Wartsila Corp B Shs

Good morning and welcome to this news conference for Wärtsilä Q3 24 results. My name is Hanna-Maria Heikkinen and I'm in charge of investor relations. Today, our CEO, Håkan Agneval, will start with the group performance, followed by the business performance, and then our CFO, Arjen Berends, will continue with the financial highlights. After the presentation, there is a possibility to ask questions. Please, Håkan.

Time to start.

Thank you. And welcome everybody and welcome to the summary of the Q3 which has been a good quarter and we are moving in the right direction. So let's look at some of the numbers. I mean we do see improved net sales, improved profitability and improved cash flow. Net sales increased by 18%. And we continue to have a strong book to build and therefore a strong order book of about 7.6 billion euro. Our journey for improved profitability continues with comparable operating results increased by 41%. And our strategy of moving up the service value ladder also continues, and we do see good progress in services as we go along. So service order intake is up with 4%, and service net sales increased by 6%. Strong cash flow, and we'll talk more about that, but we do continue to see a very strong cash flow, and in this quarter, from operating activities, close to 300 million euros. Let's look at the summary of the figures for the quarter. If we look at the order intake, It's pretty flat, but on an organic level, we are up 4%, around 1.8 billion euro. We continue to grow in services, 4% growth, up to 874 million euro. On the equipment side, we are down 2%. That is primarily driven by storage, so 929 million euro. I will talk about storage later. Net sales up 18%, so from 1.4, 1.5 billion euro up to 1.7 billion euro. And we continue to grow in services, 762 to 800 million euro. But as we talked about before, second half year, we would see strong growth on the new build side and on the equipment side. And we see here up 32% from 690 to 911 million euros. Strong book to build. It continues a positive trend above 1. Result-wise, the comparable operating result is up 41%, from 125 million euro to 177 million euro, and we are now at 10.3% of net sales. And if we look at the operating results, we increased it by 65%, and we are now at 11.2%. So if we look a little bit about the markets and our industries, in the marine, the market sentiment continues to be positive for Wärtsilä in our key segments. And we do see an increase in demand for new ships in the third quarter. Looking at clock zones, the number of vessels ordered in Q3 increased from 1,400 to about 1,900, 2,000. And despite the growth of shipyard capacity, especially in China, new-build shipyard capacity utilizations remains high, and it indicates actually still a bit of a shortage on yard capacity. And also a very interesting number. I mean, global shipyard capacity is currently... around 70% of the 2011 peak level. And the forecast is that this could increase to 85% by 2030. And the major growth is expected to be in China, which is expected to account for about three quarters of this increase since 2021. On the alternative fuels, the positive trend continues, so 486 orders for alternative fuel-capable ships year-to-date, and that accounts to 25% of old contracted vessels, but maybe even more importantly, around 50% of all the vessel capacities. Strong growth in demand and positive outlook in cruise has really driven the new-build ordering. So a lot of activities in cruise, which going forward we expect will have a positive impact on Wärtsilä. And also container new-build investments have increased in the recent month as ship owners continue to renew their aging fleets. Looking at energy, we see solid long-term market opportunities. On the challenging side, rising protectionism is of course an obstacle going forward, whereas the decreasing inflation acts favourable for our market situation in general. The macroeconomic development continued to be impacted by the protectionism and elevated risks in the geopolitical environment, creating uncertainty and also affects the speed of decision making, slowing it down. If we look at the US, the IRA, the Inflation Reduction Act, has boosted outlook for clean energy deployment in the US. while policies such as domestic content requirements and import tariffs hurt the outlook for the energy transition. So it's a mixed picture. If we look at natural gas, the global natural gas prices continue to increase, but moderately. The demand for balancing power has been strong in 2024, while demand for baseload has been stable. So we do see a strong growth in balancing in 2024 compared to 2023. In October, DNV's energy transition outlook predicted a peak in energy-related emissions to have been reached actually this year. And coming back to AI and data centers, we do see interesting opportunities in this space going forward. Today, data centers account for about 1% to 2% of the global electricity demand, but it's forecasted to basically double until 2026. And we do see strong interest here. Organic order intake increased by 4%. Order intake increased by one. Equipment order intake decreased by 2%, primarily driven by timing of energy storage orders. Service order intake increased by 4%. Looking at the order books, we have a strong order book, and the rolling book-to-bill continues above one. I think it's now the 14th a consecutive quarter that we continue to have a book to build above one. Organic net sales increased by 21%, net sales increased by 18%, equipment net sales increased by 32%, and service net sales increased by 6%. And as I said, this is a little bit what we indicated before, During the second half year, we would have strong sales in particular in equipment. We are growing in both, but equipment is growing fast. Profitability continues to improve in line with what we have said. Net sales increased by 18%, so of course we have support there, and the comparable operating results increased by 41%. And we are on a path to reach our financial targets, our 12% EBIT target. Looking at technology and partnerships, it's all about