Pre-silent call for the fourth quarter was held on 4 January 2024 with our CFO Arjen Berends. In this blog post, we summarise the main messages and questions from the call. The recording of the call is available here.
Before the Q&A session, Arjen Berends discussed the recent development of the businesses, market sentiment, and opportunities.
Market sentiment for Wärtsilä’s businesses has remained fairly positive, even though the overall macro environment has been challenging. Service business continues on a good level, supported by the strategy of moving up the service value ladder.
Customer activity has been in line with our own expectations, and our earlier statement of EPP (engine power plant) order intake being higher in the second half of the year 2023 compared to the first half of the year holds by the outlook of today.
In the energy business, the market for both storage and thermal continues to have a good pipeline and activity during Q4, although the competition in storage solutions is intense. Energy’s strategic focus has been shifted from EPC (engineering, procurement and construction) towards EEQ (extended equipment supply), as stated on Capital Markets Day in November. The order book of EEQ going into 2024 is around 80% already, compared to 40% a year ago.
In the marine markets, limited yard capacity continues to affect the costs of new ships. According to the Clarkson estimates, the contracting is expected to be lower in our key segments in 2023, than what it was in 2022. However, our expectation going forward is growth in our key addressable markets such as cruise, ferry, gas carriers, offshore and special vessels. The expected growth is ~11% annually until 2030, based on Clarkson data.
As announced before, Wärtsilä makes changes to the organisational structure, and Q4 will be the last time reporting Marine Systems as a business unit. Gas Solutions is moved to Portfolio Business to be divested in the future, and the remaining businesses, Shaft Line Solutions and Exhaust Treatments are merged into Marine Power. The changes are made to simplify the organisation and reporting structure. As of 1st of January 2024, Wärtsilä has only two reporting segments: Marine and Energy. Portfolio Business will continue to be reported as other business activities.
Q&A
Are lithium price volatility or battery costs affecting the storage industry? Are these aspects topical in conversations with customers?
The discussions around these topics have stabilized compared to Q2 last year, when they were discussed more actively. We have also implemented indexation related to lithium prices in our contracts, as we learned the “hard way” that lithium prices can be very volatile in this world situation. Currently, the volatility of lithium prices should not affect our margins too much. The indexation seems to be a standard practice in the markets nowadays.
Is the situation in the Red Sea (ships being attacked in the area and therefore having to avoid the area by sailing around Africa instead) affecting your businesses?
We don’t foresee a major impact. In our business, service business correlates with running hours, so if a vessel sails around Africa, it adds the running hours, which might even have a positive impact on our businesses. However, there could be disturbances and challenges in delivering to Asian yards, or for supply chain equipment that needs to come to the factories in Europe, if the situation prolongs.
As Wärtsilä have had very strong growth in service orders and sales over the last three years, how do you see the service pipeline from now on, especially on the retrofits?
The pipeline seems to be developing well. Currently, the pipeline for retrofit projects is different for energy and marine. Converting from diesel to, for example, LNG is one, but there are other retrofit possibilities as well related to decarbonisation: installing energy-saving devices, and hybridization.
Was there something specific that made you want to get out of the Gas Solutions business?
Considering our strategy, decarbonisation and moving up the service value ladder, the Gas Solutions business didn’t seem too relevant to our offering anymore.
Has the competition in the storage business grown in Q4 compared to earlier quarters?
The competition in the storage business has been fierce for a long time, as we are in a growth market where new parties are entering continuously. However, despite the heavy competition, there are a lot of opportunities, and we take a fair share of the market as well.
Wärtsilä, as well as your competitors, have introduced new fuel technologies that are going to be part of the future, could that drive growth in the businesses or change the behaviour among ship owners to continue ordering new ships on a high level?
Currently, there is very limited yard capacity. If there would be more yard capacity, there might be more replacements coming. A lot needs to happen to meet the decarbonisation regulatory requirements, and that will not happen overnight. Yards are also well aware of the opportunities out there but building new yard capacity takes typically a couple of years.
What is the impact of shifting from EPC towards EEQ in sales and on delivery margins?
Margins are not too different, but on the sales side, there is a clear difference. It depends on how large the scope is, but from a sales perspective on a project level, it is about 20-30%.
You now have published the ammonia engine, and the hydrogen engine will follow in the next few years. Do you already promote and sell these engines?
Ammonia engines we have launched and therefore are actively selling. As the infrastructure is still under development, the fuels are not produced or available at scale, meaning that while the infrastructure development is ongoing, other fuels can be used in those engines as well.
Regarding the multi-fuel engines, how are those performing in the energy field?
In the energy businesses, the main focus is on HFO and LNG. There are some conversations about ammonia but that is not active dialogue currently. In the future, once we have the hydrogen engines ready, I think that will be more talked about in the energy field.
Regarding interest rates, do you see those impacting the project customers' decision-making?
Difficult to answer, because the customers are global, and the considerations are different. If we think about an energy power plant or engine, there is not too much space to postpone the decisions, but in some cases, the higher interest rates have resulted in customers taking extra time to consider the decisions. However, there have not been cancellations due to these reasons.
