Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Welcome to this news conference. I'm Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Wartsila announced today the plan to establish a joint venture for our global energy storage Business with RCT Solutions and discontinue energy storage as a separate reporting sector. Today, our CEO, Hakan Agnevall will discuss the highlights of the plan. And after Hakan's key messages, there's a possibility to ask questions. As a reminder, we will host a pre-silent call next week on June 23, together with our CFO, Arjen Berends. So let's leave questions related to recent trading and detailed finances to that call. [Operator Instructions] Please, Hakan. Time to start.

Thank you, Hanna-Maria. And it's not only me today. It's also -- Arjen is also here, our CFO, so for the Q&A session. But let's first summarize our news release here this morning. So as Hanna-Maria pointed out, we are about to establish a venture for global energy storage operation with RCT Solutions. And also on the reporting side, discontinuing energy storage as a separate reporting segment. Click. So today, we are announcing this plan to establish a joint venture together with RCT Solutions GmbH, our storage business. We are in the JV, we are partnering with RCT who is an experienced player with strong capabilities in operating and an energy integrated energy storage business under challenging market conditions. And this is certainly what we are facing right now. RCT brings strong market know-how, execution capability, knowledge of the global supply chain as well as also a separate opportunity for vertical integration through an existing integrated battery storage manufacturing initiative in the U.S., which are evolving here near term. RCT has the aim to develop into globally, vertically integrated battery energy storage system players. And as a result of forming the JV in second quarter, energy storage will cease to be a separate reporting segment. Click. So I mean, as you know, those of you who follow us, our storage business, which is now transferred to the JV, is facing headwinds on the order intake side due to changing market dynamics. I mean it started with increased U.S. tariffs, also regulatory changes and also downstream expansion or upstream expansion of battery cell manufacturers, which now starts to compete directly with us as a system integrator. And so the competitive dynamics, and we have talked consistently about this now for a time, the competitive dynamics have put significant pressures on profitability and order intake. And we have -- during over time here, we've been looking at measures to improve the competitiveness of our energy storage business, and competitiveness also to drive the long-term profitability. So if we look at the JV that we are performing now. We expect it to be loss-making this year in 2026, driven both by the recent lower order intake and also the transformation actions that we plan. And basically, if you look at the transformation, it's one big financial is the right of capitalized R&D. And the impact for that for the full year of 2026 on our operating results, it's estimated to be negative EUR 40 million to negative EUR 50 million, depending on the exact timing of the closing of this transaction. So teaming up with RCT, it offers an excellent opportunity for storage to strengthen its competitiveness. And the JV is expected to generate positive results towards the end of 2027 based on those actions that is planned or being planned. Energy storage, I mean, just as a reference, it's our smallest reporting segment. It's 480 employees globally. Last year, it was a net sales of EUR 694 million, which is about 10% of Wartsila's overall net sales. Operating results was EUR 23 million, which is 2.8% of Wartsila's total operating results for 2025. So it's clearly the smallest -- or the smaller piece of Wartsila overall we're talking about here. Click. So the plan is that the JV will generate positive operating results to also 2027. But we stopped the separate reporting of energy storage already in the second quarter now in 2026. Now the ownership structure is 50% RCT Solutions and 50% Wartsila. Now we also make it clear already from the beginning that we might have new investors joining later, and if and when they come in, we will -- the original owner, we will decrease our shareholding. Now Peter Fath, who is the CEO of RCT Solutions, he will become focused 100% of his time on the -- being the CEO of the new joint venture. And he will also relocate to the U.S. If we look at the financial impacts for Wartsila, there is no material profit and loss impact at closing expected. We would transfer net assets, representing less than 5% of absolute total net assets into the joint venture. The JV is expected to generate positive results towards end of 2027. It will be loss-making in 2026 with an estimated negative EUR 40 million to negative EUR 50 million for the full year. And on the Wartsila's impact on the Wartsila P&L, so to say. And the spend depends on the timing of the closing. The segment reporting will end in the second quarter of 2026. And energy storage financial targets will no longer apply, and its demand guidance will also be suspended. Then we expect the closing in the third quarter in 2026, and that is subject to regulatory and other customary conditions and approvals as well as arranging a financing package for the independent JV. And until then, it will be reported as discontinued operations and assets held for sale. And then from closing and onwards, the JV will be reported under other business activities as a share of results in associated companies. Click. That was the news of today. I mean, this is an important milestone for our energy storage business. It's been a long journey, making the acquisitions from Greensmith, growing it, going into strategic review and in the strategic review, keeping it. But after that, also facing the changing market dynamics, U.S. tariffs, vertical integration by cell manufacturers, significantly increasing competition. And now it's the next step of the journey. We formed the JV with RCT. They bring strong competencies in the sourcing side and also establishing battery manufacturing, and they have a separate opportunity for cell -- battery cell manufacturing in the U.S. in development. And this also means for Wartsila, we will become even more focused as a group focusing on Marine & Energy, our Thermal Energy business. And I think this also goes in tandem with we have now, as you know, closed the final divestments in our portfolio business. So over 5, 6 years, we have divested 11 business units. And now we also formed the JV with storage. So coming out of this, we will be a more focused group going forward. And well set up, and that's a discussion for another day. But as we have been talking about when we look at Marine & Energy combined, strong demand side and also an exciting growth and profitable growth journey going forward. So with that, I suggest we open up for questions.

