Wartsila Corp B Shs

Good morning and welcome to this news conference for Wärtsilä Q2 2025 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 highlights. He will continue with the business performance and after that our CFO Arjen Behrends will continue with the key financials. After the presentation there is good time for Q&A. Please, Håkan, time to start.

Yes, thank you, Hanna-Maria. And a warm welcome to everybody online. If we sum up the whole quarter, it's been a very strong quarter for Wärtsilä. Order intake, net sales, operating results and cash flow, all increased. So order intake increased by 18% to 2.2 billion euro, which led us into an all-time high order book of close to 8.8 billion euro. Net sales went up with 11% to 1.7 billion euro. And we continue to improve our operating margin and comparable operating results increased by 18%, 207 million euro and we are now at 12% of net sales. And on the operating results, we increased it by 11% to 186 million euro, reaching a 10.8% level. Services, we still continue to have solid performance in services. Yes, I know the order intake is down a little bit, but I will comment more later on, so to say. Still solid performance in services. In particular, we continue the positive journey on the agreement side. So service agreements was up with 48%, and on the net sales for service agreements is up 9%. And cash flow, I am going to talk more about it, strong cash flow, 460 million euro. If we look at our summary of all the numbers, We can look at them from this perspective, so focusing on the second quarter. Order intake up 18%, so 2.2 billion euro. And you can see that it's primarily driven by equipment. Up 45%, both marine and energy, specifically a lot in energy. So equipment going from €0.9 billion to €1.3 billion. Services down a little bit, but it's related to the project-oriented retrofit business, which is a bit cyclical, so I'll come back to that. No cause for alarm. We have a strong service business. Order book, all-time high, €8.8 billion. Net sales up 11% again to €1.7 billion. And we see also a mix, strong growth on the equipment side, 12% up to €812 million. And also strong continued growth on the services side, 9% up to €907 million. Book-to-bill at 1.27. So strong book-to-bill. Comparable operating results reaching 207 million euro, up 18%. And that corresponds to a 12% margin of net sales. And on the operating results side, up 11% to 186 million euro, corresponding to 10.8% of our net sales. Industry outlook, marine and energy, we start with marine. The activities in our and Wärtsilä's key segments remain very supportive. So strong ordering across crews, container ships and LNG bunkering vessels really support our marine business order intake this quarter. The number of vessels overall in the review period decreased to 647, so down from 926 compared to the same period last year. The continued uncertainty around the economic outlook and global trade policies affected negatively the overall market sentiment and also new-build investment appetite in some segments. The impact on ordering has been uneven, I think that's the key message, across vessel segments, which continued with strong demand in our, in Wärtsilä's key segments, particularly, as I said, on cruise container ships and LNG bunkering vessels. The regulatory drive, including the global carbon fee proposed by MEPC-83, is incentivizing ship owners to increase their investments in ships that are more fuel efficient and can use alternative fuel. As we all know, the MEPC proposal is coming up for a formal decision in October. In the first half of 2025, 183 orders for new alternative fuel capable ships were reported, and that corresponds to 55% of the capacity of the contracted vessels. And if we look at the Clarkson numbers to the right here, you can see that if you look at the overall status of the industry in the top graph, Clarkson's outlook forecast for 25, 26, 27 are actually in line or actually slightly above the 10-year average. So 2024 was a record year. It's coming down a bit. But if you take a little bit longer-term perspective, you see that the projections are in line with the 10-year average. Now for VAT select key segments, it's even better. So we can see here 25, 26, 27, clocks and data, it's really, we're really looking at contracting level that is above the 10-year average. So good for VAT select continued evolve. If we turn to the energy industry and the energy market, the global energy transition continues to move forward and growth in electricity demand continues to drive new power capacity. Most of the upcoming capacity growth will be met by renewables. It is the most affordable source of energy, combining wind and solar, and both of these are expected to post all-time high additions in 2025. And while the global macroeconomic environment has made project financing more difficult, the decreasing inflation and interest rates are expected to encourage investment decisions in the mid to long term. For engineering power plants, the market demand for equipment and services has been strong. Demand for baseload engine power plants is expected to remain stable, with further growth opportunities in data centers. The driver for engine balancing power also continues to develop favorably. Now, on the challenging side, in battery energy storage, the demand is closely linked to the increased share of intermittent renewables in the energy system, and that continues to progress strongly. However, the US market is facing significant headwinds due to uncertainty around tariffs. And the growth do continue in other markets, but the competition is increasing and putting pressure on profitability. So when more and more suppliers focus outside of the U.S., competition is clearly increasing. Looking at the numbers, looking at the graph, so organic order increase actually increased by 20%. Order intake increased by 18%. Equipment order intake increased by 45% and service order intake went down by 6%. Come back to that later. All-time high order book, rolling book to build, continues well above one. It's the 17th quarter that we now continue to have a book to build that is bigger than one. We also see in the graph to the right here, we are clearly building our backlog also for the future. So the backlog is extending out over time. We will not have all the sales this year. It's prioritized over the years to come. Organic net sales increased by 13%, net sales increased by 11%, equipment net