enabling the decarbonization of marine and energy. So a landmark deal between Wärtsilä and 80s Week Offshore, pioneering the growth of ammonia in shipping. So we have signed a contract with the Norwegian shipowner Edersvik to supply the equipment for the conversion of an offshore platform supply vessel to operate with ammonia fuel. And we will supply the engine, but also the complete fuel gas supply system and the exhaust after treatment needed for the conversion. And the vessel, Viking Energy, is scheduled for conversion in early 2026, and it's expected to start operating on ammonia in the first quarter of 2026, becoming the world's first ammonia-fueled in-service ship. And the order was booked by Vaseline in the third quarter. Another interesting example from the energy space, we have signed an agreement with Aqua Electrica to continue to support Curacao's decarbonization with a new thermal power plant for balancing renewables. So we were again contracted by Aqua Electra, which is Curacao's government's own utility company, to provide an EPC contract for a 38 MW power plant capable of providing efficient grid balancing as the level of renewable energy in the system continues to increase. Earlier this year, Aqua Electric placed an order with us for a battery storage system and also for GEMS, a digital platform. So now we are bringing it all together, the thermal, the energy storage and GEMS. to optimize the whole system. And the thermal order now was booked in the third quarter. So let's look at the two businesses and how we are evolving. So in marine, the good performance continues. Net sales and comparable operating results increased. Order intake, flat, yes, but you should remember Q3 last year, we had some pretty big orders, especially on the ferry side, so the comparison is a challenging one. Underlying order intake, we see a lot of activities and have a positive outlook. On the net sales, net sales is up with 10%. And if you look at a continued journey of improved profitability, the major drivers in Q3 were the higher service volumes and the better operating leverage stemming from our higher volumes. If we look at our service business and we see good development in marine services, marine net sales to agreement installations have been stable around 500 million euro in Q3. And you see net sales to agreements installations. You can see it seems to be tapering off, but we have a positive outlook. You can see here the latest order intake we have on the agreement side in Q3 was a lifecycle agreement that we signed with Royal Caribbean to help Royal to accelerate their sustainability goals. So we basically signed a five-year lifecycle agreement with Royal, covering 37 of their cruise ships. The agreement is designed to optimize the performance, reliability, and availability of the ship's engines, so ensuring the highest level of operational efficiency. The contract covers both scheduled and unscheduled maintenance, and includes also Wärtsilä expert inside services. This is built on a performance-based model, so it means that the gains resulting from best operation and maintenance practices will be shared by Royal and us, by Wärtsilä, further highlighting the collaborative efforts. And the order was not booked in Q3, it will be booked in Q4. So, moving to energy. Comparable operating results increased. Equipment orders and deliveries grew clearly in energy power plants. Yes, order intake is down 19%, but that is primarily driven by storage. If we look at the power plant side, queue on queue, order intake is up 20%, even more. Net sales continues to increase, up 31%. And if we look at... Very positive continued journey for energy. The main drivers is, first of all, you will see in the next picture, the continued improved profitability of our energy storage and optimization business. Then, in general, for whole of energy, higher service volumes, and also here, better operating leverage, stemming from the higher volumes, and I would also say from robust project execution. Now, zooming in on storage, we see that the comparable operating result margin continues to improve. But of course, order intake in Q3 was not what we expected it to be. However, we do see it will improve in Q4. It's about periodization of certain big orders. The orders are getting bigger and bigger for us in energy storage. And when you have something sliding over a quarter, it will have a significant impact. So underlying, we are still very optimistic about the order intake for energy storage. And the overall market sentiments are also very strong. If we look at services in energy, the agreement coverage in energy continues to be strong. And here is one of the examples where we continue to strengthen our commitments to Zambia with an O&M agreement renewal for the Ndola power plant. So basically we signed a renewal of an operations and maintenance agreement covering the 105 MW power plant owned by the independent power producer Ndola Energy Company in Zambia. The previous agreement has been enforced since 2013, so now it's time to renew. And the plant operates 12 W32 engines. Six includes two-stage turbocharging technologies. And this is, we continue also to have this high renewal rate, both in marine and energy, on our service contracts. I mean, over 90% renewal rate. And you can also see that the megawatts, our share, continues to improve. We are around 30%, and we talked about that we have opportunities to grow the percentage going forward. Now, to sum it all up, the comparable operating results improved in basically all businesses, marine, energy, and portfolio businesses. And you see the... Waterfall here from 8.6% to 10.3%. Marine improving from 10% to 10.4%. Energy from 8.4% to 10.5%. And also portfolio business is going from 3.9% to 9%. And if we zoom in on portfolio for a while, we said these are business we're going to divest, but we want to turn them around and want to prepare them for divestments. And this is what we are doing. You can clearly see it here. Comparable operating results once again increased by 41%. Now, other financials. Arjan, please. Thank you, Okan.