Thank you, Hakan. So we will start the questions. [Operator Instructions] The first question is coming from Antti Kansanen.

Guys, a couple of questions for me, if I may. I'll start with the GEMS software business that you have in the storage. How does this divestment impact any potential for the GEMS on your traditional power plant business? Or does it kind of relate to that at all?

So GEMS as a software and the people around it is included -- will be included in the JV. But our energy business has the right to use the software. So from that perspective, we still have the GEMS software for our thermal energy business going forward.

Okay. And then a couple of technical questions relating to the transaction. Could you comment anything on the impacts on your net cash position, taking into account any kind of working capital or kind of funding needs that the JV will have from start of the transaction.

I can answer that. But say, the transaction is expected to have no material impact on the P&L. In practice, that basically means that you get compensated for the net asset value that we transferred to the joint venture, and the net asset value, in this case, includes, let's say, the cash, which is mainly coming from the advances because they are needed for being successful in their operations. So yes, there will be cash out. We won't quantify it because that is, of course, varying over time and for sure that amount today is a different one than the amount at close.

And I think you can also talk through the EUR 40 million to EUR 50 million negative impact, the cash portion of that.

That's the operating result, and the majority is related to R&D depreciation, capitalized R&D. So that is noncash. The rest is, I would say, cash.

Yes. And my last question was exactly on that item. Will you do the write-down already on Q2 when you kind of put it on a discontinued item or after?

No. That will happen in the joint venture, most likely.

Okay. And then just a clarification going forward. The cash flow from this JV into Wartsila will be annual dividends, and then you will book the book kind of the annual results share of that in your EBIT?

Yes. Single-line consolidation, correct. But remember that in the future, after 1st of January 2027, it will not be part of operating results because IFRS 18 will change the structure of the P&L. So it will be a result from the investing activities instead. The requirement goes for all companies, everybody needs to comply to IFRS 18. So that's no different for us.

That's a separate topic to have going forward, IFRS 18 and its impact on how P&L will be reported. But it's good that Arjen that highlights this already now for storage.

The next question comes from Akash Gupta.

Yes. I have a couple of questions as well. The first one is on treatment for putting this business in discontinued ops because I think in the past, you sold 3, 4 businesses in portfolio and you kept reporting figures for that until you close the deal. And here, you are putting it into discontinued ops straight away. So I wanted to understand the technicalities behind why this is going straight away in discontinued ops, and why you kept reporting other businesses until the deal was closed. The second one is on this EUR 40 million to EUR 50 million figure that you are giving. And is this what we should expect impact on comparable operating profit for the year, depending on when you close the deal? Or is it maybe a different number? And then the third one is on RCT Solutions. I quickly had a look at their website, and they do PV solution partner and partner of PV manufacturing, photovoltaic. So is this the company, the whole of the company, you will own 50% JV with your storage or it will be 50% in their storage and your storage business together? So just to understand which RCT Solution GmbH and what assets we are talking about here?

May be easier if we take one question at a time. I didn't have an excellent memory, but anyhow.

Let's say, the second one, I lost already. Discontinued operation is the way we chose for this one. And I think we have done it also in the past with portfolio businesses, at least on certain occasions. This is, of course, stopping a segment reporting completely. And between now and closing, we don't anticipate to be too long time. We expect this to happen in Q3 basically. And as we stop the segment reporting, we thought that this is the best way forward because it would not make sense to give another, let's say, demand guidance, et cetera, as a normal segment would require.