sales increased by 12% and service net sales increased by 9%. Profitability continues to improve. So, the United States was up with 11%, which then contributed to comparable operating results increasing by 18%. And comparable operating result margin, 12-month rolling is now at 11.1%, an increase from 10.2%. So technology and partnerships, two very important steps during the second quarter. First of all, a lot of excitement, our first engine power plant to be delivered for U.S. data centers. So we will supply 282 megawatts of a flexible engine power plant to operate a new data center project in Ohio in the U.S. This on-site power facility, providing power directly to the data center, will operate with 50 SGs running on natural gas, and we booked this order in the second quarter. On the marine side, we launched our carbon capture solution to the shipping market after the world's first full-scale installation success. There has been a lot of players working in the area, but this is the world's first full-scale and commercially viable solution. In May, we announced our breakthrough. carbon capture solution becoming commercially available to the global marine industry. And in our test, because we've been running now full-scale tests on vessels together with Solvang, we can reduce CO2 emissions by up to 70%, providing ship owners with an immediate solution to meet increasingly stringent environmental regulations. And the ability to capture CO2 from the ship's exosystem has a major potential for the industry's efforts to reduce greenhouse gas emissions, of course, considering the international IMO target for 2050. It is an ecosystem that needs to evolve, how you handle the carbon that has been captured, but one very important puzzle piece to this equation has now been added. We have now commercially viable carbon capture solutions. So, if we look at our businesses more in detail, we start with the marine side. We had higher order intake, net sales and comparable operating results. Service net sales increased by 11%, supported by merchant, ferry and crew segments. You can see order intake was up 14%, net sales also up 14% and we are now at a rolling 12 of 11.9%. Absolute we are increasing the major contributors is higher service volumes and better operating leverage. And, of course, we have increased our R&D. That is, of course, dragging down the P&L, but it's certainly an investment for the future. And as you know, we are positioning ourselves as a technology leader in the decarbonization transition in marine and also in energy. Now, we continue to have good development on the marine service. Overall, the service book to bill is well above one. We have had, if you look at the last two years, 10% annual growth. Then some of you ask, so why is the ordering taking services down this quarter? And I think you can see the answer to the right here. This is the graph that we introduced for this year, where we have the book to bill on the y-axis, and you have the time span. You see the thick line is the overall. And then you see the four different disciplines of our service business. And you noted that dotted line, which is the retrofit and upgrade business. And that is a project-oriented business. And we all know project-oriented business, that could be movements from quarters. And if you look in Q2 2024, you see the peak there, that is now coming out of the of the 12, LTM 12, so that is affecting. You can see the other disciplines, book to bill, and really encouraging to see, you see the blue service agreement line, it really has a strong positive trend. So we have a strong service business in marine and it's going to continue to grow. Energy. Record high order intake, double-digit net sales growth and increased operating results. So order intake up by 93%, it's all-time high order intake on the energy side, of course driven by certain large orders, really helpful here. Net sales up with 31%, we are having a rolling 12-month EBIT of 14.5% and you see the drivers, absolutely we are up the drivers. better operating leverage, mainly stemming from the higher equipment sales, higher service volumes also contributing, and also in energy. We are investing, which is, of course, having a negative impact short-term, but should have a positive impact long-term. We are investing in R&D, and also on the energy side, we clearly see opportunities to position ourselves as a technology leader in balancing power, but now also in data centers going forward. Similar kind of picture for energy on the service side. So really good development in energy services. Overall service book to bill, well, about one. Here you have a little bit lower CAGR over the last two years, 8%, but still I would say encouraging. And it's the same story looking to the right graph here of, you know, why is the order intake on services side down? It's the same phenomena here with the retrofits and upgrades. You see they are below one. And that is, you can see also here, the second quarter of 2024, where we had a peak. So no cause for alarm. And you see the big thick line, it's well above one. So also continued positive development on the energy services side. Energy storage. More challenging, order intake decreased due to both direct and indirect impact from U.S. tariffs. So order intake and revenue recognition expected to improve during the second half of the year. Order intake was down 79%. That is quite a lot. Of course, the U.S. tariffs, the U.S. market is muted. Competition increases in other markets. So our order intake has really taken a toll, no doubt. Net sales down 42%. If we look at the rolling 12 EBIT, 3.5%. Still, I would say, fairly okay. Strong execution in existing projects. So credit to the team there. We see the absolute is coming down. On the positive side, we have improved equipment margin in the backlog and we are executing in a good way. We also have higher service volumes. The lower equipment volumes and weaker operating leverage has a negative impact. We continue to invest in R&D, so we also have higher R&D costs. And we are continuing what we said before, we will increase our focus on growing in certain selected markets. And we are investing in terms of headcounts in new markets, customers and products. Here you have the EBIT bridge from Q2 2024 to Q2 2025. And I think it's encouraging to see improvements in marine energy and portfolio business. And the comparable operating results increased by 18%. So with that, Arjan, over to you.

