Wartsila Corp B Shs

And after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there's a possibility to ask questions. Håkan, time to start.

Thank you, Hanna-Maria, and welcome everybody to Q2 report. Q2, which was a strong quarter, I must say. And I'm very happy to say. So, all-time high order intake and improved operating results. We continue our journey. So total order intake increased by 33% to 2.8 billion euro and that is an all-time high quarter in the history of Wärtsilä. And we recorded all-time highs both in energy and marine. So all-time high quarterly order intake for energy close to 1.7 billion euro. All-time high also order intake for marine at 1.2 billion euro. And that brings us to an all-time high, it's a lot of all-time highs today, all-time high order book of close to 9 billion euro. And here we have a very interesting also piece of information. And I know many of you have been asking about this. So we are providing some clarity now on margin content in order backlog. But first, since the start of 2025, energy order book has more than doubled. While the gross margin of the Energy Equipment Order Book has improved by more than 500 basis points. This is what you have been asking us a lot. What has been the margin development in Energy Equipment Order Book? And now we have it, plus 500 basis points since the start of 2025. Marine & Energy combined service order book increased by 11%, ending up at an all-time high of 2.6 billion euro. Service 12-month rolling book to build continues to be above 1 now at 1.07. Net sales remained stable at 1.6 billion. But if we look at the organic net sales, it's actually up with 5%. And we will talk a lot about reported and organic today. And you will see we have quite a lot of difference. And that is driving by two things. We have divested. You've seen main divestments in our portfolio business. And we have FX impact also. So in general, both order intake and sales are higher organically than they are reported. But I will come back to that. Our journey of improving profitability continues, so our comparable operating results increased by 7% to 280 million euro, and that's 14% of net sales. So now we are at 14%. Operating results increased by 14% to 209 million euro, and that's 13.4% of net sales. Cash flow, cash flow very strong in this quarter, up to 497 million euro, close to half a billion euro. And we continue to develop positively, and I would say with a very attractive rosy of 73%. So let's look a little bit closer to the numbers. So record high orders drive a strong quarter. We also restated the comparative figures following the energy storage classification as discontinued operations. So the numbers you see here, we have taken that reclassification into consideration. So if we start with the Q and Q numbers, comparing with Q2 last year, we see order intake is up 33% in general. You see that service order intake is down 4% from 920 to 882. But here comes the first organic comment. So if you look at the organic order intake in services, it's actually up with a percent. So it's not negative, it's positive, it's growing. Equipment is up 61%. Of course, we have a very strong order intake, particularly on the equipment side. So from 1.2 billion, close to 2 billion euro. Net sales, it's down from 1.6 to 1.594 to 1.559. But also similar story here, the organic net sales actually grew with 5%. Services is down reported from 900 to 845, so it's minus 6%. Organically, it's about flat, it's minus 1%. Equipment sales up 3% from 694 to 714 million euro. We continue to see book-to-bill way above 1, so going from 1.3 to 1.8. And as we talked about, we continue to see the journey of improving profitability. So comparable operating results up with 7% from 203 million euro to 280 million euro, which corresponds to 14% of net sales. And the operating results also improved 14% from 183 to 209 million euro. And we are now at 13.4% of net sales. Just some quick remarks on the first half year. We see similar development order intake up 23% to 4.9 billion euro. Services similar here, the reported is down a bit, but equipment certainly grew. And you see the order backlog. We came in just short of 9 billion euro, up 13% from last year. Net sales also, I would say, flattish. But if you look at 3 billion euro, also there, if you look at the organic, it's up 5%. Book-to-bill, half-year also increasing from 1.3% to 1.6%. And the operating results, if we go down there, up 13% on the first half-year from 3.54% to 3.99% at 13.3% of net sales. So overall, a good quarter. And if you look at the order intake, it's certainly growing, even on the service side organically. And on net sales, the organic is up 5%. Looking at our industry, how is marine developing? We still see market sentiments that remain supportive of our key segments. Shipping markets remained resilient despite the macroeconomic headwinds caused by the Middle East conflict. If we look at the number of vessels ordered in Q2, it increased to 1,483. Same period last