Wartsila Corp Unsp/Adr

Good morning, everybody, and welcome to this news conference for Wärtsilä Half Year Financial Report. My name is Hanna-Maria Heikkinen, and I'm in charge of investor relations. Today, our CEO, Håkan Agnewal, will go through the group highlights, segment performance, and then after that, our CFO, Arjen Behrens, will continue with key financials. After the presentation, there is a possibility to ask questions, and let's take one question at a time.

Håkan, please. Thank you, Hanna-Maria. And a warm welcome, everybody, to a summary of the second quarter. That was definitely a step in the right direction. So improved profitability, and we continue to grow in the services side. So order intake up by 17%. Net sales increased by 3%. And we continue to see the good progress in services. So service order intake up by 13%. service net sales up by 16 percent. Comparable operating results increased by 26 percent and it's really supported by the good development and services and also a positive journey on energy storage. A challenge, a headwind on the operating result was the 19 million euro provisions that we needed to take in marine systems for a single sizeable turnkey project in gas solutions that has suffered from a combination of supplier quality issues and cost inflation. Cash flow from operating activities also improved. So overall, a step in the right direction. If we look a little bit further into the numbers, so order intake up from 1.4 to close to 1.7 billion, up 17%. Organically, it was actually up 21%. And we continue to see the growth both in services and in equipment. And I think the positive thing here is that all businesses are growing order intake and they are growing order intake in both equipment and services. So really good. If we look at the Net sales up from 1.4 to 1.45, 3%. Organically up 7%. And we continue to see a good growth on the services side, up 16%. A little bit more down on the equipment, periodization, down 9% from 700 to 650%. And book-to-bill continues to develop in the right direction in a very good way, I would say. And this is actually the ninth consecutive quarter where we have a 12-month rolling book-to-bill above one. So going in the right direction. And then if we look at comparable operating results, we do see improvements in our profitability up to 7.4% compared to 6.1% same period last year. If we look at the marine market and we start overall, I think we see higher prices on new ships and also challenges with the availability of shipyard capacity. There is a lot of vessels being built and that limits the growth in new build investments. However, for Wärtsilä, our market sentiment remained positive for our key segments. Overall, the number of vessels ordered in the review period, looking at the 12 months, increased to 773 compared to 701 corresponding period last year. the uptake of alternative fuels remained more limited, now with 187 orders reported, which was 24% down from 34% of overall contracted vessels. But that is mostly driven by a changed mix of contracted vessels. The further investments into LNG liquification capacity continues to drive demand for LNG carriers, despite activities easing off from record levels in 2022. Still, the projections are it's going to be higher than 2021. Demand for new cruise ships capacity remain limited as cruise lines are focusing on managing the current order book and leveraging their debt levels. But in general, the cruise industry has a very strong patronage, so to say, and cruising volumes are back and supersedes 2019 volumes. Service demand was supported by increased activity, increased active capacity in key vessel sectors. If we look at the energy market outlook, I think we see some solid long-term opportunities. More short-term, commodity markets are easing while interest rates rise. Looking at the 2023 first half year, it has brought relief in some commodity prices, especially in the battery raw materials. while the rising interest rates increase uncertainty. Global natural gas prices continue to decline despite the slight price rebound in June, but prices are still above historical levels. The trend in transition to renewable energy sources continues and being a key driver in the development of the battery energy storage and the thermal balancing technologies. And we can see that there is a good market activity and outlook in leading energy storage and thermal balancing markets such the US, UK and Australia. Order intake, as we said, increased by 17% overall, 21% organically. Equipment up with 23%, service up by 13%. And we have a strong order book and rolling book to build continuous above one. One thing that we really would like to point out that the remaining order book for the current year is lower than last year. So that needs to be considered. Profitability continued to improve in a good way, I would say. Net sales increased by 3%, 7% organically. And comparable operating results increased by 26%. Net sales, we talked about it. Equipment net sales decreased by 9%. Service net sales increased by 16%. And if we look at technology and partnerships, really on the road to enable the decarbonization of marine and energy. Some recent examples, we are taking the next step in the energy storage fire safety technology. I would say that is becoming one of the strengths of our storage business. We have a very strong thermal incident track record. So far, we haven't had any thermal incidents. And we have a strong focus on being on the front line of thermal stability. And now we have qualified our grids of quantum for the latest NFPA69 standards. This safety standard is about requirements for explosion