Good afternoon, ladies and gentlemen, and welcome to Wärtsilä's theme call. My name is Maija Hongas, and I'm a Senior Manager at Wärtsilä's investor relations team. Typically, we have Hanna-Maria Heikkinen, the Head of IR, here on 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 two, and we also announced new financial targets. Today, our President and CEO, Håkan Agnevall, and our CFO, Arjen Berends, will discuss these outcomes in more detail level. I would like to remind you that at the end of the presentation, we have reserved time for questions, but l et's get forward. Please, Håkan, the stage is yours.
Thanks a lot. Thank you. Warm welcome, everybody, to this extraordinary theme call. It is, of course, about the conclusion of the strategic review of energy storage, but it is also about our new financial targets. 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 Wärtsilä's shareholders. That was actually the starting point for the whole strategic review. During the review, we have done assessments of different types of potential ownership structures. However, at the end of the day, when we have looked at all different types of alternatives to grow and ownership, etc., the conclusion has been that the best way to create shareholder value for Wärtsilä 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 two independent reporting segments. Energy in the future will be basically the Energy power plants business and, of course, the related life cycle services. 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 the 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 and Energy continue to improve operational and financial performance, which is, of course, very encouraging. Marine and Energy have similar growth and profitability trajectories with strong operational synergies. We are setting the new financial targets for Marine and Energy combined as a sum.
For Energy Storage, as it becomes a separate reporting segment, it will also have its own financial targets. On the group level, we continue with group targets for dividend and gearing, and the targets remain the same. Let's look a little bit at the numbers, Arjen. The new financial targets.
Thank you, Håkan. Last Monday, as said, we introduced new financial targets. The key driver behind that is the improved profitability of Marine and 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 Håkan just mentioned, because Energy and 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 dividends. If we look at the new financial targets, which are here on the screen, basically, Marine and Energy combined, 5% annual organic growth and 14% operating margin, and for Energy Storage, low double-digit annual organic growth and 3%-5% operating margin as a target.
The group financial targets for gearing and dividend, they remain the same. K ey driver for lifting the Marine and Energy combined target on profitability is the strong profitability improvement that we have seen over the past years. It's only two years back that, let's say, the numbers were quite different. Let's say, clearly on the Marine and 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, Håkan.
Thank you, Arjen. If we take a step back and if we talk about Wärtsilä overall, we continue with the same purpose. It's all about enabling sustainable societies through innovation in technology and services. We have continued to have our two 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. If we look at marine and 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. If we look at the transform theme, we have the industry-leading technology portfolio. We are a market leader in four-stroke medium-speed main engines. We are a 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. Going out of 2024, we also had the all-time high order book for Marine and 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 and 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 one. We continue the strong focus on the quality of our revenues.
We have improved our new bill order margins, and Energy also continues 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, we see limited additional CapEx need to facilitate the further profitable growth. We have really revitalized our work on continuous improvement. There is a lot of things going on in Wärtsilä right now. All these together, we have a very clear path to reach our new financial targets: 5% annual organic growth and 14% operating margin for Marine and Energy combined. Now, a special little deep dive on the services side.
As I said, for marine and 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 one, which is basically book-to-bill above one and below one. You see that we are well above one, with a thick line, which is the total. You also see that in all the four service disciplines: spare parts, field service, service agreement, and retrofits, all of them are well above one. We have also wanted to visualize our service growth in this way because you see some elements, they go a little bit up and down. They are a little bit cyclical, quarter- on- quarter, and sometimes that raises questions from your side.
That is why we are visualizing. You can see the total is well above one. 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. Of course, the theoretical limit is 100%. We will not get to 100%, but we have still growth opportunities clearly. Also, the 90%, which we are really happy and proud about, we have a 90% renewal rate of our service agreement. That, for me, is one of the ultimate proof points that we are creating value for our customers because otherwise, they would not renew the service contracts. In Marine and Energy combined, I mean, the decarbonization and services, they are the key drivers in achieving our financial targets.
This is how we are trying to visualize our bridges for net sales growth and later for profitability. 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. It is 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. We do see growth in all service revenue streams. Energy, Energy new build is driven both by balancing and base load. 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.
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. Now, for base load, we do see data centers as a potential exciting opportunity going forward. If we do a similar walkthrough 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 base load 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.
As I mentioned before, we have revitalized our work on continuous improvement, and there is a lot of exciting things going on in Wärtsilä these days. Now, let's shift gears. That was Marine and Energy combined. Now, let's focus a bit more on Energy Storage. Let's start where we were in 2024. That was kind of the starting point. EUR 800 million in sales, over EUR 1 billion in order intake, and 4% operating margin. We have continued to be profitable. Order book about 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.