year, 644, so clear. We see there is activity clearly. The Middle East conflict has disrupted energy markets and supply chains, but shipping markets have remained resilient despite the disruption and the macroeconomic heavy winds. The market sentiment remains supportive and ordering also continues at a good level for our key segments, for Wärtsilä key segments. The story that our core segments will grow faster than marine in general still holds true. In marine in general, we also observe that the contracting is expected to remain in line with or above the average, and for vatsala's core segments, well above the 10-year average level. China introduced separate greenhouse gas targets for international shipping by requiring vessels to cut CO2 intensity by at least 15% by 2030 compared to the 2025 levels. And this will drive demand for emission reduction solutions. While on the negative side, adding to regulatory fragmentation. And that is also in line with the comments that we made after IMO, the postponement of the vote last autumn. You know, it's likely that we will see also going forward a more fragmented landscape, different regions like Europe or countries like China introducing their own regulation. And it doesn't make it easier for the marine industry, of course, to comply with all this regulation. For Wärtsilä still, it's about fuel flexibility and fuel efficiency, and that will be needed more than ever in this environment of fragmented regulation. Now, looking at January to June, 245 orders were for alternative fuel-capable ships. So that's about 70% of all contracted vessels and 24% of the capacity. And one might say that's a fairly low percentage, but it's primarily driven by the mix of vessels. So it's not a kind of trend shift, this percentage of alternative fuel. It will vary depending on what type of ships that are ordered. Looking at the energy macro perspective, I mean, clearly increased demand rise, energy transition investments, the electricity demand growth and future projection have increased substantially. And that certainly creates market opportunities for equipment providers like Vansilla. And two key themes have stood out in the recent energy-related macroeconomic development. One is load growth and the one is increased tariff-related uncertainty. And if we look at load growth, it is about electrification of the world or industries in general to make them more energy efficient. It's about electrification of transport, for example. But it's also a continued development of and growth of air conditioning. We've seen the world is getting warmer. It drives more use of air conditioning. It drives electricity. International Energy Agency predicts that the growth that we will see from Air conditioning could actually be in the same or even bigger magnitude than data centers. Let's see. Then we have U.S. aging infrastructure that needs to be upgraded. And then we have the balancing power narrative. It's all those factors combined that drives this, you could say, buoyant demand side. In engine power plants, market demand for equipment has been strong and it continues to be strong. The base load segment remains a consistent source of demand for thermal power plants. While our balancing demand also is expected to continue to develop favorably. After significant growth driven by solar up to the mid-2020s, renewable capacity addition are expected to decrease slightly in 2026. So that's a downtick. But if you look longer term, the growth prospects looks very solid. The speed of the data center build-out is creating unprecedented demand for off-grid data centers where reliable on-site power is essential. And here virtually we are clearly playing a role. And we continue to see a strong demand for data centers with a very dynamic pipeline of opportunities. and the resulting growth in our installed base. That, of course, will trigger and support a significant lifecycle service potential in 2030 and beyond. It takes time until we get into those years where the installed base starts to generate significant service business. And we see here the predictions from the International Energy Agency on average annual electricity demand growth. They have basically upgraded their forecast for 2025 with 45%. It's a significant upgrade. Now, another external report that we like to highlight is a very recent piece from Bloomberg New Energy Finance. And according to them, well, they are reiterating what we have been saying, but of course this is an independent third party, so I guess it comes with some additional credibility when it comes to advocating reciprocating engines. And basically they have concluded that Reciprocating engines offer the strongest economics for data centers. If you look at the dollar per megawatt hour, engines comes out currently as the most favorable solution. So recent analysis by Bloomberg has identified reciprocating engines as the most cost competitive technology option for data centers. The competitive lifecycle economics support attractive