Thank you, Håkan. If we look at the other key financials, first of all, as Håkan mentioned, let's say very strong cash flow in Q2. We almost doubled, let's say, Q2 last year and definitely doubled, let's say, Q1 because that was 190. Good cash flow was supported by good profitability development. We can see that also on the EBITDA line here, as well as, let's say, good positive contributions from working capital. If we look at working capital from Q1 to Q2, basically 154 million Euro improvement, now landing at 924 million Euro negative. If we look at the improvement areas, it mainly came from inventories, receivables, while at the same time, the advances received held up on a very strong level. Good cash flow clearly supported, let's say, the positive trend on net debt as well as on gearing. The good result also contributed to the positive trend on the solvency. And the combination of good result as well as good development in working capital supported clearly, let's say, ROCE. So basically, I'm super happy on this page. Let's say all the numbers are trending in the positive direction. If we look at the longer-term trends, First of all, the left side graph, let's say operating cash flow, clearly the trend is up. Very strong cash flow, as I mentioned, in Q2. I think Q4 24 was the record, so very close to that. Very happy with that, of course, and very much driven also by, let's say, good order momentum and good down payments and milestone payments from customers. Working capital impacted by the same, a very strong, let's say, performance in Q2, making another step, let's say, down to the negative. If you look at the five-year average, let's say, working capital to sales ratio, it now stands at 1.3% from 2.4% in Q1. Clearly, let's say, we are trending in a positive way, but I will still, and I did it many times before, highlight that, let's say, negative working capital is something could say extraordinary for Wärtsilä, because it only started Q4 2023. Since then, we have been going, let's say, down on the working capital trend. Very much driven also by, of course, our continuous, let's say, order growth. Let's say book-to-bill ratio for the 17th quarter in a row has now been, let's say, positive. And that, of course, also supports, let's say, if you at least agree, good payment terms with customers to a positive working capital development. Over time, at some point of time, you need to execute these projects so it will level off this orange line at some point of time. I don't expect that to happen this year to a, let's say, strong positive bending, so to say, and most likely not in the first part of next year either. This is a new graph, or a new slide actually, and here we want to reflect upon our financial targets and how are we trailing against those. In the top right corner, marine and energy combined, target of 5% annual organic growth, last 12 months is 19%, so doing very well there. If you look at the profitability, the operating margin target, 14% is the target. Last 12 months here is 13.1%. Standalone quarter is 13.6%, so also really on the right track there. Just for reference, in the first half, we clearly improved. End of Q4 last year, it was 12.8% on a last 12-month rolling basis. If we go to the right side of that top A graph slide is the energy storage. Clearly, let's say the operating margin target is within the range, 3% to 5%. But we have a challenge with the volumes at the moment. Let's say the U.S. market is stagnant. All competitors move to the more active markets, and that, of course, increase competition. That's a hurdle to overcome in the future. Looking at the group targets in the bottom, gearing, our target is to be below 0.5. I think we are almost 0.5 negative, so clearly, let's say, in the right track there. And also dividend. We pay every year basically at least 50% of EPS out as dividend, even in the year 2022 when we made a loss. Overall, I would say we are doing quite well, or very well, actually. We are on the right track to reach our financial targets, and we are confident to reach them. With these words, back to you, Håkon.