prevention and provides security and confidence for this type of authority having jurisdictions, fire service and other stakeholders. On the engine side or related to the engine side, but this is more how we deal with the systems that needs to support the engines. We have the WARMS, Wärtsilä Ammonia Release Mitigation System. We have received now the approval of principles from DNV for this. It's an innovative system that mitigate the risk associated with ammonia release. which is, of course, a hazardous substance, so to say. And with this, you can deal with leaks in a green and safe way. And it's really an alternative to venting by diluting with air or bubbling in dirty water tanks. So this is quite innovative, cracking the ammonia and reducing the risk for leakages. Let's move into the different businesses and how they are performing. If we start with Marine Power, we had a very good development in the comparable operating results. Good service performance continues. You can see ordering take up 21%. Net sales also up 21%. And if we look at the journey to double-digit EBIT here, I think the good service performance is a major driver. And still, we have a headwind. in that we are still absorbing cost for the transformation of our manufacturing footprint. We have Trieste, we have two factories in Vasa, and we are consolidating. So in spite of this, we are making a very positive journey. And service agreements continues to develop in a very good way. So the net sales from installations under agreements is strongly increasing. We have about 29% of our installed fleets is now under agreement. And you can also see here in the graph that the net sales from agreements is clearly trending in the positive direction, and it's also above, clearly above the pre-COVID levels. Agreements are signed across multiple segments. LNG carriers, for instance, the agreements grew by 28% the past four years. Crews slightly declined because some of the capacity has been scrapped out. But I think the key metric here is the renewal rate, i.e. customers that have used these services coming back. And we have a renewal rate of over 90%. That is a very strong testimony that we are adding value to our customers. Also the decarbonization journey when it comes to the fuels, new fuels continues. So here we have the latest cooperation with Stena. We will convert some of the Swedish ferry operators vessels to operate on methanol fuels and the conversion will include the fuel systems supply, engine modifications and integrating the new installations with the ship's existing systems. The contract will equip the vessel with unmatched fuel flexibility and therefore making an important milestone in Stena's journey towards becoming a leader in sustainable shipping. And the conversion is scheduled to take place in 2025. One of many examples to come. Marine systems, we love our equipment. Marine systems order intake increased. But the comparable operating result declined due to provision taking in a single sizeable turnkey project and gas solution. So water intake, you can see up with 21%. Net sales is down with 36%. We see good development on the services side. But of course, 19 million provisions in a single sizeable turnkey project has a significant impact. Now, We are not doing, since several years, we are not doing turnkey projects anymore in gas solutions. So this is a legacy from the past before we took that decision. And we are working this project out and we're going to finalize it. But we will not enter into new turnkey project solutions for gas solutions. Energy. The order intake and comparable operating result increased. Good also here, good development in services that continues. Order intake up with 15%, net sales a bit flat and partially related to periodization. If we look at the EV drivers, good service performance, improved profitability in the energy storage business. On the headwind side, we have an inefficient factory capacity utilization because we are a bit low, as you have seen in our thermal sales. And this leads to an inefficient factory capacity utilization. What I would say is on the order intake for thermal, we do see a more active second half year, I would say, for order intake. If we look at energy storage, the journey continues, the positive journey continues. So when we look at the rolling 12-month comparable operating result, we are now at minus 1. So in Q3, minus 3. We started minus 4, minus 3, minus 1. And we are continuing in a positive direction. And if we look a little bit closer to the on the positive development and energy services here, you can also see on the graph how we have grown the percentage of our fleet under coverage. We also now actually 29% coverage also in energy. And you see the growth trajectory there. And to give one of the many examples here, it's a very important long-standing relation with the Brazilian customer, Gerard Amazonas. We have renewed an existing agreement. It's a two-year renewal. with your Amazonas so they can meet the power purchase obligations. So the agreement covers the Ponta Negra power plant in Manaus. And it's a plant that has been in place since 2006. And the plant is basically running 24-7. And our obligation is to ensure that we have high uptime, high reliability, and that is maintained at all times. We have many of these types of businesses. Here is the bridge for the development of the EBIT from 6.1% to 7.4%. You can see marine power, double digit now, EBIT margin. Of course, marine system, negative impact. But you can also see that energy is improving and portfolio is also improving. As we said, comparable operating result increased by 26%. Arjen, other key financials.