long-term project returns. The benefits, low heat rate, efficient use of fuel, and operating performance. Low site-level emissions and negligible water consumption support sustainability objectives. So engines are well positioned for the rapidly growing market where cost, Performance and resource efficiency are increasingly critical. And I think this is a long-term comment also. As the market dynamics is evolving, the engines delivers on the efficiency fundamentals and also on the fundamentals of not derating at high temperature and very little water consumption. Now, back to the numbers. So, organic order intake increased by 43%. The order intake, the reported, as we call it, increased by 33%. Marine order intake increased by 12%. Energy order intake increased by 82%. Equipment order intake increased by 61%, and the organic equipment order intake growth was 74%. Service order intake, as we talked about before, the report decreased by 4% due to portfolio business divestments and negative FX impact. So the organic service order intake growth was actually 1%. A marine and energy combined service order book increased by 11%, ending up at an all-time high. So our service order backlog is at an all-time high. Strong order book development. Rolling book to bill continues to be above one. I think it's now the 21st consecutive quarter that we continue to have a book to bill above one. and the order book has been growing despite the removal of the portfolio businesses. I mean by now we have divested 11 of them. So we have been able to fully compensate for this. Another trend that we talked about a lot is that of course we are capturing orders For deliveries further and further into the future. And we do see here that trend continuing. And we do continue to come back to these data points where the existing order book will generate sales that are distributed further into the future. And you can see how clearly on the order book, end of June here, you see later deliveries, very significant growth. And that, of course, it's very important to take that into consideration when we translate the ordering tick to sales and EBIT. It will be further out in the future. Organic net sales increased by 5%. The reported net sales remain stable. We saw that before. Marine net sales remain stable, whereas the energy net sales increased by 10%. Equipment net sales increased by 3% and the organic equipment net sales growth was 12%. Then service net sales decreased by 6% and the organic service net sales was stable at minus 1%. Profitability continued to improve. With net sales that remain stable, the comparable operating results increased by 7%. The 12-month rolling comparable operating margin is now 13.5%, which is up from 11.6% last year. Technology and partnership highlights. We continue to drive the decarbonization of our industry and work with our customers, both the existing ones and the new ones. If we start with the data center narrative, we continue to expand our data center footprint with two new major orders announced in the second quarter. We will supply an off-grid energy power solution for a new data center facility in Texas. It's a 790 megawatt power plant that will operate with 42 Vasily 50 SG engines running on natural gas. And you see, we talked about our sweet spot being somewhere, you know, 20 to 500. But these days we make, provide power plants well above that. We provide thermal efficiency. Of course, you need the space to host our machines, but we have a very interesting power solution. So we do see this trend of bigger power plants continuing. Then we had the second one. It's a 412 megawatt engine power plant to support major new hyperscale data center project in Ohio and Texas. And it's built on 34 SG engines. So that was the first introduction of the 34 SGs. Both of these orders were booked as order intake in the second quarter. Now, coming back to one of the arguments, yes, data centers are important for us and for our growth, but we have multiple growth avenues. And balancing power, we talked about it for many years, it continues to be a major growth opportunity for us going forward. So in the second quarter, we... We booked more than half a gigawatt of balancing power in various locations. And one of the orders that we had in the second quarter was Origin Energia in Brazil. So following the first contract we had with them in the first quarter. It's a 185 MW power solution to support deliverable, reliable and flexible capacity to the Brazilian power grid. It's a consequence of the reserve capacity auction in 2026. That was the largest capacity auction ever held in Brazil. Origen has emerged as one of the auction's leading winners and we are supporting them. They plan to start commercial operation in 2028 and 2029. So, energy growing in data centers, but also balancing power in several disciplines. Now, on the technology side, we have two interesting items to report here. I mean, first, we had another Wärtsilä World's First. So, it's the world's first