.

So I mean, clearly, the markets that we will enter are markets where we see customers and segments that are connected to our core strengths. And as we mentioned, the core strength is about project execution, it's about thermal stability, the value that we deliver to our customers. And that is not the lowest price in the market, just to be clear on that. So we will not change our strategy in the new markets we enter. It's the same value prop, but taking it into new geographies.

Okay. The second follow-up is also coming back to storage. I mean, I'm not expecting you to talk about who you spoke to, but I still wonder if the Trump election was a pivotal moment in the process and that after the election, it was simply no longer possible to find any buyer in this environment? Is that maybe also fair to say?

I won't go in -- as I said earlier, I won't go into the details who we talked to. No, I wouldn't say that the new administration in the U.S. has played a major part of this dynamic.

But could we -- I mean, could we look at the new divisional structure also in a way that you reserve flexibility in the long term because obviously, with a separate business, it would also be easier to do the same again?

So -- I mean now -- for now, we have decided we're going to keep storage. We're going to keep on investing it and growing it. That's a clear message. Then at the same time, as we say this, I mean, we do regularly -- I mean, annually, we do strategic reviews or strategic assessment, what is the potential of all our different businesses and different business units. So this type of regular review, storage will, of course, be part of that also going forward. But for now, it's -- clearly the strategic review is over. Now we want to grow and want to invest and keep the business.

Final follow-up, if I may, is just on -- also on the margin target because, I mean, the 12% was always an all-in target, right, including storage, including portfolio. Now, of course, portfolio is no longer part of any of those margin targets and that alone has a certain accretive effect. I mean, if I do the simulation, I would get to like 12.5% group target long term, but that would not be an increase because it would be excluding portfolio, which would have always been like a 50 basis points accretion. And so is it not fair to say that basically -- the overall profitability targets are basically unchanged?

No, I would not say so. Like I explained to Daniela when she put the question on, if you go back in time, I think on the scope that we are looking at here, it's clearly, let's say, an improvement. Then, of course, let's say, when you go to portfolio business, there has been a lot of in and out. We also, in 2021, had Voyage, piece of Voyage went into Portfolio business, which is now basically, let's say, recently sold as ANCS. And also Marine Systems, let's say, piece has moved into portfolio business. And all these businesses at that time or at least most of them were loss-making or very small profit businesses. So I would say it's not so easy to compare, let's say, the scope 1 on 1. But let's say, if you do the simulation from 2021 onwards on this scope, what we have here on the screen, clearly, it's an ambitious target.

The next question comes from Antti Kansanen from SEB.

I only have one, and it's regarding the 14% EBIT margin target. And I just wanted to know how should we conceptually think about it? I mean sales mix has a very big role on your margins, obviously. And if we look at last year, the mix was very favorable. So should we think about the 14%? I mean, you don't have any firm year or a time frame to achieve it. So would we look at the 14% as a level that you expect to fluctuate around depending on the mix? Or is it more a few year ambition to step up to that level and then let's see what happens next?

I would say it's a little bit the latter. I mean we continue the same approach as 12% was quite aspirational in 2021. We were clearly far away from 12% back then. It's the same journey. I mean we set the target of 14%. We have a clear path to get there. Once we get there, then let's evaluate that situation. Then also -- and also just to complement that, and we all -- I know I'm saying the obvious, but I think we should not forget that. We are living in a situation with a lot of geopolitical uncertainty. And of course, today, and we have also been in our guidance, we have been very clear that to make forward-looking statements, et cetera, in this environment, it's harder than ever, so to say. But what we know now and what we see, we have a solid path to reach our financial targets, our new financial targets in a few years.

Okay. And maybe I'll follow up in the sense that, obviously, if we look at the 4 businesses within the power plant business, the marine equipment and then the respective aftermarket businesses, can you rank in terms of like-for-like profit improvements, where do you kind of see the most potential? I mean, obviously, if the mix improves, then you're moving closer to the targets. But from a like-for-like basis, which of the businesses has the most potential?