Thank you, Arjen. So you also noticed our recent announcement on the M&A side. So we continue our work to become a more focused, stable and profitable company. And we do progress to divest the business units in our portfolio business. So we had the announcement that the divestment of ANCS to SOLIX has now been completed. So 1st of July we divested ANCS to the Swedish investment company SOLIX Group AB. We announced the signing in December 2024 and we estimate to have a positive impact of 30 million euro on the result for 2025, of course subject to post-closing adjustments. And this will be most likely reported in items affecting comparability in the third quarter. Then we have the second recently announced transaction, and that is we are divesting Marine Electrical System to Vinci Energies. So 17th of July, we announced that we have agreed to divest MES. to Vinci Energies. Vinci is, as you probably know, a global company focused on multi-technical solutions and services for energy, transport and communication infrastructure. And of course, subject to the ordinary approvals, we expect that the transaction will be completed in the fourth quarter of 2024. So finally, the outlook. And on the marine side, we expect the demand environment to be better the next 12 months compared to the previous comparison period. On the energy, we expect the demand environment for the next 12 months to be similar to the comparison period. But here we should all note that we have had a very strong last 12 months. We had all-time high order intake in the second quarter for energy, and we still guide for similar. On the energy storage, we expect the demand environment for the next 12 months to be better than in the comparison period. However, the current geopolitical uncertainty particularly impacts this business, and it may affect growth. Then we have the general comment. Given the current high external uncertainties, it's very hard to make forward-looking statements. Due to high geopolitical uncertainty, the changing landscape of global trade and the lack of clarity related to tariffs, there are risks of postponements in investment decisions and of global economic activity slowing down. So that's today's presentation. I would say overall for Wärtsilä, a strong Q2. So now we go over to the Q&A, Hanna-Maria and Arjan, you will join back.

Thank you, Arjan. It sounds like that we have many good reasons to smile.

We do.

So continuing with the Q&A, I kindly ask all of the analysts to start with one question. So please leave the follow up questions to the second round. You can also raise some questions in the chat. And handing over to the operator, please.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Max Yates from Morgan Stanley. Please go ahead.

Thank you. Good morning, everyone. I guess just my first question is just trying to square up the energy guidance and thinking through kind of your expectations of data center orders. I guess a question kind of we're all wondering is should we think about the guidance being broadly stable, that maybe we get kind of one of these orders falling again in the next 12 months, and that's kind of how we think about the stable outlook? And obviously, since you've now announced the order, could you just give us kind of any color on other discussions that you're having? Would it be reasonable to assume that we get another one of these in the next three months, or are we thinking more along the lines of kind of one of these a year, hence the sort of broadly stable guidance? So any color there would be helpful. Thank you.

So I think you should really consider the 12-month guidance. It's not a three-month guidance. It's a 12-month guidance. And we know this is project business and we always underline that this is lumpy. So I will not give a guidance how many orders we're going to receive in the coming 12 months. When it comes to data centers, we have ongoing discussions with potential new orders. Those discussions are in varying degrees of maturity. So, but normally I would say they take time. These are projects, these power plant projects, and they normally take time. So I think you should consider this from a 12 month perspective. And I would say also, as I said, you know, we are given this guidance considering also a very strong order intake the last 12 months and an all time high Q2.

Sorry, can I just squeeze in one very quick one? On the pricing on this data center order, if we use your kind of prior quarters of price per megawatt in your energy division, would the pricing on this order look completely different? I would assume it should be meaningfully better than what would be a normal power plant order on a euro per megawatt basis. Would that be a correct conclusion?

Well, this with Europe, first of all, there is always this challenge how much of EPC content there is and how much equipment. So these are equipment. I mean, you know, data centers, orders, we have a good price realization, but of course it's a competitive market. But I would say, you know, they are certainly not dragging down our overall margins.

That's good to hear. Thank you very much.

Thank you, Max.

The next question comes from Uma Samlin from Bank of America. Please go ahead.

Hi, good morning, everyone. Thank you so much for taking my question. My question is on your marine outlook. You're guiding to be better than the last one month, but then on your slide, page four, You have the lines showing the key segments versus the general marine contracting, but that seems to show that that calms down in 2025. How should we think about that? Where do you see the market to be better in the next 12 months?

Sometimes the line is breaking up a little bit. So I will try to answer the question that I thought you were posing. I mean, if you talk about our core segments, we clearly see a continued positive development. Cruise, ferries, you know, also some parts of the LNG space, also some parts of the merchant space. And you see in the graph that I think Clarkson is agreeing with us in their numbers as well. So that is the major driver.

Okay, thank you. I was just referring to the second graph. on the page for that because that clearly shows that your key segment is coming down from a high level on the 2024 versus 2024. That's why I was wondering if that, you know, how should we think about that? Do you see the cruise and ferry segment to significantly outperform that? Or, you know, what is the sort of what makes you feel that it will be better than 2024 if the contracting will be done?