And let's take the second.

The second one, I don't remember. Can you repeat it, please?

Yes, it was this EUR 40 million to EUR 50 million loss that you are guiding for the year depending on exact time of closing. So I can see consensus as EUR 9 million positive for the whole year in comparable operating result. So does that number needs to go to somewhere between EUR 40 million to EUR 50 million. Is that the message?

That's the comparable number, yes, correct.

And on RCT. Yes, RCT Solution. So they are taking a 50% ownership in this JV. We are not taking any ownership in RCT Solutions, just to clarify that. But maybe I misunderstood your question.

In the JV, it will be your battery storage business and their battery storage business, not the whole of the company?

No. So it will be our battery storage business only. They will not bring their battery storage business. So RCT Solution, the major portion of that, it's, you could say, engineering firm and their specialty is to set up factories for -- both for solar manufacturing, but also for battery manufacturing. And they have done [ 40 ] factories all over the world. So they know clearly the battery industry very well. They know the supply chain very well. But they are not moving any battery business into the JV. The JV will be the Wartsila battery business. So what RCT is bringing is the knowledge. And then in addition, they have a separate parallel initiative, which we are not investing in as Wartsila. And it's not included in the JV. So RCT Solutions has a separate initiative where they are currently in the role of financing and setting up battery module and later, battery cell manufacturing in the U.S. that will, our understanding will be [ fairly ] compliant.

So that is a separate business, and you wouldn't be required to put any money for CapEx in that?

It's a completely separate business. Then, of course, there are plans of cooperation and offtake, et cetera. But from a legal perspective, it's a separate business. We will not invest in that separate business. We will put our [indiscernible] into the JV. This is how we contribute to the JV.

The next question comes from Sebastian Kuenne.

Can you hear me?

Yes, we can hear you.

Yes. One question is regarding the operations that you give to the joint venture. I would assume that there might be some staff reductions needed or some other restructuring. And I was wondering if this is already included in the losses, in the EUR 40 million to EUR 50 million losses that you predict for this year or whether there could be more one-off charges further down the line that the JV has to bear itself and that will ultimately go into your EPS? That will be my first question.

No. All the transitional activities, as we foresee them to happen, they are included in the numbers presented, so in the EUR 40 million to EUR 50 million.

So by year-end, this is a lean business, basically?

Should be, yes.

Okay. And then secondly, I just tried to understand the incentive for RCT to go into this joint venture. Is there any contractual agreement between Wartsila and the joint venture further down the line that basically guarantees business that is done between the 2 companies? Or is there any funding guarantees further down the line that the JV could basically execute and where Wartsila is the liability partner in that deal? So I just try to understand whether this is a very clean cut without any future guarantees on business or whether there's further liabilities.

So the guarantees on the existing order book, they will stay with Wartsila. So that's clear. And for any new business that the joint venture enters into, they need to take care of their own. That's the guarantee facilities.

Can you explain it a little bit more in detail, the guarantees that stay with Wartsila the existing order book?

Let's say, for example, you have the parent company guarantee, let's say, that is not transferable. I don't think that customers don't -- preferably don't like that. Now this is very customary in energy storage business where parent company guarantees to secure the performance. We have done it for years. We have never got any claims, but these are typically staying with Wartsila. And for new, let's say, business, they need to provide similar guarantees themselves. Same for, let's say, advanced payment guarantees for, let's say -- sorry, guarantees for account payments or bank guarantees for advanced payments, same story. Our existing business stays at Wartsila until it's out of the books basically. For new activities, they need to take care of it themselves.

And you also signed service contracts for the existing installed batteries, I would assume. The liabilities out of these service contracts that can run for more than 10 years, is this also still staying with Wartsila?

Yes, but the risk is a very, very, very small one.

The next question comes from Vlad Sergievskii.

Yes. I'm just trying to understand, how did you arrive to 50-50 split in the JV ownership structure? I assume some valuations of assets should have happened. Will you be able to disclose what were your internal valuation of your energy storage business for this transaction? And maybe how did you value the contribution of RCT? Is it just the knowledge they are bringing? And this is the case then this knowledge is worth at least a few hundred million euros? That's the question.