I'm very happy with this page. Actually, all the key performance indicators basically on this page improved compared to Q3 last year. And actually, they also compared to Q2 this year. So, good improvements basically on all the numbers that you see on this page. Operating cash flow was very strong. If you compare it to last year, main contribution came from improved profitability, while the contribution from changes in working capital was more or less on the same level. The good cash flow contributed clearly to further improvement on net debt as well as gearing, and an improved profitability supported the solvency ratio as well as the EPS to further improve. Looking at the long-term trends, If you look at the left side, let's say operating cash flow on a rolling 12-month basis, we reach 1.16 billion now over the last one year generated operating cash flow. So really, really happy with that. And if you look in the working capital to net sales ratio on the right side of the slide, the line is now landing at minus 8%. If you look at the five year average, let's say working capital to net sales ratio, it's about 2%, as you can see from the dotted line in the graph. For reference, if we go on the 10 year average, it's about 5%. This level of operating, actually this level of working capital to sales ratio being negative minus 8% on a rolling 12 month basis, I keep saying it's extraordinary, and we do expect this to normalize in the near term as well. With these words, back to you, Håkan, on the guidance. Thank you, Arjan.

Yes, and on the guidance, positive outlook for demand. We do see that the demand environment will be better for both marine and energy going forward, the coming 12 months. So, underlying positive market outlook. All right, time for Q&A.

Thank you, Håkan, and thank you, Arjen. So now there's time for Q&A. So let's start with one question per analyst. So please leave the follow-up questions to the second round. Handing over to the operator, please.

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning, thank you. So the topic I wanted to ask about is if you could give us a little bit more detail on storage. Just like looking at the orders to sales chart, look like you have a big gap this quarter, I guess. How much of the backlog have you used now and how much you have left? And was it one of just one order that maybe got slightly delayed that you expect to receive in Q4? Is that what is behind it or more broad-based?

So, I mean, if you look at our order intake, and as I said, it's a low order intake for Q3. But this is a project business. We are negotiating several contracts with several customers. And sometimes this slides from one quarter to the other. But based on what we have in the pipe and what we are negotiating, we feel confident for Q4. And we do see a strong underlying demand. I think that the storage business in general is developing in a positive way. You could see the improved profitability. I mean, we have had a focused strategy. We have been focusing on certain markets, US, Australia, UK, a couple of other markets. And we are really focused on execution. And we can see it translating into financial results as well. So overall, yes, Q3 might look not good on the order intake side, but I think we have a very positive outlook.

Thank you.

The next question comes from Vivek Midha from Citi. Please go ahead.

Thanks very much for taking my questions, and good morning. My question is, again, on the storage business. It looks like the implied ASP in storage has roughly halved year-on-year. Clearly, there's a large contribution of that from lithium prices. But over and above this, has there been any underlying pressure on pricing due to greater competition and new entrants? Thank you.

So basically, I mean, you're perfectly right. The lithium prices are coming down quite significantly. I think they are down about 40% year on year, or even more, I would say. First of all, if you look at the order backlog, we have locked that in. So it's not affecting our current order backlog. If we look at new order intake, yes, the orders we take in, we deliver more and more megawatt hours for the same price. It doesn't affect our margins. I mean, we still have the margins that we need to have. So that is also, I would say, the underlying fundamentals are in place. Competition, competition is increasing. And I think this is also where our focus strategy serves us well. We talked about it before. You cannot look at the battery storage market as one unified market with one unified customer types. We clearly focus on customers that value our core propositions, and they are delivering on time with the right quality, the execution skills, the thermal stability. So far, we haven't had a thermal incident in our power plants. Our power system knowledge and our capability to integrate battery storage with different generating assets for highest uptime reliability. That's a customer proposition that is attractive for certain customer segments. There are other customer segments that are more CapEx focused. We continue to focus on our core segments, and I think we are using our key competitive advantages in that segment, so to say. Thank you.

