Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript

Yes. So first of all, I mean, if we look on the demand side, I tried to highlight, this is a broad demand cycle than they I mean clearly, data centers are contributing. But the balancing power narrative, it's really strong. And what I'm excited and encouraged with now it's coming also in other countries. I mean Australia, now for the first time, there are engine tenders coming out for balancing pace because there's an acceleration of the shift from coal to renewables in Australia. -- and it's in several parts of the country. And they have -- they -- I mean, Australia has been 1 of the pioneers in batteries, and that is good but they have also understand that it naturally happens to be the vessel message as well that you cannot only do balancing with batteries. You need thermal also. So now as a result of this journey, there are concrete tenders coming out for engines, not for gas turbines or engines. And that is new. So that's a very -- and as I said, I mean, a couple of countries in Europe, it starts to happen. And I take Finland as an example, which is fairly new. I mean we delivered our first balancing power plant in Finland ever. We have just delivered it, and it's operating. And I think the operating experience there is triggering a lot of excitement and people are making money, et cetera. Now we see it's -- there are also new tenders opportunities coming up, very concrete. So there are those kind of proof points on the whole balancing narrative. And then on top, as I said, we have our traditional markets like Southeast Asia, electricity demand is growing, electrification of industries, et cetera, et cetera. So -- it's -- I mean, quite frankly, this -- our expansion is clearly not only driven by data centers in the U.S., clearly not because then you could, yes. You would probably have a different kind of risk reward assessment, so to say. It's driven by this broad narrative -- and we do see -- I mean, we have visibility. I mean we're sold out for '28. I think we have fairly value-cavisibility for '30. So it's really what's going to happen, I mean, until 2030. And so what's really going to happen in '31 to '35 and beyond. And we think that the fundamental trends will still be there. And that's, I would say, fit is a fairly unique perspective that you can have this long term. Now on the supply side, if we go there, I mean, clearly, I mean gas to mines are ramping up. We are ramping up. I mean we saw the Himsen announcement. We've seen the MAK announcement by CAT, et cetera, et cetera. Now so there will be capacity coming in. And let's see when demand meets capacity, I think that we can have a long discussion. I don't think anybody knows. Now what makes me excited about the future, I mean then I'm talking beyond 2030 is a couple of things. One is this notion I've been talking about before. And I say this a little bit colored by the U.S. situation. When customers have tried the new candy medium speed, not high-speed, medium-speed reciplicating engines with high-fuel efficiency and high flexibility. They like that can, and they will come back. So I think that structurally, this is a great opportunity for us to grow our market share because more customers will be acquainted and familiar with our technology. So that's a great opportunity for us because the fundamentals are there, the fuel efficiency and the flexibility -- so -- and that's why I see that as -- I'd like to kick the gas to banks in the lake, and we will continue to do so. And because we have in our sweet spot, and we talked about it, the 20 to 600, 700, 800 megawatts, we have a very competitive technology. Yes, combined cycle gas turbines, we will not be able to compete with them but the industrial and the aero derivatives, ladies and gentlemen, we have a winning technology. That's one. So the other thing, and then on top of that, we took fuel efficiency, but now we have water coming in as an increasing issue. We have thermal derating in the hotel world, et cetera, et cetera. So there are a number of those parameters. It's nothing new. Then of course, you could say, okay, how come? We believe that reciplicating medium-speed engines actually has a vital role to play in the mix going forward. So what about your medium speed reciplocating and in competitors. Then I say -- we have the most -- we are a technology leader. We have the most energy-efficient medium-speed engines with the best flexibility, and I dare say we have the best service network in the world. And we have been in the U.S. for decades. We have been in the U.S. for more than half a century. That's fairly unique among our other competitors. So there are a couple of those strengths. But let's see how Anti, wewill follow our hopefully, in the coming years, and we will see how this plays out, but I think we have -- and that's why I like this. We have fundamental concrete competitive advantage. And if we play this right, and we grow in a sensible way, in a robust way where we deliver. We serve our customers with uptime reliability and fuel efficiency. We have something really good here.