No. I mean in terms of how we value and the different parties value the business, we will not go into those details. I mean -- but it's very clear that what RCT is bringing in is competence, execution capabilities, sourcing capabilities and also the parallel opportunities for vertical integration.

Then next question comes from Panu Laitinmäki.

I just wanted to clarify on the EUR 40 million to EUR 50 million loss. So do you expect to make EUR 40 million to EUR 50 million loss on a reported basis. So it consists of whatever the operational EBIT is and then the write-down of R&D? Or do you expect to do that on a comparable EBIT basis?

No, it's the operating results. So not the comparable one.

The next question comes from Antti Kansanen.

Yes. I just wanted to follow up a little bit on the kind of guarantees for the JVs. Let's -- because I understand that the advanced payment portion of the cash is moved to the JV. But let's assume that '27 would be still a very challenging year and they are not themselves, cash positive. So do you have some kind of commitments to fund the JV further, inject cash flow into it, assuming kind of they are not self-sufficient in terms of cash generation going forward?

No, we believe that we don't need to do any, let's say, further capital actions. Of course, 1 of the 3 closing conditions is the financing package. So that needs to be, let's say, worked out. But so far, we see it doable. So for now, we don't see any need for it.

But do you want to provide any further comment on how much cash you will insert into the JV from Wartsila's balance sheet, excluding the working capital advance payment side of things?

No.

The next question comes from Uma Samlin.

Just a question from me. I was wondering, given you guided that this business unit will likely to turn more profitable in 2027. What gives you that confidence? Is that backed by the current order backlog? How do you see that market evolving?

No. So they come back to profitability, that is hinging on one side on continuing to drive down the cost and work with supply management and new initiatives there. And the other element is, of course, this possibility for vertical integration. I mean the team is executing on the current order backlog in a good way, and you've seen Q1, 5% EBIT. The challenge is that we are not taking in order. So we need to rebuild the order backlog to be successful.

Then I don't see any hands up. [Operator Instructions] Johan Eliason, please go ahead.

Can you hear me?

Yes. Johan, please go ahead.

Okay. Let's try, only it works better today for me. Just you mentioned the financial targets. You have targets for Energy & Marine. Will you sort of automatically take those as group targets? Or will you announce some new group financial targets now in Q2 or at the Capital Markets Day?

No. So what we said also, there is no new financial targets coming in Q2. I mean at CMD, for sure, we will discuss the financial targets. And I'm not saying we're going to revise them or whatever. I mean you have to wait until then. But I mean, and we will not revise the marine and combined -- energy combined financial targets for Q2, certainly not, they are still relevant.

The next question comes from Daniela Costa.

Just following up, I think, on some of the things you mentioned yesterday, but to make sure I understood. In terms of sort of like -- I guess we are hearing more and more about storage and data centers and the opportunity there while you're doing this and potentially even getting other investors into the JV. So I guess diluting your potential stake and the ability that you use that future for commercial links. So just wondering sort of like what was really the trigger there given you have done a strategic review not so long ago and you had concluded to not. Was it initiated by RCT and you saw an opportunity there? Or really, you just took an assessment of the technology and thought this wouldn't be really something good to complement your offer a more integrated solution in terms of what you can offer for data centers, for example, just on that?

Yes, to give a little bit of the history there. I know it, you know it, Daniela, but for the benefit of everybody. So I mean, we grew the business to break even at EUR 1 billion. And then we initiated the strategic review, which we ran quite for some time. And we also said very explicitly that during that time, we also looked at different ownership alternatives. I mean the logic was that this is a growth business, but it's clearly dilutive to group margins. Now so we ended the strategic view. We basically, when we have assessed all the alternatives, we said that the best way to create shareholder value is to keep the business. Now after that conclusion, 2 things happened that has impacted the competitive situation quite significantly. One is the Liberation Day and the tariffs in the U.S., which has highly impacted the U.S. market. And two is this, which I would say it's a consequence of [ EV sales ] not developing. There is a lot of capacity for battery cell manufacturing on the market and they are looking into new industries and clearly identifying energy as one, and where you basically have suppliers, battery cell suppliers starting to compete. So it's for both of those reasons, it's becoming a more competitive space, and that happened after the strategic period. So we have now been working on this. The team has been executing and done it in a good way. But of course, still, if we were to achieve the group margins of 5% as we put in, in the financial targets, it's still dilutive, and it's getting more and more challenging space to work in. So I think these have been the major drivers behind, so to say. Then with RCT, they came up as a potential player, and now we are launching the JV together with them.