large-scale, 100% hydrogen engine tested at Wärtsilä's Bameo laboratory. and working on providing energy to the Spanish grid. So we have now successfully operated a new 100% hydrogen engine supplying power to Spain's national electricity grid in Bameo. And this is the world's first demonstration of a large-scale hydrogen engine running on 100% pure hydrogen. and Vatsala W31 that also can support energy intensive sectors such as AI data center and industry in the future. So that was hydrogen. But we also continue our journey on ammonia. And ammonia we actually further because we are Thank you very much. and a gas valve unit for two new mid-sized LPG ammonia carrier vessels. The ships are being built at a shipyard in Shanghai and will be owned by a joint venture between Navigator Gas and Ammon Maritime, Navigator Ammon Shipping A.S. And the order for the engines, the SCR and the GVO was booked by us in the second quarter of 2026. So we are certainly continuing to be a technology leader in future alternative fuels. We also announced To expand our capacity as a result of the buoyant market that we see and the great opportunities that we see for the future. We are expanding our capacity. And basically, with the latest announcement we did in the quarter, by 2029, we will have increased our operational capacity 2.2 times. So more than doubling our capacity compared to the 2025 operational levels. So during Q2, we announced investment of additional €90 million to further expand our production capacity by 30% in SDH in Vasa. And that followed the earlier announcement to expand by 35%. So if you put that all together by the first quarter of 2029, that actually means that we are expanding 2.2 times compared to 2025. And that, of course, also is a proof point of our long-term favorable outlook of the demand side in energy certainly, but also in marine. Now, let's look quickly on marine and energy and how those have developed. So, marine, all-time high quarterly order intake in Vatsala Marine in our history. And then order intake and comparable operating results both improved. So, order intake up with 12%. Net sales up with 2%. And if you look at the EBIT bridge from 1.14 to 1.24, we benefit clearly from better operating leverage. But we also had lower service volumes in the second quarter, which is a bit of a drag. But of course, a continued journey. And now at an LTM last 12 months, result of 13.1%. Services in marine. Overall, the marine service book to build was above one. And if you look at our marine service order book, it actually increased by 8% compared to a year ago. So we do see continued growth. You also by now, you know, our Different areas in services. And you can see that agreement came down a little bit on the book-to-bill side. Agreement came in order intake, came from relatively high comparison quarter last year. So that's one of the things. And then we have also seen on the service side, because of high fuel prices and also because of some very favorable business, some of our customers, they are postponing some maintenance. But that's postponing, not canceling. So we have a positive outlook there also for agreements going forward. and you see we talked about it many times on the project side. It can swing quite a lot and now you saw a bit of an uptick. We have said though that the IMO decision not to make a decision has had some impact on the order intake on the retrofit side because people are postponing retrofits. But overall you can see book to bill above one and we will continue to grow our marine service business. Now energy, all-time high, quarterly order intake also for energy. And now since the start of 2025, the gross margin of our energy equipment order book has improved by plus 500 basis points. Order intake is up 82%. Net sales is up 10%. And then you see something very unique here. The only way is up. 76% to 90% driven by both better operating leverage and service net sales has increased. So really contributing to better operating results. And an LTM EBIT of 15.5%. Services on the energy side also booked a bill above one, and the energy service order book increased by 16% compared to the second quarter of 2025. And here we see on the right side how things can fluctuate. And here, for instance, if you look at the project business, yes, it went down deep in the red, but now it came back up in the green. And we will see these swings going forward. I think the important thing here is the thick black line, which is the sum of it all, and it's well above one. We will continue to grow our service business also then. Now that brings us to the bridge for the Q and Q bridge. So where we went basically from 12.7% to 14%. And it's good to see marine going from 13.2% to 14.0% and energy going from 14.3% to 15.5%. Then we had a bit of a downtick in portfolio. But as I said, by the end of this quarter, we have divested all the portfolio business units. and our comparable operating results increased by 7%. Now, over to Arjen and other key financials.