Yes, thank you, Håkan. If we start with operating cash flow, good performance, I would say, in quarter two, as well as in the first half of this year. Definitely, if you compare it to previous year, the same periods, they were all deep negative. The cash flow was very well supported by both improved profitability, as well as, let's say, changes in networking capital. We had to increase our inventory somewhat, but we got a lot of money also from the customers. Net interest bearing debt improved, so it went down actually compared to the end state of last year. Financial debt at least is somewhat increased, but we definitely got more increase in the cash, so making the net interest bearing debt going down. Geering stayed more or less on the same level as at the end of last year, around 0.23, and so obviously went somewhat down in the first half of the year, mainly due to the fact that we accounted dividend into the equity in the first half of this year. Basic earnings per share, a little bit low on the quarter compared to, let's say, previous year, the same quarter, of course, related to the impairment that we had to do in portfolio business. And also good to remember that on the minus 16 cents that we had first half last year, we took a 200 million provision in that for the related to the exit from Russia. If I move to the next slide, cash flow from operating activities, as mentioned, good performance in this quarter, clearly trending up. Definitely after a negative operating cash flow last year, this is a very welcome trend, and we, of course, aim to continue that Good trend. Working capital to sales ratio on a good level, I would say, definitely comparing it to long term historical levels. We are around 2% now and basically it's the same as we had at the end of Q1 and also very close to what we had at the end of last year. And let's say long-term historical average was 9%. So I think we are on a good track here. Of course, it doesn't stop us from further improvements. We are working with operating working capital elements all the time in many different ways. But with these words, I give it back to you, Håkan.

Thank you, Arjen. So if we look at the prospects and demand environment, so we expect the demand environment for the next 12 months to be similar to the comparison period for marine and also for energy. So it's the same outlook, the demand environment to be similar for both marine and energy. So that wraps up the presentation.

Thank you, Arjan. So now we will continue to Q&A. So let's take one question at a time, please.

And also, please keep your mic muted while you're not talking. Thank you. First up is Max Yates from Morgan Stanley.

Thank you. I guess if it's just one question, I'll focus on the energy storage margin because that looks to have been a sort of pretty important driver of the energy profitability. I mean, if I try and kind of back out of that rolling margin, it looks like you're at sort of low single digit margins in the second quarter for energy storage. I guess what I wanted to understand was, is there anything exceptional in that? Or is that a kind of reasonable estimate for how we should think the rest of the year should continue?

We don't give specific guidance, but I would say we are on, I mean, we communicated the plan is to turn storage around. And I think we are executing on that plan. And we are seeing that it's giving result also on bottom line. And we will continue to see storage moving in the right direction.

Okay, so there was just there was nothing exceptional, though, that you call out that means that shouldn't be a level that we were at isn't sustainable.

Now, I think this is the journey that we see is part of our turnaround program.

Okay, great stuff. Thank you very much. I'll get back in line.

Thank you very much. Next up is Vivek Midhab from Citi.

Hi, everyone. Can you hear me?

Yes. Hello.