And sorry, I might have missed this on one of the questions. I think you addressed it slight on one of the questions earlier, but I didn't fully get it. But you will not keep a direct commercial link? Or how -- can you leverage this somewhat for competing for like future data center tenders, for example, which might be integrated between your balancing and storage?

We can, of course, cooperate, but we will not have a strong commercial link in type of approaching, for instance, data centers. No, we do not have it. I mean both of these technologies, both our engine technologies and battery technologies, they need to be competitive on their own merits. Otherwise, we start to dilute the group margins.

They have also never been contracted in one go. So it's always separate contracts and negotiations.

And I do not see any hands up. Just double checking whether anybody who is calling in by mobile phone, just if you have a question, you place it now. Please go ahead.

Hanna, can you hear me? It's Sven here from UBS?

Is it Sven?

Yes. Can you hear me?

Yes, go ahead.

I couldn't dial-in using Teams. Question I have is just on the accounting treatment again because I'm a little bit puzzled here because when you said -- call something, discontinued operations, does it mean that you're aiming for 100% exit eventually? And also where you put this into the P&L because the other companies I cover, that normally lands at the net profit line and not in the associates results. So could you help me understand the accounting treatment first?

We [ didn't ] put it as discontinued operation between, let's say, signing today, basically in closing. After that, it will move. And then it will -- let's say, in discontinued operation, of course, it will have the full P&L impact for the time it takes. And after closing, it will move to share of results in associated companies, one single line consolidation.

And to the other question -- sorry, if there is some follow-up on that. No, I mean, to the other question, as we declared also, we will entertain and we are entertaining other investors to come into the JV. And if that happens, we will reduce our ownerships. And we see this as a journey from Wartsila's side as a journey over several years. But we could contemplate to reduce our ownership.

And did you mention this on the back of interest that you've already seen? So is that why you're mentioning it? Or is that something that needs to happen from here?

Sorry, can you clarify your question, Sven? I'm not sure I got the question.

No, in terms of additional parties to the joint venture, did you mention this that you're happy to entertain more investors because you already had interest from others? Or is that something that needs to happen from here?

No, we have -- we are having and have had discussions with several different parties.

Okay. And so -- and they would be interested also to invest into the JV?

That's correct. I mean that's the type of interest we are discussing. But it's not in the close. Sven, just to clarify, the closing is not hinging on additional parties coming in. We will certainly close with the parties we have already. But if there are more coming in, there might potentially be more coming.

That's understood. And just coming back on the U.S. tax credit point because, as you said, the power unit of the company is already doing battery storage, I was just wondering why, I'm not so sure, are they engineering this for other battery storage companies? Or do they have an own manufacturing business for battery storage in the U.S.?

They are primarily an engineering house. And I mean basically, designing battery cell factories and then helping investors also to execute the projects. So they know battery -- sorry, but it's an engineering house primarily.

And is the idea that this sister company steps up U.S. manufacturing for your business so that you can benefit from the tax credits? Is that the plan then?

It has nothing to do as far as I know with tax credit. It's just -- it will be a sister company in a completely different legal entity, but where there is possibilities to enter into partnership for offtake. And as you know, with the current focus on FEOC, Foreign Entity of Concern compliant, there are not so many fully FEOC compliant battery cell manufacturers in the U.S., and the intention that this will be one of them.

I do not see any hands up, but if somebody else calling in by mobile has a question, now is a good time to raise the question. And also, if anybody wants to have a follow-up question, please, now is the time. I have not received any questions by e-mail. It looks like that we can conclude.

So to sum up, I mean, one important step of our storage business. It's been a long journey. We know that from initial acquisition to strategic review to some tough times, but good execution, and now we find from the JV. I think it's good for the -- for our team and the storage business. I think it's also good for Wartsila. We are creating a more and more focused group. We have now also concluded portfolio. So now it's really about Marine & Energy combined. And you know, we have a very favorable market situation and we continue to expand our capacity. So our narrative will now be even more focused on Marine & Energy combined, and it's a positive.

Thank you, Hakan. So as a reminder, next week on June 23, we will host a pre-silent call together with our CFO, Arjen Berends. And then Q2 results will be published on July 21. Thank you.

Thank you.

Thank you.