Yes, thank you, Hakan, and very happy to present positive other key financials. But before doing that, two, let's say, structural items I would like to highlight. First of all, portfolio business. In Q2, we closed the divestment of water and waste, selling it to Solex, as well as the closure of the divestment of gas solutions, selling it to Motaris. And this actually closes a journey of about six years in which we... About 11 business units divested under the umbrella of portfolio business. With the completion of these last two, Vetsula portfolio business will have no remaining business activities and basically, let's say, making Vetsula a more focused company and also more profitable because these business units that we divested were typically dilutive to Vetsula results. Second point I want to highlight here is energy storage joint venture. Not so long ago, 15th of June, we announced to establish a joint venture, 50-50 joint venture with RCT Solutions from Germany to strengthen its long-term competitiveness of the storage business. The closing, still the expectation to close in Q3. of course subject to customary approvals and financing arrangements. And the joint venture is expected to have a 40 to 50 million euro negative impact on Wetzlar's 2026 operating results. And that is basically 50-50 between, you will see it once the closing is done, you will see probably 50% of it on the line share of result in associated companies and 50% on the line items affecting comparability. and items affecting comparability is of course related to the transformation related costs. Then going to the numbers. First of all, cash flow. It was, again, an all-time high. Second quarter of all the second quarters that we could check. Historically, we never found a bigger one. So 497 euro is really an absolutely good number. And that's also, let's say, good to remind that it was a low number in Q1. Only 7 million euro now we are really, let's say, back on a big number. Support really coming from the profitability, but certainly also from the working capital. In the working capital, I would say the main contribution came from customer payments, not just advances, but also, let's say, milestone payments. As you remember, in Q1, we talked a lot about, let's say, building equipment actually for batch deliveries. Many batch deliveries went out. You get the milestone payment at that point of time. Also good to reflect here that let's say the capacity utilization of our factory is still at about maximum. So really let's say we're producing all we can. Net interest bearing debt, of course, let's say going further down, driven by, of course, a very good cash flow. Profitability, I think Hakan talked about that already a lot as well, and I'm very happy to see positive trends here. Return on capital employed, good profitability, further negative working capital clearly contributing here. Geering, not so much to comment. It's on a very deep negative level, which is, of course, extremely good. Solvency also bouncing back from Q1, because typically in Q1 you book the whole dividend against equity. And now that is, of course, now with a profitability improvement, less severe, you could say, or less impacting. And earnings per share clearly up from, let's say, last year, both on quarter and year to date. So all in all, I would say very good, let's say, other key financials. Looking at the Trends Cash flow from operating activities as well as working capital to net sales ratio clearly trending in the right direction. If we look at working capital to sales ratio, the dotted line basically, blue dotted line, around 4% over a five-year average period. So really, let's say, good result. It's actually 3.8% to be precise, and it's actually all the quarters coming down. Last quarter, this was 2.4%. 1.257 billion negative working capital is heavily supported by advances. I think you can see that from the report as well. We have about 1.8 billion euro advances. But if you strip that out, let's say you would have a positive working capital of 500 million, about half a billion. But also that has been improving a lot over the past three years. If you look at, let's say, three-year horizon, for example, on that number, so working capital excluding advances, clearly several hundreds of millions down while sales is actually going up. So we are really doing a real good effort on continuously working with working capital and make it better going forward. Financial Targets First of all, growth on marine and energy combined, 9%. Actually, if you break it down into what is marine and what is energy, it's actually 9% on all. So very easy to remember. A key milestone I want to highlight here is the 14% that you see on the orange line. Let's say we are now on a rolling 12-month basis, operating result as a percentage of net sales at 14%, which is our financial target. So really happy with this milestone. It was 13.9% at the end of last quarter. Group Gearing, I mentioned already, deeply negative, not too much to add. And also the dividend distribution, basically in all the years, well above, let's say, the financial target of at least 50% of EPS. So really happy with what we can report here on other key financials. Back to you, Hakan, on the outlook.