Perfect. Thank you very much. So I have a question on the margin side. So excluding the provisions, you appear to have shown a strong sequential margin improvement over Q1. How should we think about margins going into the second half and the moving parts within that? So, for example, how much is left of the legacy backlog to deliver and so on? Thank you.

Okay, so we don't give guidance for margins, but of course, if we look at how our business will evolve going forward, we continue to see strong growth on services, and we know that's normally a very strong generator of profitability. And also to your point, we are working through, as you know, still this year, we said we had 1.2 billion euro of order-backed log from orders we took before the big inflation set in, so to say. And we have earlier communicated that the majority of this we will have worked through by Q3. So that still holds. The turnaround program in storage, you can see yourself, we are on the right way. And then turnaround in voyage. Yes, it has been delayed. That was one of the reasons why we have made the structural changes, as you know. And we do see that if we look at combination of Voyage Services, which is now in Marine Power, and ANCS, that is now in portfolio business, if we bring them back, so to say, we can see that the turnaround program is now actually in speed and it's going in the right direction.

Thank you very much.

Next up is Sven Wajer from UBS.

Yeah, good morning. My question is on the outlook statement, which you kept stable despite somewhat tougher comms when we look at the current quarter. I was just wondering how you see the outlook between the equipment and the service side.

Well, I would say that I mean, the demand for cash relates to both. I think when we still keep the similar level, it's related to the level of uncertainty we see looking 12 months ahead.

I don't know, Arjen, if you want to... No, I think that's exactly as you say. Let's say we see a very active, let's say, service business, so that we also believe that will continue to be a good business going forward, at least on the near term. But of course, let's say single big new build projects, let's say we have a couple of hundred new build in or out that may change the mix quite significantly on a certain, let's say, definitely on a short-term horizon. So it's very difficult to give an answer to this. It can swing a little bit. It's lumpy on the new world side. That makes it difficult. But service remains solid.

And you said on the thermal side, right, you said you expect these orders to come in at the end of the year, beginning of next year. I mean, has there been any development during the quarter that has raised that confidence relative to last quarter?

So I think what we're saying is that during the second half year, we do see a stronger pipeline on the tendering side in some of our core thermal markets.

Okay, thank you.

Thank you. Next up is Antti Gonsanen from SEB.

Hello, Håkan and Ari, I hope you're hearing me well. I had actually a follow-up question on the profitability side, if we think about the second half and knowing that you don't drive for margins, but on the equipment side, we should see benefits from fading of those legacy projects, but at the same time, I guess the fixed cost absorption is trending a bit down. So should we kind of think about the normal seasonality going into Q4, a little bit higher, a little bit lower? How should we balance out those two things in in the equipment side.

Yeah, so not giving any guidance as I said, but you know, I think we will see the normal seasonality with a lot of activities in Q4.

The hockey stick, yes.

All right, I'll get back to the line.

Next up is Panu Laitinmäki from Danske Park.

I wanted to ask about these legacy projects again. I'm just wondering, how did they play out in Q2, like in a year-in-year comparison, because you don't mention them as a driver for the result in any of the divisions. So was it like similar profitability still compared to what you had last year, and then there should be an improvement going forward, or how was it?

I think, I mean, if you look at Marine Systems, where we made this 19 million euro provision, so it's related to one specific project. And that is a kind of a wine timer related to, you could say, a turnkey business, which we are not doing turnkey anymore.

So it clearly... Sorry, I actually meant with the legacy projects, I meant this, like the 1.2 billion Okay, sorry, I misunderstood you. Related to inflation.

Okay, then I missed your question. Can you restate your question? Because I misinterpreted you. Sorry about that.

Yeah, the question was that we have been discussing these projects for several quarters, but then if I look at your slides, you don't mention them as a driver for the operating result in year-on-year comparison. So the question is basically that was the profitability of this business similar in Q2 as last year and then should we expect improvement going forward or how does it play out?