I want to follow up on one thing. And let's assume that you have the best medium spin resid technology there for fuel efficiency and uptime and all of that, and you have clients who agree. And if we talk about balancing in Australia or in the U.S. or base load in Southeast Asia, what are those guys kind of investment horizons or delivery times currently if there would be somebody who will be not as good as you but close, but they can deliver 6 months, 9 months earlier. Does it matter for those guys? Or is it only the DC guys where the time to power is so critical. I mean, how do you balance on being on board with those maybe more traditional guys who follow their own schedules versus maybe taking those kind of high-margin DC deals right now?

So I think -- I mean, a customer regardless if they are DC, if the utility, they will always appreciate a shorter delivery time compared to what it is right now, clearly. So I think there is not one answer to your question. I mean it's like a balanced decision for customers where they take -- do I take a penalty and the life cycle economy of the plant because I will pay more fuel. How do I weigh that towards having a delivery earlier? I mean, right now, our medium speed recipe they are -- I am not aware that they have significantly better delivery time than us. But let's say, if they would. -- it's -- there is not one answer to that. It's how different customers evaluate life cycle economics versus time. On the data center side, that valuation is clearly skewed to delivery time. On the utility side, I would say it's more balanced.

Okay.

And I mean also I got some questions on this about Hims and of course, you should ask them. My understanding that they're going to put up a house, I mean in a year, 1.5 years, but it's going to take them to 2030 to ramp up the capacity. So yes, let's see. You should ask them.

We'll do. Thank you. .

Thank you, Ann. Then the next question comes from Adrian

Yes. Hi, everyone. Now you can see me even. So just -- good being at your side. I was just the next couple of years and how you do it in terms of will have some flexibility in terms of temporary staff on onion put on, put off depending on the demand of the next couple of years. Actually, question I get it. That's the first one. The second one is coming back to Tokyo Gas, obviously, I mean, the -- our production slots you're saying it's not coming any orders or so. But what would be the next actually and eventually leading to orders. What would be your wish list on how...

So I start on the flexibility. And this also comes back to Andy's earlier question on competitiveness and how do we build that? So it ties to that? Because, I mean, we have an industry system that is where we build a lot of the suppliers. So you could say it's a little bit automotive style, but of course, with much less volume, i.e., we do R&D, we do engineering and we do final assembly and testing, but we buy a lot from our supply chain. And of course, we do certain in-house machining, but a lot is done on the supply chain. And of course, that gives certain flexibility because you share the volume swings with the supply chain. The other area where we are clearly -- and that's nothing unique with the exception now of Hisun, nobody has been building new factories. I mean if you look at the gas turbine players and also if you look at the other recipocating players, they have all been extending or rejuvenating or revitalizing their existing or former facilities. And our strategy is the same. We -- because that is one way to deal with -- to create flexibility. Because obviously, if you set up a new factory, you introduced new fixed costs, so it increased your general fixed cost level, so to say, in a different way than you scale up an existing plant. I mean using consultants or template, it's part of our normal mix, so to say, like it would be like in automotive, whatever. You have a certain share on. We have always had that, and it's one way to deal with flexibility. Then I would also highlight, clearly, we have a very good, strong relationship with our units. I mean Scandinavian unions, I commend them for that maturity. Of course, you always have the battle of terms, so to say. But overall, when it comes to structural measures, I think if you follow the capitation, the moment, I think we have a very favorable unit because we have unions that's thinking about and it was clearly realized, how do we secure the most number of jobs over time. And then sometimes you need to take structural measures. So yes, I'm very happy on that. And I think it's a little bit define maybe from some other parts of Europe. I know it's some other parts of. So actually, that is part of the whole equation. Then Tokyo Gas coming to that. Now let's see how fast it will turn up to orders. I think you should ask talk you guess. But I mean, they are seriously looking into building power for data centers. And they -- I mean, I've said before, and I hold to that statement, that how do we allocate our capacity because in this very favorable market situation, it's a little bit how you allocate. And we said that we do not put all our in the data center basket. And we have also said we want to be -- we want to diversify geographical presence. We have strategic capital both in Marine and -- we will honor those relations. And Tokyo Gas, a very strategic customer for us when we have decades long begets long related. So clearly, when we talk about where do we put what Tokyo Gas is high on the list.