The next question comes from Max Yates from Morgan Stanley. Please go ahead.

Thank you. Good morning. My first question is just on the marine margins. So if I look at the margins, they've come down by about 100 basis points quarter on quarter. But if I look at the mix of the business, equipment and service, it hasn't really changed that much since the second quarter. talked about implying weaker margins in the second half has been driven by mix. So I guess my question is, should we expect as mix gets worse from here that we see another kind of sizable or meaningful 100-bit sequential margin step down in the second half? in the fourth quarter, and could you maybe talk about, if it wasn't obviously a big change in mix, what really drove the sequential margin weakness in marine? So yeah, sequential trends in marine margins, and then also how to think about the fourth quarter, because I assume that should get materially worse with worse mix.

Of course, there is more than just mix between equipment and services. Let's say also within equipment you have a mix in projects. Let's say not all projects have the same margins. It depends on what segments are you operating. As well as in the service, let's say business itself, you have basically different margin levels between spare parts, field service agreements, and projects. So there is mix and mix, and I think this has a quite significant impact in the numbers as we see them today. And as we have guided also before, we see a similar trend happening also in Q4. So these all-time high EBIT margins that we have always seen in Q4, we don't anticipate to see this year, to the same level at least.

And then to compliment Ian. Sorry if I just may compliment Ian. And, of course, we are not guiding specifically for Q4. But as we talked about, we do see a continued journey to reach our financial targets.

Absolutely. Very positive about that.

Can I just clarify what you're really trying to say with this guidance? I mean, if we really simplify it, are you saying there is a reasonable probability that margins will be below the third quarter and the fourth quarter, or should we compare it to the first nine months? I'm just really trying to – What is it you're trying to actually guide to?

I will not guide you on that question. Let's say that we have said, and we said it already at the end of Q2, that the second half of the year from an EBIT percentage point of view will not see the same, let's say, hockey stick effect as we have used to see in Q4. And the second half is, therefore, let's say EBIT margin-wise expected to be on a lower level than what we saw in the first half, which was 10.7%.

And that still holds. You've evolved that message today with what you wrote on the fourth quarter. So you're trying to tell us something. I'm just not entirely sure what it is you're trying to tell us.

I'm not sure if I get your question now. Sorry.

Well, in the text, you've made a comment about 4Q's seasonality. You've deliberately put it in there. Is it what you're trying to tell us, that we should look at 3Q margins, and you're trying to tell us that fourth quarter should be worse? Is that what that deliberate comment in the outlook statement is trying to tell us? No. I'm just really trying to kind of interpret what that message really is trying to get at.

The message has been that, let's say, Q4 traditionally or historically in Vetsna has for many years been the highest percentage. That's not likely to happen this year. That's the message.

And if you look at the specific wording, it's actually exactly the same as from previous quarter. I think we added the text there about that, of course, in the Q4. On new bill deliveries, we always know that things can slide a little bit. But otherwise, the text is exactly the same as in Q2.

Okay. Understood. Thank you.

The next question comes from Sebastian Cuena from RBC. Please go ahead.

Hi. Thank you for taking my question. My question relates to e-storage. You mentioned that in the U.S., because of regulation, there is a big focus on local content. Maybe you can elaborate a little bit how this affects you, whether you're getting e-storage squeezed out of tenders there and what your strategy is for the North American market, especially given that data centers is such a big or important business currently for the U.S. So I just want to get a bit of an idea of what your strategy is for North America and whether you're really impacted by that local content regulation. Thank you.

So if we look at storage and then data centers... energy storage, yes, local content requirements and import duties will certainly go up in 2026. So considering that, you need to have a diversified supply chain. And this is something that we are working on. It's not holding us back. It doesn't have an immediate impact on our order intake, just to clarify that. But it's something that we are working on on a structured basis. you need to have a diversified supply chain, including having suppliers in the U.S. So this is an ongoing process. On the data center, I don't see any immediate impact from localization requirements. I think we see a lot of interest as the data center market is transforming. If you go a couple of years back, data centers maybe had a power requirement of around 10, 20, 30 megawatts. It was easier to get access to the grid through a utility. But now as we talk about data centers requiring 50, 60, 100, 200, 300 megawatts, the grid cannot support this additional load. And then you actually move the whole business into type of a baseload industry, so to say. And this is where we see potential. We talked about it before. In Europe, we have our first orders. We see a market evolving in the U.S. as well, but it's still early stage.