Here it's very important to highlight this is our target market because we continue to have a selective approach. We are really focusing on the numbers here, focusing on our target markets. Key takeaways from this 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. Wärtsilä's Energy Storage current key markets include Australia, the U.K., and the U.S. What we will do going forward is that we will have to do selective market expansion targeting new geographies.
Wärtsilä, we remain among the top five players, but we do see new players coming in to the system integration market, and the competition in the market is increasing. 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. One of our key strengths is project execution, executing on time with the right quality and with happy customers that really feel that they can trust us in delivering our equipment because 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 their 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. Multi-sourcing, we have implemented for key components. 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 leveraging GEMS in providing those services. In Energy S`torage, continuous improvement. We have a modernized 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. The last couple of years, we have not entered into EPC in storage either. We now want to do a selective market expansion to new geographies. We have also been clear that since we are doing this, the related investments are 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 and 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. That means that depending on the periodization of projects, we will have volatility also going forward, both in revenues and operating margin. Having said all that, we think that we are really on a solid path to deliver on low double-digit annual organic growth and the 3%-5% operating margin target. These are the strategic priorities of the Energy Storage management team going forward to reach the financial targets. It is to capture profitable growth in selected target markets. It is to continuously drive product cost reduction through hardware and software development, capture growth in recurring revenues. We can do more there. Excel in our multi-sourcing strategy and also strengthen our regional supply chains, continuously improve our project execution.
I think this has developed to one of our strengths, but we can always continue this journey. The foundation of it all, people, we need to attract, hire, and retain high-performing talent. 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 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 quarter of 2025.
As Tamara de Gruyter will move to Energy Storage, heading that business, then Bertram, which is currently running also a Propulsion business in Marine, will also head, let's say, Portfolio Business, reporting to Håkan, 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. Håkan, to you for the final closure.
Yes. 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. This is clearly our ambition also for these targets.
Marine and Energy combined, 5% annual growth and 14% operating margin. That is the combination. It is not Marine and Energy single. It is the combination, the Marine plus Energy. That is the target, is for Marine plus Energy. Then we have separate financial targets for Energy Storage with low double-digit annual organic growth and 3-5% operating margin. On group level, we keep the gearing target of less than 0.5 and the dividend of earning target of more than 50%. That is the summary. Now let's open up for questions.
Thank you, Arjen. As Håkan mentioned, now it is time for questions. I would 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 email, maija.hongas@wartsila.com. Let's start with the questions from the conference call line.
Thank you.
The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi, good afternoon. Thank you so much for hosting this call. I have three questions. They're quick, hopefully. The first one, I'll ask them one at a time. The first one was just to, I mean, you're clear that the Marine and Energy margin target is higher, 14%, and you've explained why. 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? Maybe I'll start there.
I would say if you look at, and we haven't done, and we will not do now going forward, a combination of this and give a combined target.
We will not give an equivalent to the previous 12%. If you look at these two targets for the two 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 back to 2021 when we set our previous targets, let's say 5% and 12% targets. Of course, we need to compare scope- on- scope. If you would simulate the same scope as we have today for Marine and 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 movements to be included.
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 targets is higher. It is an ambitious target.
Okay. In terms of the process, can you kind of clarify, was there ever a sales process being considered, or it was just more of an internal process of thinking about the pros and cons? Just curious on that.
Around the process, the starting point for the process was really, we've grown the business to EUR 1 billion. It is 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. This is what we have done. 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 Wärtsilä 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, etc., etc. There have been an external dialogue, but the conclusion is very clear. Now we continue to own and develop the business.
Got it. Thank you. 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 modeling them? Thank you.
Basically, you can think about it. I mean, we will enter certain new markets. That is one of the outcomes of the strategic reviews. I will not go into the detail which markets. It is in Europe, in Asia. I will leave it at that. When we go into market, there is additional cost related to those market entrants. Those costs will burden the profitability short term.
You expect to remain profitable?
Absolutely. In LTM, we certainly expect to remain profitable.
Got it. Thank you so much.
T he caveat there, Daniela, is of course, we underline that this is a project business. The projects are rather big, so it is lumpy. Because of this lumpiness, order intake revenues and also profitability can vary.
I mean, if you look at the last 12 months, yes, it's going to certainly be profitable.
Thank you.
The next question comes from Sven Weier from UBS. Please go ahead.
Yes, hi. Thanks for taking my questions. 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?