Well, as we invoice these projects, they are currently impacting our... They are dragging our profitability. And what has happened after, you could say, first quarter in 2022, because this is where we set the line, is, of course, we have adjusted our price levels on the new orders that we have taken on the equipment side, so to say.

Okay. Thank you.

Right, and yes, we had a big impact of cost inflation in Q2 last year, and we have also a big impact on cost inflation this year. So in that sense, it's not significantly different. Otherwise, we would have mentioned it.

Okay, clear. Thanks.

Next up is Erkki Vesola from Inderes.

Hi, Håkan, Arjen, can you hear me? Yes, welcome. Yeah, just a clarification. How many gas solutions legacy projects are there still in the marine systems backlog? I mean, how do you see the risk of similar provisions being made in the coming quarters only to this 19 million?

So I would say that this particular project is rather exceptional in the portfolio business. in the business portfolio. Of course, marine systems, there is a lot of project in that project portfolio. And in project business, you will always have some project that performs a bit better than expected, some that performs a bit worse. But this particular one is an exceptional one. So I would say that the rest of the portfolio is more within what you would expect from a normal project business.

And would you like to disclose how big this turnkey gas solution that turned out to be sour was?

No, sorry, I will not go into those details. Sorry.

But this turnkey project was part of this 1.2 billion low margin backlog?

Well, those projects were taken before, way, way before. So you could say, yes, you could say that. It's part of the inflation, impacted projects, correct.

Okay, very good. Thank you.

Next up is John Kim from Deutsche Bank.

Hi, good morning, everybody. Wanted to chat a little bit about storage. in the statement in the quarter you talked about customers delaying deliveries on batteries due to lithium or battery pricing can you give us a sense of how prevalent that is and is that a problem that's clearing should we expect this on an ongoing basis and how does that affect your call it profitability? Do you have taper pay clauses in these contracts?

Thank you. So basically, the mechanism here is that the raw material prices for battery cells have been coming down. And we have material price indices. So it's a pass through for us. And of course, some of our customers, they see this trend. And then some of the customers, they say, well, I will wait to place my order and firm it up until I've got confident that the raw material prices have bottomed out. So that's the kind of mechanism. So it's not impacting our profitability in storage because we are covered by the indices, so to say. Now, how prevalent is this? It's a mix, so to say. And how long will it be there? Well, I think the answer to that is what type of volatility we will see on the raw material price side. And I think that is hard to predict.

That's what it is. And of course, with the indexation, of course, if price go up, let's say, if the raw material price or cost actually go up, then let's say our price goes up and equally so it goes down. When it goes down, and of course, in that sense, we are secured with our margins. And I think that's critical for us. But of course, customers, at least certain customers, not all customers, but certain customers, wait for an opportunity perhaps. If they have the time to wait, then they might wait a month and think that the price might further go down.

Okay, thank you.

Next up is Sean McLaughlin from HSBC.

Good morning, can you hear me?

Yes, good morning.

Thank you. Again, another question around energy storage. We've seen a trend, particularly in Europe, for transmission as a service working directly with the transmission operators rather than, let's say, a kind of a generation co-location thing with solar. I mean, is this a trend that you're seeing? Are you also aiming for this market? And more broadly, where are you differentiating in the storage market? Thank you.