So if you're referring to the kind of slight downturn of the 24, I think look at the longer trend, so to say. And also, I restate, we have a positive outlook on the demand side, and it's driven by our core segments. And we do see that those core segments, they will perform also in the future.

If I can add to that comment, Håkan, that graph that you are looking at is the Clarkson forecast. That is not our order intake. Let's say it's the Clarkson forecast on chip contracting. And as you can see from that graph, let's say if you look at 10-year average and our core key segments, it's well above, let's say, the 10-year average. So our markets are developing very well. And we believe that we have, let's say, a good position to, let's say, capture a good number of orders. Clarkson input is one of the inputs that we use for making our guidance. It's not the absolute holy grail of, let's say, forecasting. We use, of course, also our own business intelligence. We have other sources for take offshore. We have other sources to use than Clarkson, for example, as well. But also, of course, what our salespeople hear and see in the market. So it's not the only input we use to make our guidance. And this one is particular. Let's say the graph relates to Clarkson forecasting.

Okay, that's clear. Thank you very much.

The next question comes from Akash Gupta from JP Morgan. Please go ahead.

Yes, hi, good morning. And my question is on storage outlook. So in storage, you are guiding for higher activity in the next 12 months than past 12 months. And I wanted to ask how much of that is the reflection of underlying market versus the weak orders we have seen in last three out of four quarters, which means that your base is not really that demanding. And on the market outlook, I mean, we saw the headlines overnight that there is a big tariffs that the US is going to impose on battery materials from China. So just wondering, have you incorporated that sort of uncertainty on the business in your outlook?

Thank you. Thank you, Akash, for the question. So I would say it's a bit mix of both. I mean, we are certainly coming now from a low level. So you're right in the sense that that is, of course, part of the guidance. But I would also say that we do see continued growth of basically all markets except the U.S. So when we think about market growth going forward, US situation is extremely uncertain. I don't think anybody can make any predictions around that. But we look more outside of the US. As you know, geographically, we are fairly well diversified with other strong markets like Australia, UK, other markets in Europe. And this is behind our kind of outlook.

Thank you.

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

Good morning and thanks for taking my question. It's on the service order intake and the two charts that you've shown on the rolling 12 months. I was just wondering if, I mean, is all fair what you said on projects and that's lumpy. So I would be curious the pipeline on projects that you see. So is there a chance that this gets better again? And the other question I had is just when you look at field service and spare parts, the trend is also seems to be clearly rolling over more slowly towards a more slowly development. I mean, is there the cannibalization also from service agreements that, you know, you have those kind of items in there? Or how should we think about those two lines coming off? Thank you.

Yeah, a few comments on that. Yes, of course, the more agreements you have, a part is shifting. That's a fact. I would say overall, as we have said many times before, if you keep your book-to-bill ratio above one, you're growing. And there will always be fluctuations between, let's say, single quarters on something is up or something is down. It has a lot to do with timing. Now, when it comes to the retrofit projects that Håkon was mentioning earlier, as well as the main reason of this rolling 12-month book-to-bill ratio going down, just for Your info, and I think you can calculate it from the numbers that we provide, but I will give you the numbers. Out of the 2024 order intake, full-year order intake for retrofit and projects in energy, 43% came in Q2 last year, and 37% in marine. So Q2 last year was extremely strong, and that has all to do with timing. It could have also been distributed differently, but it came all in that quarter. If we look forward, and that is confirmed both by Energy and Marine, we have good opportunities also in service and upgrade. So as Håkan said, we are not concerned. Let's say we believe in our service business, we move up the service value ladder, and that trajectory is not stopping.

Thanks, Arjen. Can you just repeat what you said at the beginning? I didn't quite, the audio was bad in terms of what you said on parts and field services. So there is a cannibalization with the agreements.

There is always, let's say, if you do an agreement and you do operation and maintenance, there is, of course, a little bit, let's say, moving from, let's say, field service, for example, to agreement sales. So there is always a little bit of, let's say, movement in between the lines if you look like that. But it's not majorly.

and not so much on the spare parts bit.

No, no less on the spare parts.

And how do you see that? I mean, again, if you look at those lines also on spare parts, you know, it's coming close to one. Is that something just also that you see as a comp issue or is there kind of an underlying slowing there also in the market?