Yes, thank you, Arjen. So on the outlook, for marine, we expected the van environment to be similar, as in the comparison period. And for energy, we also expected the van environment for the next 12 months to be similar to the comparison period. But we also highlight the following, because of course on energy, we have put it at similar now. This is actually a very solid demand situation that we see. So following two consecutive record order intake quarters in energy and a record high order intake in marine in the second quarter, the outlook reflects a continued strong demand environment, especially on the energy side. The strong demand environment is clearly underscored by our decision also in the second quarter to further expand our capacity. So we are on a very good level and we have a great opportunity going forward. With that, we go to the questions and answers.

Thank you, Hakan. Thank you, Arjen. So now moving on to the Q&A. So I know that there are more than 10 analysts on the queue already. So please, we will take one question for analysts first. And so please leave the follow-up questions to the second round. There's also a possibility to ask questions by chat. 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 Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. I'll stick to the one per analyst, but thanks for letting me ask a question. On the comment regarding sort of the energy equipment growth margin moving up 500 basis points, that's a very big number. And I just wondered if you could help us reconcile with a topic that we discuss frequently on this call about sort of like ASP and euro per megawatts, because the trend there seems the opposite. But maybe you can help us reconcile both in what has driven this big growth margin expansion. Thank you.

Thank you, Daniela. And for those of us who follow us regularly, I would say this is what we have said all the time. We have said that there are good opportunities to expand. We have also been very clear that that is not the right KPI to try to assess the margin content of the backlog. We have said that several times. I know some have listened and some have still clung on to the euro per kilowatt. So we thought let's now give out this piece of information because we understand that we need to be a bit more clear than we have been in the past. And you have been... Thank you for giving us that feedback. And this is where we are. So it's plus 500 basis points compared to the equipment order backlog in energy comparing beginning of 2025 to going out of second quarter of 2026.

It's fair to say that it's mostly your execution rather than the market pricing that is making the difference here.

It's a combination of pricing, execution, everything together.

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

Thank you very much, everyone. Good morning. My one question is on demand guidance, particularly in energy. Clearly, with the strong orders in Q2, the bar is higher, and I appreciate that you're still guiding for a strong level of demand. But I was wondering if you could expand, please, on how we should think about the scope for upside or downside to this guidance. Was this motivated by desire to be prudent, given that you hit this new record? Or is there anything else that we should bear in mind? Thank you.

Basically, let's say it's based on... First of all, let's say the demand is very strong, as Hakan also explained earlier. We also, in the coming quarters, see, let's say, strong activity. The pipeline is good. Let's say the AI pipeline is also very strong, though volatile. But it's not just, let's say, the data center. It's also, let's say, the balancing power, which is really also getting a lot of traction. Thank you very much. Thank you very much.

Give a bit more meat in our guidance. I mean, do note that we are making significant investments in basically more than doubling our manufacturing capacity. But of course, that kicks in only in the beginning of 2029. But that is a clear evidence, fact point that we believe in long-term growth.

Thank you very much.

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

Thank you. So I just wanted to pick up on the 500 or more than 500 basis points of gross margin expansion, the backlog. So I guess, you know, the first part of the question is, would you be able to kind of share with us how much of the total order backlog was energy new equipment at the start of 2025 and how much it is today? And then I guess the second sort of part of this question is, you know, how would you best suggest we actually use that number? Would you think of it in terms of if we take your new equipment margin today, we should sort of add that on and that comes through by 2028? I guess actually what's coming into the backlog is probably even higher than 500 basis points. So now that you've kind of helpfully disclosed that, how would you best suggest we as analysts, so we don't get into kind of confusion around price per megawatt, how do we use that number in your view? Thank you.

So I mean, first of all, We also communicated that we have more than double energies order backlog, I mean, from 2025, beginning of 2025 until second quarter of 2026. So that gives you a kind of a feeling for the magnitude of the increase of the total order backlog. Then for the new build, you know, upgrade of plus 500 basis points. I mean, we know it will take time for that to translate into EBIT. 28 and beyond. Definitely, 28 and beyond. We have a certain delivery time and there is a certain delay. So that's another fact. It will take time for this order backlog to translate both to sales and EBIT. and it's 2028 and beyond. Then another thing, and it's also based on questions that we have received from the analysts, you know, okay, but your mix of new build and services, the new build will grow faster than services. And we all know that the margins in general are lower on new build and services. That's still the whole truth. But the other message here is that the net effect The next question comes from Vas Panavari from Barclays. Please go ahead.

Good morning, it's Vlad from Barclays. Thanks very much for the opportunity. On the demand outlook for energy, you now see it's stable in the next 12 months. Is it stable versus extraordinarily strong Q2, or stable versus average level over the past 12 months? The reason I ask is that water intake in megawatts in Q2 was about 100% higher Thank you very much. That's very clear.

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

Yes, hi, good morning. I have a question on ASP, and it's more of a conceptual question for us to understand, given the debate on this number that often looks to me as the tip of an iceberg. So, I mean, can you elaborate on some of the factors that are driving this significant volatility in quarter-on-quarter average selling price in energy? I think previously you highlighted scope as a big effect, but then outside of scope, when we look at different types of engines, how does the ASP compare? Like, is there any thumb rule that we should be aware of that if you announce certain types of engine orders, then we have to think about ASP in a different way And also, if you can talk about geographical mix, because covering some of the other equipment names, we have seen some variance in ASPs based on geographies. And then lastly, on the same topic, when you book an order in the U.S., I think you have said it's customers that pay the tariff. So I wanted to ask, when it comes to your booking, what are the amount that you are booking and what you are not booking? Thank you.