I mean, it's primarily around staffing, building up. Sometimes you need to be a little bit more aggressive when you want to come into a market. Sometimes you don't. I think that is part of normal business. I think there are all different elements.
It's both, you could say, our operational, but also our aggressiveness in the market.
Also, the R&D investment needs to stay on a good level.
It's not that these new markets are more competitive in general than those that you are focusing on right now.
I mean, clearly, the markets that we will enter are markets where we see customers and segments that are connected to our core strengths. As we mentioned, the core strength is about project execution. It's about thermal stability, the value that we deliver to our customers. That is not the lowest price in the market, just to be clear on that. 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, thanks for this. 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 we talked to. No, I wouldn't say that the new administration in the U.S. has played a major part of this dynamic.
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.
I mean, now, for now, we have decided we're going to keep storage.
We're going to keep on investing in it and growing it. That's a clear message. 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? This type of regular review, storage will of course be part of that also going forward. 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 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. 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- point accretion. 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. 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.
Also, Marine Systems, let's say, piece is moved into Portfolio Business. All these businesses at that time, or at least most of them, were loss-making or very small- profit businesses. I would say it's not so easy to compare, let's say, the scope one-on-one. If you do the simulation from 2021 onwards on this scope, what we have here on the screen, clearly it's an ambitious target.
Understood. Thank you both.
The next question comes from Antti Kansanen from SEB. Please go ahead.
Good afternoon. Thank you for taking my question. I only have one, and it's regarding the 14% EBIT margin target. 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. If we look at last year, the mix was very favorable.
Should we think about the 14%? I mean, you do not have any firm year or a timeframe to achieve it. 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 always say it is 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 is the same journey. I mean, we set the target for 14%. We have a clear path to get there. Once we get there, then let's evaluate that situation.
Also, just to complement that, 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. Of course, today, and we have also been in our guidance, we have been very clear that to make forward-looking statements, etc., in this environment, it's harder than ever, so to say. 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. Maybe I'll follow up in the sense that obviously if we look at the four 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 you kind of see the most potential?
I mean, obviously, if the mix improves, then you're moving closer to the targets. But from like-for-like basis, which of the businesses has the most potential?
I mean, if you look at profit model, I think you can always look a little bit how we rank things in our waterfall slide there. You see it starts with Services. We have Marine New Build and Energy newb uild. I think you get a little bit of indication. We won't go further into the details than that.
Yeah, I'm not guiding on mix.
Sure. Okay. Thank you very much.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.
Okay, we have received a couple of questions as email. Part of this we have already discussed, but I tried to pick up the part that we maybe haven't.
You have commented that you are entering selective new countries in storage. How do you assess the competitive situation in these markets? Can you also quantify the related investments to which you have alluded?
No, we will not quantify the investments. I think that we will keep. We do not want to give out to competition how much we are investing. That is also why we are not talking about which country specifically, so to say. I think there are some competitive concerns around that. The first part of your question?
How do you assess the competitive situation?
Yeah, no. In general, the competitive situation is increasing. There are more players stepping into the integrator 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. 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, etc. Also some of our core customer tells us that you have the industry-leading software. We are targeting those. Competition in general is increasing, clearly.
The second question is that you commented that the Energy and Marine targets are a target for those two combined rather than each of those two 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?
Here I will come back to the mix. Sorry about that. When you look at Marine and Energy, I mean, why do we keep them? Why do we talk about the combination? First, the similarities. Both Marine and Energy have similar growth trajectories and similar profitability trajectories. They have very strong operational synergies. The industrial system, including manufacturing, sourcing, R&D, is really, really integrated. Also on the services side, it is really integrated. In some countries, Energy is leading the service team. In some countries, Marine. Operationally it is very, very integrated. Of course, the Marine and Energy cycles go a little bit differently. This is also why we want to keep it combined, so to say.
We don't want to separate it out. 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 and Energy are project-related. Therefore there is a little bit of cyclicality, so to say.
Energy storage is targeting 3%-5% margin. With limited CapEx, it's 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 and energy?
No, we will not open that up. Let's say 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. 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 contracts. They are clearly less than in Marine and Energy combined, but there are service opportunities. When we look at further growth opportunities, I would say that the EUR 20 million, yeah, 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 have done guarantees, right?
Correct.
Because 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. There are certainly customer segments there that are really interested in this solution. There we have further growth opportunities.
Okay, there were the questions from email. Do we still have any questions from the line? Apparently not. In that case, thank you, Håkan. 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. Hopefully we will meet then again.
Thank you very much.
Thank you.
Thank you.