But I took it right that you're not working with any kind of slot reservations and there is also a topic for Tokyo Gas that won't get a reservation in that sense, right?

We are not working with any customers on slot reservation. I think we have been consistent with that, and we continue to be consistent with that.

The next question comes from Liam Maki.

Yes. I have a couple of follow-ups, really. The first 1 relates to the emissions and permitting backdrop or the U.S. power market for data centers. I mean, we've seen tightening, I think, at the state air rules level and maybe loosening at some of the federal levels with particular technologies. . I wonder -- I mean -- and there's also a debate when we look at prime power and the number of hours that Empower is expected to run that some of that creates delays to permitting. So there's clearly no problem in demand. But I think when you build your order book and when you look at your order book for data centers, in the U.S.A. How do you think about time lines and the risk of slippage? And to what extent could permitting or emissions-related slippage impact your profile around that business?

So I would say, I mean, we don't take risk on our customers' project execution. And included in that bucket of project -- our customers' project risk is they are responsible for the permitting. And so we don't take risk on that because we sell our engines. So you need to sign up for an order. So if a customer in our case and sorry to be a bit black and white, but here, if a customer gets problems with the permitting, they still need to buy the engines. And if they need to terminate the -- they need to terminate the contract and there are provisions for termination and there are cost compensation, et cetera, et cetera. So it doesn't have direct impact. Now the other thing that we've been trying to do is -- and that is also putting our eggs in different baskets. We -- on the data center, customer side. There is also a vast array of different type of customers with different level of experience, everything from the very experience to the new comes. And we try to work with some of the well-established players that have experience and also, in many cases, have global ambitions or actually global footprint, so to say. So yes, -- so customers running permit problems, it's their problems. We have, of course, obligations on outside delivery time and quality, et cetera, but permitting is not in our scope.

That's very clear. And coming back to the -- an earlier question about attachment of service. To what extent do your customers agree in principle to attach a service contract to your engine sale and to what extent do they have an alternative? What I mean is, actually, the service contract will -- is it just a matter of time? Or do they have an alternative? And is there a risk your attachment rates fall below one.

So over time -- so basically, for the vast majority of services, we are the only ones that can provide it because we are the only ones that really no in-depth technology. And I mean let's look at our service offering. So I want to give you a little bit more granular answer expand here. But the general answer is the high level of sticking. We talk about our service value ladder. I mean if I sum up our strategy, it's moving up the service value ladder. And there are 4 steps in this service value ladder. The first step is the transactional spare pulp business. The second step is the agreement business. And we have a fairly broad array of different type of service agreements we adapt them to customer need. The third step is the retrofit project. So these are upgrading existing engines to new fuels, so making them more energy efficient. And the fourth step is the performance based. And this is where we make long-term agreements, 5 to 10 years, and we have bonus males clauses, et cetera. And moving up the service value later is that we we want to move all customers up this ladder because there is more stickiness, there is more revenue and it's a way to grow our business. So now coming to your question, we will always have the Spark business clearly. But that's not sufficient for us and normally not for the customers as well because they need more help. So on the data center agreement, there is certainly going to be agreements and they're going to be with us. Now some customers want full operation and maintenance agreement than we'd even operate the plant for them. But some customers say, "No, I'm going to use somebody else to operate the plant, but I still need Vasile to service and maintain the technology, so to say. And then they are all -- and since this is very early stage, but I would envision that we will have also data center that will go to performance-based contracts. So answering your question, there is a high level of stickiness there. I mean on the first step, there is nobody else that can do the job. On the agreement side, if you look at operation and maintenance, yes, you can contract with somebody else. But the tech-regular servicing agreements, basically, it's actually because we have the technical knowledge. And then the performance base, that will only be that.