I would say it's more, let's say, Periodization, let's say what is crucial of course for transactional service business is the running hours of the fleet. And let's say the ships are running, let's say transportation is not stopping, it's not slowing down either, so the running fleet is doing well. Actually, the same goes for the energy side. Let's say the running hours of our installed base is fairly stable. And that, of course, offers opportunities. If you then get, let's say, more agreements and can propose, let's say, solutions from an upgrade perspective to customers that they are not even aware of themselves, because we know it, we have implemented similar solutions on the other side of the world, it works also for you, you have the same conditions, that's how we move up the service value ladder and that's how we continuously grow. And for us, the main thing is to keep the book-to-bill ratio above one. That's the sign of growth.

And also to complement, especially on the energy side, because we have addressed this in some of the service calls that we've been having, we see that the overall running hours of our installed fleet is going up overall, but certainly in energy, it's not that balancing power is having a negative impact on this. The overall running hours of the fleet is going up. And what we do see as well is that Sometimes when we install a plant for balancing purpose, the energy efficiency is so good that some of our customers start running it more and more and more, which is, of course, good for running hours and for our service business.

Understood. Thank you both.

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

Thank you very much, everyone, and good morning. I had another follow-up question, really, on energy, particularly on the margin side. Given what we've seen in Q2, as you commented, the data center order likely pretty positive for the margin, but at the same time going forward, the mix should be moving more towards equipment. So how should we think about energy margins over the next, say, two years? Is there much upside here, given those developments? Thank you.

So we have two kinds of... things that is happening. I mean, certainly, and I think if we continue in a good way, we should see more new build coming out from the energy side. And we do know that, you know, services has higher margins than new build. That's one thing. But you should also note, I mean, in the margin of the things that we deliver, that they're improving. So, and I think there are two major factors we highlight. I mean, the the margin in our order backlog is developing in a positive way. And you should look at some of the structural things that we have been doing. I mean, we talked a lot about the move from more equipment, less CPC, but also some of the structural changes that we have made. I mean, ceasing manufacturing in Trieste and working with operational excellence. And all those factors contribute to a more positive margin development for new builds down the line, so to say. So it starts to get the more mixed picture in a positive way, I would say, because margin in your bill is improved. Understood. Thank you very much.

The next question comes from Panu Leighton-Mackey from Dansky Bank. Please go ahead.

Thank you. I wanted to ask about the strong energy equipment orders in Q2. Could you kind of provide color? How did those split between baseload balancing and data centers? If you look about your expected pipeline going forward, how does that split between those three segments?

So basically, I mean, we talk about balancing and baseload, and data center is a subsegment within baseload. We will not separate out data centers, and there are too few orders, and we will disclose too much. But if we look on the order intake in Q2, it was all baseload oriented. So, I mean, RecoDict, baseload application, some of the other, I mean, data center baseload, some of the other orders baseload. So, but this will vary from one quarter to the other. I mean, going forward, both balancing and baseload will be important. Thanks.

Can I just have a follow up? I mean, Excluding the data centers, would you say that the base load market looks better now than it used to?

I think it looks stable. And with the caveat that it's extremely, you could say, it varies quite a lot. I mean, if you have a big auction in Brazil one year, it could really swing up. And then if there are not these big opportunities, it can go down. So therefore, I would say if I average it out, it's stable. But I mean, it's no secret that Brazil are coming for auction or they have been postponing the auction for quite some time now, but it will come eventually. So there are opportunities that are interesting going forward also in, you could say, the normal baseload business.

Okay, thank you.

The next question comes from Auntie Kansanen from SEB. Please go ahead.

Yeah, hi guys, it's Antti from SCB. Just one question for me related to the power plant side and I guess the US markets. You mentioned that on the data center side there's various degrees of kind of maturity on the projects that are in the pipeline. But after booking the two large ones on the power plant side on Q2, what is your own delivery capability? And also now that the backlog is stretching longer and longer, how do you take into account the potential tariffs between EU and US in booking those kind of the US orders, data centers or other kinds? Yeah.

So good question. I start with the tariff and then I go to capacity. So tariffs, we are forwarding that to the customer. So we are not taking tariff risk on our side. Right now it's 10%. Let's see what's going to be. But clearly with the language and the agreements we have with our customers, we are not taking the tariff risk. On capacity, we are still running, I would say, at around 75% as part of our technical capacity. However, I would say that for certain parts of our product portfolio, our lead times are now starting to increase as well. And where there are other parts of our product portfolio where we still can deliver around 12 months. And I will not go into the details because these are certainly, we don't want to disclose that for competitive reasons, so to say. But you could say with a good streak that we have had, certain parts of our product portfolio, the lead times are now increasing for deliveries.

Yeah, maybe a follow up on that one. Do you believe that that creates some urgency among your client base? I mean, there's a little bit of a scarcity, whether it's turbines, whether it's now your engines. Do you think that that will have an impact on any negotiations that you are having or is it more about what the clients kind of their own project pipelines are?