Thank you very much. I will go back in line with my second question. Thank you.

The next question comes from Vlad Sergievsky from Barclays. Please go ahead.

Yeah, thanks very much for taking my question. I also asked on storage. Today is the year since you have started the strategic review. Now, 12 months later, would you be able to share with us, please, interim findings of this review? Sure. The business, as you show in slide 16, started to decline, at least tactically here. But operating margins, on my calculations, are in high single digits over the past two quarters, despite relatively limited operating leverage compared to history. Do you think those high single-digit margins in storage are sustainable over the medium term with volumes what you have today? Thank you very much.

So I... The general... answer. I mean, first of all, strategic review. Strategic review has not been ongoing for a year. I mean, we started in October last year. It's still the same narrative. We are looking at how the best way to create value for customers, for shareholders. We are looking into different ownership alternatives. And we want to do a thorough job. The job is still ongoing. We clearly understand that there is a A lot of interest from external stakeholders, but I would also say from internal stakeholders, what are the results? But I say we will come back when we are ready with the analysis. We are putting a lot of time and effort into it, but we are not ready to come back with our decision yet. So the study is still ongoing. When we see the development, the continued development of the storage business, as we said before, we continue to invest in it. We continue to build it. We do see significant growth opportunities. We do see a journey to continued improved profit margin. We have not provided the guidance where we think we can take this, But we are now at around 4%, 12-month rolling, and we do think that the journey of improved profitability can continue.

The next question comes from Antti Kansanen from SAB. Please go ahead.

Yeah, guys, I wanted to follow up on the previous question on the marine segment's profitability. And to be fair, I had expected a bit more in terms of earnings leverage year over year, despite the bit of a weaker sales mix. So I guess my question is, why are the margins on the marine side similar as energy, despite quite the big difference on sales mix, I mean, size of the service business? And what is kind of really driving that? equipment margin volatility that you were referring to? Is it the different product groups? It's the timing of the project? And is there kind of a meaningful difference how you allocate the shared manufacturing fixed cost between the two segments? Just trying to understand kind of the different margin trends on the two segments.

I can answer that. I would say, of course, as you know, let's say the manufacturing segment As we are organized in Wetzel, it's owned by marine. The same actually goes for the R&D, and then they provide services to energy on both ends, basically. And, of course, it's always challenging to exactly say, okay, this much is for energy and that much is for, let's say, marine when it comes to absorption differences or the likes. But I do believe that, let's say, we do it as good and as accurate as we possibly can. A lot of improvements have been made here over the past as well, and of course simplifying the whole structure, having only one location now in Vasa supports that as well. So I would say that's a fair split. It's not, let's say, doing anything special, so to say, to benefit one versus the other. It's a fair split. We also want to know it ourselves because the better you know the profitability of each business, the more accurate you know it, the better you can steer it also to better levels.

Fair split. And really about, you know, how we should interpret the margin variations. I think it's coming back, and I think I am touched upon. It's really about mix, mix in the new build segments, mix in the service segments. Yeah, I think this is as detailed as we will go. Also complementing, the overall trend is positive. Correct.

All right, thank you.

The next question comes from Sven Beyer from UBS. Please go ahead.

Yeah, good morning. Also, just to follow up on storage again, I'm sorry for that, but I still want to understand what has been delaying the customer decisions in terms of the order intake. Is it ahead of the U.S. elections that makes them wait, or have you received some of the orders in the meantime in Q4? And corresponding to that, because of the review you do for the storage business, I mean, one side of the equation could be to find a buyer for this. And is this U.S. election uncertainty maybe also delaying the whole process?

Thank you. No, thank you, Sven. Now, I can say it's not related to the elections or uncertainties around strategic review. It's the good old kind of negotiations that you have in any type of commercial relations. I mean, you have a lot of terms and conditions to settle, et cetera, et cetera. So I would say it is the ordinary pace of the business. It's not related to elections or anything else.

And that also true for the strategic review that this has not an impact?

I mean, there is no strong connection between the outcome of the U.S. election and the strategic review.

