Giga Buffalo

Main messages from the Q2 2022 mid-quarter call

We hosted the second Q&A-based mid-quarter call with our President & CEO Håkan Agnevall on Friday 20 May 2022. The recording of the call is available here. Håkan started the call with a brief introduction on the service business development.

We hosted the second Q&A-based mid-quarter call with our President & CEO Håkan Agnevall on Friday 20 May 2022. The recording of the call is available here.Håkan started the call with a brief introduction on the service business development. The presentation slides can be found here.

Håkan pointed out that Wärtsilä has a significant and growing service business, and we are heading in the right direction with regards to service agreement volumes. Our customers are renewing agreements, which is the best feedback that we can get. We started a project to deliver our new decarbonisation modelling service to Carnival in order to support them in reducing greenhouse gas emissions across their fleet. We also introduced the decarbonisation service concept for the energy markets. Through decarbonisation services, we support our customers in identifying and implementing the solutions needed to decarbonise their power systems, while taking into consideration their long-term planning and emission reduction targets.

In the Q1 interim report, we acknowledged that the share of active cruise fleet had remained at 70%, flat compared to the end of 2021. The situation was still the same at the end of April. However, during the summer we should see more and more cruise ships returning to service.

Finally, Håkan shared a few words regarding the newbuild marine market. After a clear increase in vessel contracting in 2021, it is good to note that we are likely to see a decline this year, according to Clarksons estimates. Increasing raw material prices and lack of capacity at shipyards are slowing down new vessel orders. However, Clarksons expects vessel contracting volumes to increase again starting from 2023, driven by accelerating fleet renewal and steady demand growth.

Some highlights from the Q&A session:

Have you had difficulties with your battery suppliers because of the lockdown in China?

The majority of our batteries come from China, and our suppliers have been affected by the raw material price increases. So far, our suppliers have maintained deliveries according to the agreements, and we have been able to do so towards our customers as well. What we have clearly done is that we have increased our prices.

Will the energy storage loss be lower this year compared to last year?

We are going in the right direction and, as we have stated previously, our plan is that the storage business will be profitable in a couple of years. Energy storage also fits to our “decarbonisation as a service” model and, as we scale the business, profitability will increase.

Have you seen pressure in service profitability due to cost inflation?

Our price realisation in services is fairly strong, and we do not see a lot of pressure there.

Last year you suggested that the pipeline for traditional power plants is improving. Are those projects moving forward?

There is still a lot of activity, even considering the high energy prices and the Covid-19 situation. But I should point out again that the Q4/2021 order intake was all time high for Wärtsilä.

Does energy storage have service business potential, for example in five years’ time?

There are two main elements in the energy storage service business: spare part maintenance and decarbonisation services. Spare part maintenance is less important for the storage business compared to the thermal side, because there are mainly electrical devices and no moving parts. Decarbonisation services can be provided to different types of customers, providing the lowest energy cost and the best uptime reliability. We see that decarbonisation services have great potential in energy storage.

Do you see component availability (especially electronics) and logistics costs as a continuing issue in Q2?

Electronics availability has been a major challenge indeed, but we are starting to see a light at the end of the tunnel, which is encouraging. But we are still far from a normal situation.

Have Covid lockdowns impacted your manufacturing in China?

Yes, our facilities have been in lockdown, but now they are slowly ramping up again.

If customers are hesitant to buy energy storage systems, does that mean that they are looking more at buying engines to provide the balancing power?

We see thermal balancing and energy storage as complementary solutions, because they cater to different needs. So it is not one technology against the other in this case.

Your messages in energy storage are very different from your competitor, Fluence. They are saying that the demand environment is strong, but cannot get batteries. You say that you can get batteries but the order environment is weak. Why is your message so different?

We cannot speak on behalf of our competitors, but we are disciplined in our pricing, have a positive gross margin, and a supply chain that works for us.

Can you explain why 2-stroke engines are gaining market share? Would you consider going back to the 2-stroke segment?

There is no general increase in the market share of 2-stroke vs. 4-stroke engines. 2-stroke is currently dominating the LNG carrier segment. When I look further to our technology development, I see opportunities in a 4-stroke revival in the LNG carrier space. But this will take time, and is based on some of the technologies that we are developing now, including hybrid solutions.

Delivery schedules; are you worried about delays?

We are also impacted by supply chain disturbances, but we are managing it quite well, so delays are not a major concern for us. 

Is there a restocking impact in the spare parts business, especially on the marine side? Is the demand inflated?

It is a little bit too early to say, but so far we have not drawn the conclusion that there would be a strong restocking effect. It seems that the uptick is very broad and driven by the underlying operations. We are following this very closely, though.

Are you seeing a lag in the order activity because customers are waiting for the environmental regulations (CII, EEXI) to take place?

We are having a lot of conversations about regulations with our customers. CII is basically a classification system, where vessels will have a classification for efficiency. The vessels need to reduce their emissions year by year to stay in a certain class, which is triggering some very interesting business opportunities.

How are you prepared for the electrification of marine?

We are really excited about electrification. Broadly speaking, we expect that the hybrid opportunities will actually be significantly bigger than the full electric opportunities. Batteries take a lot of space onboard a vessel, so it is not a viable solution in every application. However, we see a significant retrofit and newbuild potential in hybrid solutions, where an engine is complemented with a battery. We have a dedicated hybrid team, and we are building competences in that area.