The next question comes from Anders Erber. Please go ahead.

Thank you. A follow-up. But on the marine side, I agree. I mean looking at the contracting, it has increased further. So normally, when we look at this, it should lead to sequentially higher equipment orders for marine. But given the tightness in the engine market, is there anything that is different now? Are customers placing engine orders earlier perhaps to secure a slot. How are the lead times working out in particular regards to marine customers here?

And it's in line with what we have said before. And that is also on the marine side, the lead times are getting longer and longer because maybe not so such so far for Indian, but more for slots with the shipyards. So -- and especially if you go into cruise, I mean, you're way into the 2030s, if you want to order a new cruise vessel. And then, of course, once you ordered it, you want to lock up the equipment and very simple potent equipment. So all -- so also on the marine side, the lead times are getting longer.

Yes. I know customers ordering engines earlier than usually or?

Yes. I mean if you earlier clearly than...

In relation to delivery date of the vessel, obviously.

The next question comes from Tom Kutman.

Yes, hello Mcnamara. You see very positive about the marine prospects, and you don't really have us overheated orders as in the energy side. So I just wonder what would it take for you to upgrade the demand outlook for Marine. We already know that vessel orders are strong. Shipyards are expanding faster than expected. So what is the kind of missing piece to say that demand really will improve for you in Marine?

So I think there, it's -- and we kind of alluded to it. We are already on an all-time high level. So I mean when we have issued our demand guidance, and we guided similar to your point, both in Marine and Energy, we also said clearly, you need to see that we are running at all-time high level. And for our order intake, of course, now, I mean, Vasa is running at 100%, but it will take us some time to ramp it up. And we are already sold out for 2028. So if I had more capacity than we are currently having and have announced, I could sell it.

Then another question about AI in service. I noticed some engineering companies are now more kind of outspoken about how they aim to use AI in pricing and resource utilization in service. Can you open up what you are doing and when we could start to see some benefits from that?

And Tom, I appreciate it a lot. Now I'm going to make a little joke here for given. You can see it already in our annual report for 2025. It's there, concrete. It's nothing new. I mean, we are -- there is so much Goregaon the AI side already. So for us, this -- I mean, not being arrogant, but this is nothing new. When we talk about AI and Marcela, we've been talking about 2 focus areas. One is how we use AI as a tool in our toolbox for continuous improvement. And this is happening all over the company. And we are not unique here, I would argue. I mean any industrial business they're trying to do. And there, it's very concrete. I mean it used to take us a day to compile the documentation for the classification societies that needs to approve certain things. Now with the help of AI, we do it in minutes. These are very concrete examples. Here, I would now in this -- the most important to be successful in AI and continuous improvement is the continuous improvement culture. And this is something we are working on in age and evolving. But the IEI tool itself, it's not the latest cloud version or whatever. It's the mundane AI, so to say, but very valuable. And it does create value. There is no doubt. The second focus area that we have been talking about when it comes to what we are doing in AI in Vale is exactly what you mentioned, and that is how the strategic bets that we are making to support our service business because service is more than half of that sort of revenues, as you know, and it's a good source of customer interaction and profitability. And what we are doing there, what we are concretely doing there is that we are creating an edge platform. And we compute platform, several stages and a data architecture. So you can have data flowing usable data flowing in a good way because we are in remote areas, so we are at , et cetera. So there's a lot of investments. I mean you're talking hundreds of millions of euro going into that. You have these program in Finland EUR 200 million over 5 years. So investing in this edge platform, data architecture and then combining that with the knowledge of our people. We have so many knowledgeable people so they can use the right tool and have the right data-driven support. And what do we provide? Uptime, reliability, and reduction of fuel consumption and reduction of emissions. This is kind of customer proposition. And this is what we are integrating in our service business. This is one of the fundamental pillars for moving up the service value ladder that we talked about earlier. So it's very well integrated into our strategy. And it's ongoing. We have a lot of potential here, but we have started clearly.

But I guess there must be a lot of potential in kind of trying with pricing and pricing power in certain products and areas and stuff like that as well or I mean, are you doing that already in a sophisticated way or will it be very different a couple of years from today or.