And could you confirm, because it sounded very confident on getting the orders in Q4, I mean, does it mean you have already received some by now, or is that still pending?

We can only announce orders when we have them assigned, et cetera. So we will not make any order announcement. But as I said, we have a solid pipeline, and we are confident that we will get that.

Okay, thanks. I'll get back with another one later. Thank you.

The next question comes from John Kim from Deutsche Bank. Please go ahead.

Hi, good morning. I'm wondering if we could go back to Maureen for a second. When we think about the backlog, particularly what you're going to deliver and call it the next 12 months, are there noticeable mix effects on the equipment and or the service side that we should think about when we think about margins on a go-forward basis?

Thanks. There is always mix effect when you compare, let's say, quarters to quarters or year to years. It's never the same. So in that respect, I can say that the answer is yes. I will, of course, not open up, let's say, what's the mix effect going to be.

More than we are saying that the underlying trend is positive. Yes, exactly.

So operational leverage should offset potentially any negative mix. Is that a fair read-through?

No, it's your interpretation. I mean, do also consider what we are talking about when we talk about, you know, our growth in marine is fueled by two major streams. One is, you know, the growth of our core segments. So cruise. Cruise is extremely strong now. Offshore, a lot of activities still, a lot of service activities. New build is still to pick up, but it's expected to pick up. LNG carries a little bit slower right now. Let's see how it evolves. And containers is actually coming back. So if you look at some of our core segments, and then you know the segments, and I'm sure you have your hypothesis around the profitability around those segments. I will not go into those details. Think about that. And then the second driver is the decarbonization transformation, where we have said that with new technology, like in all industries, you have a better price realization, at least as a technology leader.

To answer your question, let's say, of course, with growing volumes, you have, of course, operating leverage. That's clear. And that we also expect to see in our businesses if volume grows. Clearly. Clearly.

The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.

Hi, thank you. I just wanted to ask about storage margins. So can you confirm our calculations that it was high single digits or around 8% in Q3, and what has driven the improvement in the margins in that business?

So, I mean, you've seen the outcome. We don't give any guidance for where we expect the margin to be. We only say that we will continue the improvement. And where is the improved profitability coming from? I would say major... source is the discipline, both around what type of orders we take in, but also in the project execution. I mean, we have a good team. We are executing the project to the benefit of our customers on time, but also keeping our costs under control. So it's solid, I would say, execution excellence.

I think our focused approach in the past on order intake looking at really, let's say, the orders that we want to take and that we're also feeling very confident about that we can deliver them according to technical specification, according on the right times as customer requires them. I think that pays back now, actually, and that we can see in the margins clearly.

Okay. If I just may, like, do you see Q3 run rate as a sustainable level, or was there something exceptional in Q3 that everything went very well?

As we see, I mean, we have a positive outlook, and we do see a continuous improvement. Okay.

Thanks.

The next question comes from Erki Vissola from Indiris. Please go ahead.

Yes, hi. Regarding the lead times in marine engines and lack of shipyard capacity, if a customer orders an engine now, when will it actually be delivered? And linked to that as a reminder, on average, how much before the ship is delivered from the shipyard to a customer do you usually get the engine order? Just this timing dynamics.

I think, okay, if you order an engine now and how fast you can get it, I think you can get it pretty fast. I think, let's say, the production capacity and our supply chain is not the bottleneck. But, of course, let's say the vessels that are in the shipyard order books, as Hawker mentioned and showed on the slide as well, let's say the shipyard capacity is limited, and that also creates that shortage. Yeah, engine orders are typically, let's say, longer contracted to us, basically, than what we used to see. Earlier we saw typically, let's say, 12 months in advance, and now we see more like, let's say, 12, 18 months in advance, so it's moving a little bit longer forward.

But that is not related to our own capacity. This is how our engine... fits into the overall time schedule of the build of the whole vessel. Correct.

Would you say anything about how large a chunk of your marine engine backlog will be delivered in 26M after that?

No, we are not opening up.

No. You can see in the slides, you can see the overall for the whole company, but we are not going into the respective business for competitive reasons.

Or the book this year, next year, and the years after, yes.

Okay. Get the point and get back to you. Thanks.

The next question comes from Tomi Raylo from D&B. Please go ahead.

Hi, Håkan, Arjen and Hanna. Tommy here from D&B. Question on the thermal orders, which were pretty solid, around 200 million in the quarter. Would you have a similar confidence to say that you would expect also those orders to improve in the fourth quarter compared to third quarter?