So if I start with the second part of your question, how are we differentiating on the storage market? I think the one critical element for us is the power system optimization. I mean, with the heritage we have and the knowledge we have built, I would say we are rather strong on power systems and how you manage them for lowest overall energy cost and also the best uptime reliability. So we try to implement that knowledge in our software systems, which we use not only to manage the battery in itself, but also to optimize how the battery is interacting with different generating assets in the power systems. So that is one factor where I think we stick out, at least when I talk to our customers. A second one is our project execution capability in storage, because I think we have a strong track record and executing on time. and with the right delivery, so to say. There has been a lot of dynamics in the industry, but I think if you ask some of our core customers, they will say that Wärtsilä is reliable and we execute in a good way. And the third element where we are also sticking out is what I talked about here earlier. I think we have a very strong track record on thermal stability. And if you look at some of the fundamentals of how we have designed our battery systems, they have an edge in how we have set up our product architecture, you could say, to cater to thermal stability and avoid fires, etc. So I think those are some of the areas where we stick out. I mean, coming to your first part of your question, I think we will see... We are clearly on the utility side, so we are clearly on the front of the meter side. If you look at how to provide stability in a power system that will have more and more renewables, strengthening the transmission system is definitely one way of doing it. But it's not always the easy way to do it because of right-of-way issues and permitting and cost, etc. So I see, you know, there will be different tools to provide balancing. That will be, you know, working with the transmission system. But there will, of course, also be the approach to working with different type of generating assets, like a thermal system. like on machines, but also with battery storage. It's going to be a palette of different solutions, and there will not be one solution fits all.

Very helpful, thank you.

Next up is Max Yates from Morgan Stanley.

Hi, thank you. I just wanted to ask about the services business, because obviously you're putting in very impressive service growth rates, much faster than I would say any of the normal indicators for that business would suggest. I guess what I really wanted to understand, when you talk about capturing more of the companies on the service ladder, moving up the service ladder, when you talk about capturing more in the installed base, where are we in that journey? I guess what I'm trying to get to is, should we expect sort of outsized service growth rates to continue because you're halfway through this journey? Or would you say kind of moving a lot of those customers up is more or less kind of done? Where are we and how do we think about future growth rates? Because it's clearly a lot above your kind of 5% ambition.

Now, I would say, and you saw the figures we've been presenting, now we are close to 30% coverage for both energy and marine of our installed base, so to say. And we think there is still significant growth potential. I mean, just looking at the coverage. Then we have the other element, and that is moving up the service value ladder, i.e. moving customers from transactional to the first type of agreements and moving agreement customers to more advanced agreement customers, etc. And you know this notion of moving up the service value ladder. And we have seen and we have communicated about this before, and I think we will come back to this at CMD, that there is a scaling factor if you take from the first step to the last step. I mean, there is a scaling factor of revenues to two to five, if you look at revenue per kilowatt per customer, so to say. Now, of course, you will not move all the customers from step one all the way to step four. But I think it gives you a feeling for there is, in our view, possibilities for really interesting growth going forward.

Okay, and just a very quick follow-up on the power plants business, because I guess I'm struggling a little bit with this business, because there's not many businesses I look at where orders are below COVID levels, and this business is one of those. So I appreciate the environment is challenging, but it was also very challenging in COVID, and you were generating more orders. What is really happening here? And when you look at quotations, I mean, can we kind of very quickly see this business go back to above a billion, considering we'll probably be at 650 million this year? And is it just waiting for certain regions to start ordering? Is it the U.S. coming back? I mean, what's really going on here? Because the numbers are incredibly low.

So, I mean, we have had certain countries that were very important for us actually going through COVID. If you take Indonesia, it's one of our important countries. It's not until now that they are coming out with the big tenders. So there is actually ongoing tenders there. So that's a very concrete example how kind of COVID impact has lingered on for quite some time. Then if you look at another significant growth opportunity is the U.S. with the balancing because renewables is moving very fast now in the U.S. And you have states like Texas, they currently have 40% renewables in their energy mix. And we have installed close to a gigawatt of balancing power and we see it's going to continue to grow. What has happened a little bit in the US, as you know, there are the different independent system operators, the ISOs. And there is queues of permitting projects in each ISO. They call about the interconnector queues. And that has also put a little bit delays. So this is what we are seeing. We see a lot of interest. We see potential. And there has been certain delays. As I said before, in H2, we do see a pickup, and we intend to grow this business going forward.

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

We still have plenty of time for questions, and also follow-up questions are warmly welcome now.

And next up is Vivek Mitha from Citi.