I mean if you look at profit margin, I think you can always look a little bit how we rank things in our waterfall slide there. So you see it starts with services. We have Marine new build and Energy new build. So I think you get a little bit of indication. We won't go further into the details than that.

I'm not guiding on mix.

[Operator Instructions].

Okay. We have received a couple of questions as e-mail. Part of this, we have already discussed, but I tried to pick up the part that we maybe haven't. So you have commented that you are entering selected new countries in storage. How do you assess the competitive situation in these markets? And can you also quantify the related investments to which you have alluded?

So no, we will not quantify the investments. I think that we will keep -- we don't want to give out the competition, how much we are investing. And also -- that's also why we are not talking about which country specifically, so to say. So I think there's some competitive concerns around that, but the first part of your question?

How do you assess the competitive situation?

Yes. No. So -- I mean, in general, the competitive situation is increasing. I mean there are more players stepping into the integrated space. Now when we expand our selective profitable growth, as I said, we want to expand in segments with customers and in countries where our value prop actually is appreciated. And that is -- because we are not the lowest CapEx supplier, let's be frank about that. Our proposition is about project execution excellence, which we have well proven by now, also the robustness of our solution in nominal capacity, in thermal stability, et cetera. And also some of our core customer tells us that you have the industry-leading software. So we are targeting those, but competition in general is increasing clearly.

And the second question is that you commented that the Energy, Marine targets are a target for those 2 combined, rather than each of those 2 separately. Marine appeared to feature slightly higher up in the elements in your sales and margin bridges on the slide overall. Is there upside to the stated targets in Marine with Energy perhaps not performing at quite the same level?

So here, I will come back to the mix, sorry about that. But it's -- when you look at Marine & Energy, I mean, why do we keep them -- why do we talk about the combination? I mean, first, the similarities. Both Marine & Energy, they have similar growth trajectories and similar profitability trajectories. They have strong -- very strong operational synergies. I mean, the industrial system, including manufacturing, sourcing, R&D, it's really, really integrated. Also on the services side, it's really integrated. In some countries, Energy is leading the service team; in some countries, Marine. So operationally, it's very, very integrated. Now Then, of course, the Marine & Energy cycles, they go a little bit differently. And this is also why we will -- we want to keep it combined, so to say. We don't want to separate it out. So there will be some time periods when Marine is doing a little bit better and Energy a little bit worse or vice versa. As I said before, both Marine & Energy are project related. And therefore, there is a little bit of cyclicality, so to say.

And then Energy storage is targeting 3 to 5 percentage margin with limited CapEx is currently free cash flow positive. Can you give us a return on capital employed indication of the business that would justify retaining it compared to Marine & Energy?

No, we will not open that up. Let's say, a capital employed is typically a parameter that we follow on group level, and it's not separated exactly, let's say, like the businesses. That's also why we don't report it in quarterly results. So no, we will not open that up.

Can you elaborate on what the recurring revenue is in energy storage? I thought there were no real service opportunities.

There are -- I mean, we are already now having service contract. They are clearly less than in Marine & Energy combined, but there are service opportunities. And when we look at further growth opportunities, I would say that the EUR 20 million, yes, it is a value. But I think here, we have a growth opportunity, further focusing on our software and how we sell and promote our software.

But also uptime guarantees, right?

Correct. We launched -- in Energy, we have the decarbonization services, which is basically using GEMS, our software platform to optimize the operation of, you could say, a microgrid where you have storage, where you sometimes have thermal generation, you might have wind and solar and you optimize the system for highest uptime reliability and lowest energy cost. And there are certainly customer segments there that are really interested in this solution. So there, we have further growth opportunities.

Okay. There were the questions from e-mail. Do we still have any questions from the line?

Apparently not.

In that case, thank you, Hakan. Thank you, Arjen. Thank you, everybody, online who have joined us today for this call. We will be entering silent period on this Friday, and we will be publishing our Q1 results on the 25th of April. So hopefully, we will meet then again. Thank you very much.

Thank you.

Thank you.