So, Tommy, you know as well we don't provide guidance per quarter. I only say that the underlying trend is positive. Of course, this is a lumpy project business, so it can vary. I don't make any statements about Q4, but I can say that the underlying trend is positive.

And we have a solid pipeline as well.

Thank you. The next question comes from Akash Gupta from J.P. Morgan. Please go ahead.

Yes, hi, good morning, everyone. I have a question regarding your order book delivery schedules. So when I look at your deliveries in current years, we have only slight uptake in the backlog you have for this year. But then when I look at the consensus revenue expectations, we have like 20% increase in revenue expectations. So maybe if you can help us reconcile, is there anything that consensus is missing on the revenue side, or has there been any deference from this year to next year in delivery schedule? Because when we look at your next year delivery schedule, you have quite a large gap there versus what backlog you had last year. So, yeah, any commentary on your Q4 order book? Thank you.

No, we are not commenting on consensus. Let's say we are providing, let's say, guidance on order intake, and order intake with, of course, let's say the assumptions that analysts make converts to, let's say, sales in a certain year. Of course, the order book is a fixed one. That's a given. That part we have. But how much will come in addition, let's say, that converts into deliveries next year, I think that I leave to your, let's say, assumptions to identify that. We guide positively. Let's say we have an outlook for better in both end markets. We see a growing trend in book-to-bill ratio all the time. So we are very confident that, let's say, we see growth also in the future.

Maybe I phrase my questions differently then. If you look at the last couple of years, when we look at your backlog in the slide and actual revenues in Q4, we had delta of like a couple of hundred million euros. Are there any reasons to be different this time around? Thank you.

I don't have now in my head, let's say, what happened in all the previous years in Q4 compared to that particular statistic. So, honestly, I cannot answer that one.

I think what we have said, and it's nothing new, second quarter will be high level of equipment deliveries. This is what we have said. We are not guiding for Q4. And once again, and this is clearly we understand it's a challenge, but we are a project business and we are a bit lumpy, and therefore it's very hard to guide on specifics on the quarter.

And looking at the existing order book, there is always, let's say, in-for-out part that even happens within the quarter, in particular on sales. And you also see every year, at least in all my 30-year-plus in Wetzel, we see every year at the year end, let's say, orders slipping to next year. But we also see it the other way around. Orders that plan to be delivered in January, they are delivered earlier. So it's never exact. But it's ballpark close, I would say.

Thank you. Thank you. I'll go back and key now.

The next question comes from Sean McLaughlin from HSBC. Please go ahead.

Good morning. A question on your portfolio business. You've seen strength here both on demand and on margins. So firstly, is this You talk about gas solutions and marine electrical. What are you seeing across other segments, automation, navigation, voyage, and so forth? And I guess, how is better demand and profitability changing your thinking on how you structure and whether you keep these businesses going forward?

Thank you. So, I mean, the direction is still clear. We're going to divest these businesses. So we are not reconsidering. We will divest. And as we said before, we want to do this in a sensible way. We want to find the right owners, and we want to have the right value opportunity for us as Wärtsilä. To create the value, we have several of these light gas solutions have been not profitable, and we are turning it around. And we are in different stages of our divestment process for each of these four assets. They are clearly for sale, and it will take a couple of years to execute this, but it's clearly what we're going to do going forward.

And we are, of course, very happy with the profit improvement because that clearly supports us in the divestment process as well. And, of course, it can vary a lot, let's say, one quarter to the other. This quarter, for example, we had a very good service business in the portfolio businesses.

Very clear. Thank you.

The next question comes from Tom Skogman from Carnegie. Please unmute your microphone.

Yes, hello, this is Tom from Carnegie. I would like to understand your margins a bit better, not just for this quarter. So, for instance, is the order book margin now after, you know, several years of great demands clearly better than what you have delivered year to date? And then when I look at your margin compared to other engineering companies, I mean, I don't really see any reason why your service margin should be worse than, you know, most have at least around 20%, but that would give you really low margins in the equipment business. So what is kind of, is the service margin weak because of a lot of modernization projects with volatility, or is it still that the equipment margin is really low?

We are not going to comment, Tom, on the margins in order book. We are not guiding like that. Of course, we are all the time aiming to improve margins going forward, and I think we are doing quite well in that respect, but to open it up in detail level, we will not do.