I can start with the last one. Let's say, yes, tariff risk is passed on to customers. We are not paying for any tariffs. Yes, on certain cases, let's say we might need to pay the tariffs, let's say, as we are the importing party, but then we charge it on to the customers. But now with the recent decision of the Supreme Court, basically that has been reversed. So no impact. But of course, when you do tariffs, we typically use change orders for that. So let's say it's a change order when the tariffs is charged to us. We also send that invoice then to the customer, which is then actually, let's say, adding to the sales, but it's then reversed when we, let's say, pay it back. It's a credit note, basically.

And then when it comes to, you know, how should we think about profitability of different markets and different engine types, etc., etc. I'm sorry, there are no simple rules of thumbs. I mean, we have good price realization in many areas. So in many application segments. and in many geographies. So it's not that one segment or one market, geographical market, has a higher profitability than the other. It's actually a mix. It's much more catered to the situation and the customer.

My question was more about pricing in kilowatt hours in euro term rather than margins as such.

I understand and I respect your question, but as you understand from our hesitation and our earlier discussions, frustrating as it is, we don't focus so much on that KPI, quite frankly, because it says very little about reality for the reasons that we have mentioned, so to say. I know it's frustrating, but that's a matter of fact.

Thank you.

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

Hi, good morning, everyone. Thank you very much for taking my question. I just have a follow-up on the energy margins. Really appreciate the 500 bps today. I was wondering, do you see any, given you have a very strong pipeline on the data center side, do you see any further potential to increase beyond the 500 bps that you have given going forward?

Well, it's a very hot market and the demand side is very, very strong. And therefore, as we said before, there are good opportunities for price realization in, as I said before, in all different segments and in all different geographical markets. It's a hot market globally.

Thank you. So do you mean that you will be able to continue to

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

Hi, good morning. Thanks for the opportunity. Congrats on the numbers. Just wanted to speak a little bit about supply-demand dynamics around baseload and data centers. You may have seen some competitors have gone public and spoke to adding capacity over the next five years. Do you have a sense on where engines as a category could stabilize as a percentage of market share demand? When you think about the positive aspects of engines over turbines, any sense on what percentage of applications or installs that would be applicable or attractive to? And could you comment at all on your market share within engines itself as it relates to DCs? Thank you.

Now, so if we start with the first one, our market share related to DCs, I would say we don't know it. I would argue that nobody knows what their market share is because there's so much secrecy. We talk about that in the industry. I mean, you have noted before that some of the releases that we have made, we are not even allowed to mention the customer names, etc. So I know that there are attempts from independent players to compile market statistics. It's very, very challenging. So, sorry, I wish I could tell you, but I can't. The facts are simply not there because of the secrecy in the market. Coming to your other question, what's the potential market share of engine versus gas turbine? It's very, very hard to predict. I mean, I have seen data points, but... We struggle actually to compile them. The only thing we can see, we are growing. And the Bloomberg New Energy. And also, I'm coming to that right now. The Bloomberg New Energy makes one point. I mean, it's one piece of study, etc. But it shows that engines are for real in this segment. And it has some advantages. Now, I would also argue that if you look at medium speed engines, we are coming back to the fundamentals, you know, because to your point, there will be a lot of competition inside in capacity, the gas turbine competitors, but also the engine competitors. So, of course, right now, you know, supply is a bit less than demand, but it will balance out at a certain stage. Now, then it's going to be a focus. That's our hypothesis and be a focus on the fundamentals. Fuel efficiency, you know, no thermal derating, no water usage. And here we come out in a very good way. Now, our disadvantage, we are not the quick and dirty solution if you want to ship in a container and get power fast, which is really a strong focus now. But we are strong on the fundamentals. And also, we talked about that in our data center call, you know, if you stretch it out even further, what will happen? There will be transmission networks being built. There might be renewables. What do you want then? You want flexible power generation that is energy efficient, because then you can balance the renewables and you can also be a player on the network. And if you want to be a player on the network, you need to have fuel efficient, good heat rates, basically. Otherwise, you won't be competitive. So that's why we are optimistic also about the long term future, because we have a good competitive technology.

Okay, fair. Thanks very much.