Thanks very much for taking my question. Could you please talk a bit about Cruise as an end market? You've called out Cruise as supporting the equipment order intake in marine power. Could you maybe elaborate on the developments you're seeing in that end market? Thank you.

so so if we look at the cruise industry in general uh first of all if you look long term it has been a very resilient industries throughout for economic downturns actually even if people have had challenging personal finances people have been cruising now of course covid has been very very challenging because of of the COVID situation. I think that was probably the first real crisis for the cruise industry. Now, COVID is kind of over and people are cruising like never before. In the US, very strong demand. Also Europe, strong demand. Even now, cruises are coming up again in Asia, so to say.

higher actually than before.

Yeah, the cruise bookings are higher than in pre-Covid. And if you look at the industry association of cruise companies, they expect a cumulative growth of, I think, six percent, you know, through the second half of the 2020, so to say. Of course, during Covid, the capital structure of many of the big cruise operators has changed because they had to take on a lot more debt to go through the tough period. And I think what they're doing now, I mean, this is a cash rich business, so the demand is good. They will get the cash in and they will deliver a bit. And it's only after they have found the balance sheet to have the right structure that they will come back for big new orders, so to say. I think we will start to see order for some of the smaller, mid-sized cruise vessels, but for the big, it will probably be a year or two more, so to say. But it will come back. When I talk to our cruise customers, they are, I would say in general, very optimistic and positive about the future because cruise as a holiday destination has a lot of growth potential overall. So that's why I'm saying, when we look at order intake for that, for new build, it's still fairly muted, so to say. But for services, it is very strong, because the cruise operators are cruising, and then we are providing them with services, so to say. And here, the cruise industry has been one of the important pioneers in this concept of moving up the service value ladder. And we often talk about the Carnival project, where we are basically providing this type of performance-based agreements to Carnival and their fleet, so to say. And it benefits both parties. And I would say Carnival gives us very positive feedback on this. So to sum it up, new build, Cruise for us is still muted, but it will come in a couple of years. On the services side, it's right here, right now, and it's very strong.

That's very helpful. Thank you. A very quick follow-up on marine power. You've highlighted the effect of the large-order methanol. Could you maybe quantify how large that StenaLine retrofit project was, just to get a sense of base orders versus large orders? Thank you.

Sorry, we don't give out the order values for competitive reasons, so to say. So, sorry about that.

Next up is Tom Skugman from Carnegie.

Good morning.

Good morning. Good morning.

You have said that the ammonia and hydrogen concepts will be presented in 2023 and 2025. So I would like to get an update on this and also get some kind of understanding. When can you sell, you know, larger quantities of this, you know, from the, you know, if you present the hydrogen concept in 25, when can you really start to sell volumes of these?

Yeah. So, so if we start with hydrogen, we have, as you said, we have communicate, we'll have a, sorry, if we start with ammonia, as you pointed out, we have said that we're going to have an ammonia concept this year. And for hydrogen, it's a hydrogen concept by 2025. Now, in both of these cases, we will have the technical concepts ready, and then we will see a little bit where the market is going. how fast we will evolve and how fast it will pick up. So it's very hard to predict how fast this transition will go because it is influenced by externalities like the IMO regulations, also by the evolving green market. But if you look at If I talk about ammonia, I think we will have the concept this year and we will be looking for the first orders probably by the end of this year or beginning of next year. But then from that to the full commercial breakthrough and full steam ahead, it is a bit hard to predict. Because we will have the engines. We will also have interested customers. I can assure you of that. But then the rest of the ecosystem will need to follow. The ammonia needs to be available. You need to be able to bunker it, etc. And that will take time to evolve.

for risk mitigation reasons. Let's say you always start first with a pilot before you go to full release.