No, and we don't guide on margin on service, respective new builds. I mean, we have said for sure that the margin on services is better. Then I think, and you can see this in the waterfalls here, I think you can see clear evidence of that we are improving our execution skills. I mean, we have the volume leverage, but we also, I would say both in marine, are improving the way we operate. We have also made structural changes like Trieste and closing the manufacturing and centralizing the European footprint to Vasa. So we are taking many steps to improve our competitiveness, I would say.

Perhaps rephrasing a bit, I mean, the other companies now report their service margins, basically all of them, you know, signal what it is, close to 20% or so. And is there something that kind of means that you could not have a 20 or 20-plus margin in service? Is it so competitive with pirate parts and so many modernization projects where the competition is tough, or is it just kind of a thing that you can fix, basically, then?

So I would say we don't break out the margins, and we don't want to do that for competitive reasons and for a number of reasons. To your specific questions on pirates, yes, there are pirates, but I think we have, you know, coming out of COVID and going forward, we have really strengthened our position on the spare parts market because through COVID and also after, we have been showing that we are reliable, we are there. And also our strategy of moving up the service value ladder means that customers that before might have only kind of transacted with us on spare part business, they are now starting to move into their first agreements, et cetera, so moving up the service value ladder. And that really supports our service business going forward.

And with engines getting more complex and agreement coverage getting better, the impact of Pyrus – Piracy, if you want to call it like that, is getting less and less. That's clearly in our favor.

But then on the modernization side, would you say that your type of modernization projects are more complex with lower margins than in many other engineering companies, or is that a wrong understanding?

We are not going to comment. We can't comment on that. I mean, I think we are growing services. We are growing in a profitable way. I mean, one area is, I mean, when we talk about the digital toolbox, we see great, application examples of applying digital in the service side. And we have many examples of that, both externally, which has enabled us to do the kind of the performance-based contracts. We are unique in the industry by providing performance-based contracts. But we also see this in our internal efficiency, so to say. So I think we are certainly not perfect, but we are step-by-step improving our efficiency also on the service side.

Okay, thank you.

Thank you, Tom. Then we have a couple of questions from the chat. We continue with the service theme. Energy service order intake growth has been slowing and been negative on a year-on-year basis in recent quarters, including Q3. Could you talk a bit around the market dynamics here and what you expect going forward should we assume continued declines ahead?

So on the energy services, I think first if you do the Q1Q comparison, In Q3 last year, there were a couple of big retrofit projects. And they saw that these big retrofit projects, they come when they come. So comparing Q on Q, we look a bit flat. There is also, if you look at the megawatts that we have on the agreement, you saw the curve was flattening out, but that is also related to that we have ongoing negotiations with renewals. It's just that we didn't manage to get them into Q3. They will hopefully come in Q4. So what I'm trying to say here, the underlying trend is positive.

We are definitely positive, and I think... even a better parameter to look at is book-to-bill ratio. If you look at the book-to-bill ratio for energy services, it has been over one for a long time already. So that's the real proof, in my view, on the continued growth. Of course, it can fluctuate quarter-on-quarter comparisons, but the underlying trend is positive, and moving up the service value ladder, as Håkan was reflecting upon, is clearly working.

Then a product-specific question. What future do you see for scrubbers?

So I think that the – I mean, we are very much looking at Scrubber 2.0, where the next step is to go for the carbon capture. I mean, the Scrubber, the basic technology basically enabling customers to use heavy fuel – It's still there. There are still business cases. And there is one way of looking forward on the decarbonization story of marine is to evolve the scrubbers to carbon capture and then still being able to use heavy fuel oils. even in a regulatory context where your year-on-year needs to decrease your carbon emission footprint. Now, of course, and we are investing, as you know, in carbon capture, and it's our extension of the scrubber business. We are selling and delivering scrubbers that are enabled for carbon capture and production. We are having our first pilot installations. We will have a commercial launch of carbon capture next year. The key thing is that it's a whole ecosystem that needs to evolve. We provide one part, which is to scrub out the CO2, but then the ecosystem needs to evolve about storage. Are we going to pump it back in a well? Are we going to use it for producing synthetic fuel? This whole ecosystem still needs to evolve, and it's at a very early stage, I would say.

Thank you, Håkan. Thank you, Arjen. Thank you for all of the good questions. Before closing this call, I would like to remind you of a couple of upcoming investor relations events. So we will host a CEO strategy call and also a theme call focusing on energy power plants in December and then pre-talent call together with Arjen in January. Thank you.

Thank you very much.

Thank you very much.