No, I think in general, I think there is a recognition not only in data centers, but in the power plant market overall, that lead times are getting longer and longer. And that is something I think that all parties that are involved are recognizing. So that is, of course, having an influence on the negotiations. Yes.

All right. Thank you.

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

Yeah, thanks for taking my follow-up question. It's also on data centers. Maybe two parts of the question, if I may. The first one is just obviously now that you had the announcement, I was just wondering whether this has done anything to your incomings, because I could imagine that a lot of people planning data centers maybe still have a bit of a conservative mind on what kind of power generating assets they use and engines is still something maybe relatively new. I mean, do you feel that's changing the minds of people and the pipeline gets bigger because of the announcement that you made or does it not make any difference?

Well, I would say short-term maybe not a huge difference, but long-term I think it makes a difference because it is really about Sven, you have been with us, showing the advantages of reciprocating energy compared to gas turbines. That is the journey we are on. Now, as we talked about before, data centers are moving in because it used to be less power. You know, there is a sizable chunk of the market which is really moving right into our sweet spot. But there are still many people for whom the rice technology, the reciprocation is new. So this certainly helps mid to long term, I would say. And I think we are building the key thing here. Why are we competitive? We are competitive. We are more fuel efficient. we are more modular and that means because these power plants, I think we talked about it before, they need high uptime reliability and then the redundancy concept becomes very interesting. And this modular approach of our engines is an advantage. We don't need water or very little water compared to our gas turbines competitors. So there are some, you could say, intrinsic advantages, which we feel really excited about. But it's the good old story of, you know, taking our customers, new customers with us, show the benefits, show that we can deliver. But I really like that journey, I must say.

And regarding the pipeline, right, I mean, of course, we understand these projects are at different stages of negotiation, but are we really talking about a handful of such projects for the next 12 months, or is this like a double-digit number of such projects? It's just very difficult for us, I guess, to... To size the opportunity.

It's more than a handful. The challenge is it's a very dynamic space. So there are opportunities coming up, and then they're down again, they stay silent for a while, then they come up again. So it's only more than a handful. There is a lot more. But they come and go a little bit. That's why we say varying stages of maturity. And we also highlight, you know, these are power plant contracts. They take time to negotiate.

Understood. Thank you, Håkan.

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

Yeah, hi, guys. Thanks for the follow-up. I mean, I think this was referred a little bit on the pre-silent calls, but given kind of the vast data center opportunity and I guess the positive impact that it has on on the margins profitability, I mean, it's likely a good business. How do you manage the fact that keeping slots available for your data center clients going forward, given that there's a bit of an uncertainty, whether it's tariffs, whether it's their own project timelines to be able to address that now that the lead times are getting longer and longer?

So basically, just to complement one thing, data centres are interesting, certainly from equipment, but also very interesting service business, just to highlight that. Now, we don't work with pre-reservations with our customers. There are some other players that do that. We don't. So it's people that contract with us where we can reach mutually beneficial agreements, and then we move ahead. So we don't pre-reserve capacity. Okay, thanks. And then on the capacity side, on top of what we already talked about, utilization and, you know, that lead times for certain parts of our product portfolio extending, you also saw in Q2 we went out with a 50 million euro investment, primarily in R&D, but also in manufacturing capabilities. So, of course, we are investing and we are expanding our capacity.

We still have some eight minutes time left, but it looks like that there are no further questions. So please, if you have a question now, it's a good time to raise it. Actually, there are some questions now on the chat. Do the recently high amount of energy equipment orders help you to gain service sales in the long run? How important is the connection between equipment sales and service relationships?

It's a very strong connection. And of course, the new build equipment will certainly generate service profit going forward. And I think a very positive trend the last couple of years. We have become better on you know, already from very early to start talking about service agreements. And as you know, we have our service value ladder, so there are different type of agreements. So short answer, this will certainly have a positive impact on the service business.

Especially because Q2 order intake was all baseload. Yes, exactly. That's even better.

Then another question regarding data centers on the data center deal. Was the data center customer a major player in the market or a smaller one, say not in top 10? Will the following deals come from other customers or from the same? What do you expect?

No, I think if you look at the end customers, they are the big hyperscalers of the world. And then there are players in the field of providing data center power. I think we are working both with established players and also newcomers. And as I said, it's a very dynamic market, I must say. There are a lot of players and it's evolving rapidly.

Thank you. Now it looks like that we have some additional questions on the line.