I cannot comment on the level of sophistication, but we are clearly using you could say, data-driven pricing, leveraging a lot of data that we have. I'm sure we can evolve it going forward. But as I said -- and I'm really excited because -- we are really -- of course, we are providing power to AI. So we benefit from that, and we're excited about that. But I am -- we are really excited about the potential of AI to drive efficiency and develop the customer offering and making sure that we get paid pricing, et cetera, there is a lot of potential. What I'm happy with is that there is curiosity in vase. We want to adapt. There is much more curiosity than negative is because we also know in the current overall discussion society, there is a lot of concern and rightful concerns about AI and what will it do? And will people lose their jobs and could it even kill you manage all those big questions. But from how the SPC inverter, it is a positive. We see it as an opportunity. And the concrete proof points are the good things that there's so many good things going on in continuous improvement. And then it's hundreds of millions of euros investment into AI service business. And they're involving the Expert Insight platform and the customer offering, the performance-based contracts, you know them. We are evolving them. There are more customers coming in. So I think we have good protons. And there is a lot of more opportunity to come. And we are investing. It's one of the areas where we're really investing like we are investing in engines in the fuel efficiency and fuel flexibility. AI is a second major area where ants invested. And all -- sorry, and of course, not to develop large language models. I mean that's clearly out of our competence and scope. But how do we apply those to create value for our customers in the -- in our 2 industries. And on the -- sorry, the second area is how to leverage AI for service business, we want to be best in our industries, not in the world, we will never be to do that. But we want to be leading in our industries, like we are leading in fuel flexibility and fuel efficiency in our industries. We want to be leading in how we apply AI in our service business in our industry.

Then finally, on Brazil. there was, I mean, 19 gigawatts of power that companies committed to installing before 2031, where of 10 gigawatts is gas. And to my understanding, this is balancing power. So it's either aero derivatives or your solution. And you have only announced 1 order so far. So what am I missing here? I mean they should be in a brutal hurry or is it so that there will not be any sanctions if you are late or what happens?

So I think we have some orders. But I mean, also, to be frank, I don't think there will be so much more coming because we are sold out. So we have solar capacity, and we could sell more in Brazil. But I mean, unless -- I mean, if there are some new auctions coming out, we cannot meet the delivery times because we are already sold out. So that's the -- so to your point, could we have sold more in Brazil, yes, but we didn't have the capacity.

Now the last question comes from Sara Mill.

Canaria. Can you hear me? Just a follow-up on your various comments about running at all-time high demand and capacity would you hypothetically have the actual physical ability to increase capacity further than you've already announced? So for example, do you have the physical space in Basa and would the supply chain physically be able to do that? And if so, what would you need to see in order to justify it?

So the first question is -- I mean, the answer to the first question is yes. We could expand further. Second, what do we need to see? I mean, I'm sure you noticed that we have had a kind of staggered approach on making announcement of new capacity investments. And that's one of the kind of derisking strategies from our side that we form a certain view and then we invest and then we go and we get even more confident and then we invest in them more. So -- what is the key decision criteria is that we -- for further investment is that we continue to see this trend extending even further out in the future. And then we can -- I mean, I'm now talking well beyond 2030, as I hinted by the one. And then we can certainly take more steps. Yes, there is more supply. We talked about that coming in. So of course, we need to consider that. We need to be disciplined. However, I'm still coming back on this of technology, the medium-sized risk creating technology has in our sweet spot, very competitive features. And that sweet spot in terms of the overall market is growing. So that's good. And then within the medium-speed reciplicating engine population of supply payers, we are a technology leader, I have a very strong service offering. So we look probably more on the demand side than the supplies.

I'm afraid that we are running out of time. So as a reminder, we are hosting Presence together with our CFO, Ari next week on October 1. And please remember to register our CMD. There are only a couple of seats left the face-to-face event. Luckily, there's always plenty of of seats on the online event. Thank you.

Thank you, everybody.

Thank you.