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

Yeah, morning. Thanks for taking my question. Just to follow up again on the 500 basis points, I was just wondering, How much of the improvement is actually coming from your shift away from EPC, which I guess also happened during that time? And what have you actually seen happening to energy service margin, given that is obviously an important part of the energy sales?

So first of all, this is new build, so service is out. So this is the new build modules, just to clarify that. And then I would say the shift from EPC to EQ, very little impact. Because we have made this shift, the major part of the shift has been made before 2025. So I would say the major driver is things like price realization, efficiency, etc. It's not the shift from EPC to EQ. During this time period.

I mean, on the service bit, that was clear that it's not part of it. That's why I was asking what happened to service. Was service stable in the last one and a half years?

I mean, the order backlog for services is up significantly. It's up 18%. And the margin on services, they also developed favorably.

And can I just ask, because you had this nice chart on the cost comparison between engines and turbines and fuel cells, I mean, why do you reckon, I mean, it's no longer a lack of information in the market about the qualities of engines. Why do you think that those other technologies are still winning on turbines, but also fuel cells increasingly? Why are people still placing orders for those then?

I mean, right now, I would say, and if I take the U.S., It's so focused on lead time. I mean, you can basically sell any technology if you have a short lead time. So that's why, you know, right now everybody is selling. But as I said, longer term, as more capacity is added to the market, I think it will be more focused on the fundamentals. We talked about that before. And then another element, I would say also in the U.S. context, is you could say a bit of technical conservatism. Because to your point, Sven, I mean, the engine's been around for quite some time, but I can say that I have dialogues with many U.S. customers. For them, it's still a new technology. It's something new. And that's a great opportunity for us, coming back to what I said before, when our new customers, U.S. customers, they try our new candy, so to say, and they see that the heat rate's working, I mean, they are good, and they see that we are delivering on our core value proposition. They came back. So we have repeat customers coming back. And that's why I'm optimistic about the long-term future. because more and more customers are seeing the benefit of the engines. But seeing is believing. It's one thing to try to convince somebody with PowerPoints and logic. Seeing is believing.

Understood. Thank you, Hakan.

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

Hi guys, another follow-up on the 500 basis point improvement. So if we look at kind of the deliveries, the energy equipment deliveries that you have done on the first half of this year, when were these orders booked? Just trying to get that, is that kind of run rate profitability that you are now achieving on the energy side? Is that 500? No, I don't think we have seen it in the first half of this year. Let's say the orders that we delivered for energy in the first half of this year, I think they were booked a year plus ago, most of them. And then maybe a follow-up on the phasing of it. If you look at kind of what you are selling now, have you already sold out the 28 capacity expansion and are now booking the 29? Just on what you've said that the capacity is a little bit constraining the demand outlook as well. So just like as a theoretical, if you would decide to further still expand your capacity, would you believe that that would open up a more demand growth for you potentially?

So basically, I mean, 2028, we are sold out to your point. I mean, there might be smaller things, but in general, we are sold out. And the orders that we are negotiating now is for 2029. And we have started to sell out. You remember the latest capacity expansion we talked about. We said that that will come into operation in the beginning of 2029. and we are starting to sell that now. I mean, we have already sold some of it, so to say. But we are booking orders in 2029 right now and also 2030. All right, thank you. Then I will take a couple of questions. And I would also say, I mean, sometimes I get the question, can you expand even further? Yes, we can. But, you know, it's a step-by-step journey, and we have taken important steps, which underlines a positive outlook. You know, could we take further steps? Yes, but we take it step-by-step.

And the key thing is to keep the supply chain aligned. Yes.

Then I will take one question from the chat. Can you explain in more detail how the data center segment sales of hardware will bring lifecycle services cash flow after 2030?

Yeah, so basically, so what's the time frame here? So let's say we get a data center order. I would say it's about two years until it's up and running. And then, of course, you have some maintenance, et cetera, in the beginning. But it's approximately another two years until you have the real big service kicking in, and then it runs. So that's why we talk about approximately a four-year delay from new-build order intake until you start to see a significant impact on the service business.

Thank you, Håkan. Thank you, Arjen. Then we have one more slide. Thank you everybody. Have a nice summer. Thank you.