The next question comes from Panu Leitmacki from Dansky Bank. Please go ahead.

Thanks. I just wanted to ask about the equipment profitability in energy. I assume you won't give any numbers on the margins, but directionally, is it fair to assume that it's already more profitable than the marine equipment? And where are we kind of in the historical context of the margins in energy? in energy equipment and how much do you expect, how much potential do you see for that to improve going forward?

So I won't compare marine and energy new build margins. I would say that the key, I think I mentioned it before, the margins are improving on the new build order backlog. And that is, of course, partially driven by, you could say, a favorable market environment. But it's certainly also supported by the big structural changes we have made. More equipment, but also we have improved our efficiency. We have shrunk our footprint. We have worked hard on good old continuous improvement, and that journey continues. So the margin is improving. Okay, thank you.

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

Yes, hello, this is Tom from DNB Carnegie. I was also going to ask about, you know, the same subject. So the service share of sales is higher in marine and you are kind of, you know, what... very high delivery volume levels, while on the power plant side you used to have much higher sales and the service share of sales is lower. So what explains just generally this margin difference? Is it the markets or is it that you have a wider variety of products that are outside the core on the marine side? How should we understand this?

So I would say, I mean, it's different type of customers, it's different type of markets. I think the common theme, what we have done, and you see that trend continuing, we are really moving up the service value ladder. So moving from transactional service business, both in marine and energy, more into agreements. It's been a very strong trend in energy. I mean, taking the U.S. as an example, you know, in the past we didn't do agreement business in the U.S. Now it's really growing and taking off. I mean, and we also continue this positive trend of, you know, we have 30 plus percent now of our installed base under agreements. Renewal rate is still above 90 percent. So this story is really working out for us.

Would you say that it reflects really that it's more repeatable customers perhaps in the marine industry? And in the power plant side it's more going to different customers and perhaps more exotic places where you have a higher risk premium in order.

On the marine side there are certain, for instance in cruise where we have fewer, but very bigger customers. And that, of course, creates a certain kind of environment. But Marin, you also have many small customers, whereas on the energy side, you're right in the sense that there are much more customer relations that it's one every five years, etc. It's a little bit more opportunistic, so to say. So there are differences in the characteristics.

And also, let's say the customer you talk to is different. Let's say in energy, let's say you talk about the new equipment sale as well as the lifecycle agreement with one customer. The benefit comes to that customer. But in marine site, let's say the operator gets the benefit of your machinery while, let's say, the yard is negotiating the new-built contract. It's a different dynamic. Much more complicated on the marine side, though.

And is there any difference in payment terms that would explain the margin difference?

I think payment terms are never the same in any contract, I would almost say. It's so unique case by case. And let's say there are many things you negotiate. It's the price, it's the payment terms, the warranty terms, the indemnities, whatever. Sometimes you win on one and lose a little bit on the other, and sometimes it's the other way around. So you cannot always win on the same, on all the points, so to say. So it's very different per customer. But typically, let's say, and that's clearly, let's say, I would say a big change that we have been really pushing for is that we want to have positive project cash flow in all our projects. And that's the ultimate aim with also, let's say, our salespeople go out and sell, basically. That's what we aim for. We succeed more and more. We don't always succeed, but it's trending in the right direction.

And then finally, would you be more optimistic about, you know, potential to expand the margin in the marine or in power plants, if you have to choose one?

We can expand margins in both.

In both, yes, I would say so. It's also good to remember that our manufacturing footprint or R&D footprint is shared between the two. So if you make a saving in your manufacturing footprint, it benefits both.

All right. Thank you.

The next question comes from Louis Billen from Alpha Value. Please unmute your microphone.

Hi, good morning. Thank you for taking my question. Could you give us more information about your Navy business? You mentioned that it was one of the drivers for the quarter, and I understand it's quite small. Do you anticipate any changes?

So Navy overall is less than 4% of that revenues. It's a small business, but of course there are growth opportunities considering the current geopolitical situation. And we are working on that basically. Right now I wouldn't say it's a major contributor to the current improvements that we are having. I think Navy will grow, but we should also acknowledge that defense business takes a long time. It's a long time between decisions and execution, and then you see the full impact. But there is potential.

Maybe a follow-up, are you selling main engine or auxiliary engine for the Navy business?

It's primarily propulsion related equipment, not so much engines. Okay.

I'm afraid that we are running out of time now, so thank you for a very lively Q&A session. Now I hope you can enjoy summer during next couple of weeks. Wärtsilä Q3 report will be published on October 28. Thank you.

Thank you. Have a nice summer.

Thank you.