Then to give you another perspective as well, if we look at methanol, Methanol is, as you know, it's not zero carbon, it's carbon neutral. But there is a lot of movement now on methanol. We are selling methanol engines in commercial volumes. I will not disclose for competitive reasons the volumes, but we are clearly selling. There we have the commercial breakthrough as we speak. And I think one tidbit of information, I think if we look at the contractor container vessels, I think 60% of them that has been contracted this year will be methanol ready, so to say. So there it's happening. And I think also there are parties that predict, I don't know if it was IMO, that predicted that by 2030, 20% of all new orders, vessel orders, will have some kind of methanol enablement, so to say.

So my understanding is that, you know, from 2026, you could sell big quantities of hydrogen and it's not just like going to be trial products. I mean, you already depends on the fuel availability basics. Is that like the right understanding that it's not just presenting a concept but you don't really prepare to sell volumes?

So for ammonia, I think you're right. For hydrogen, we will have the concept in 2025. But to have full fledged commercial volume, that will probably be a couple of years after. But that is depending on the market and the demand side that we see.

I think gas turbines are also evolving and moving to hydrogen-based solutions and the Chinese are investing a lot in fuel cells. To me it's very hard to understand how competitive the engine solution will be in the hydrogen world compared to in the gas.

I would say we are optimistic. I would say that because if we look at the thermal efficiency of the engine, of course, we are still evolving. If you talk about the hydrogen concept, we are still evolving. So we are still in an R&D stage. But I would say we are optimistic with the thermal efficiency and also with, as you know, the ramping capabilities of our engines compared to the gas turbines and the fuel cells. You know, there are different technologies, there are different efficiency, thermal efficiency of those, there are different ramp capabilities. I feel strongly, I mean, we are very optimistic about the future and some of the fundamental properties of our technology, I must say. And there, of course, we are doing a very careful technical analysis of the different options that are available.

And then finally, why is it more difficult to bring out the hydrogen than the ammonia solution? It takes longer time.

Well, one thing is that we want to stage our development. If you try to do too much at the same time, you will strain your whole system. That is one element. And the second element is, of course, also related to how we predict the pickup will be. Because at the end of the day, we need to get to a commercial stage where we make the money back that we spend on the R&D.

Thank you.

Next up is Erkki Vesola from Inderes.

Hi, thanks for the follow up. I'm still on storage. Where do you guys see yourself trending in terms of storage market share vis-a-vis Tesla influence say on a rolling 12 month basis?

So I would say that we are currently probably around the top five players. We have a growth trajectory and growth target. I don't say that we have a specific market position target. I think we need to be big enough to be relevant for our supply chain to work with, because there is clearly a scaling effect. But I don't think we have a target for which position we want to be. You said top five, not anymore, top three. Well, it depends because if you take error in almost one gigawatt hour, that really moves the needle. So, you know, it's a lumpy business. So depending on, you know, which projects you have taken, it could vary. So one to three or one to five, it depends.

Okay, very good. And then lastly, just to make sure, are you going to book this 300 plus million Australian storage project order?

order in q3 now we have already booked it now in q2 and and and we booked it at around we booked it in q2 and it was at around 275 so it came down why did it come down because of raw material price indexation so we have booked it in q2 it's part of the okay very good thank you next up is john kim from deutsche bank

I just wanted to touch on the low margin backlog. Again, 1.3 billion, I think, was the guide at the start of the year. Is that progressing the plan? And how lumpy is that number? Can it execute in a timely fashion, smaller orders? Or is it quite bifurcated or slanted to one or two projects?

So it's a couple of projects. I would say maybe two handfuls or something like that. But I mean, it is a step by step journey. And as we talked about by Q3, we should have invoiced and recognized this. And that is progressing according to plan.

Yes.

Thank you.

Next up is Sean McLaughlin from HSBC.

Thanks for taking my follow-ups. I guess, firstly, what is the risk of provision on these low margin, these two handfuls of projects that you talked about?

No, I mean, there are risk provisions, like you would have in a portfolio of projects. You always have risk provisions.

Also... Inflation projects, right? Or am I misunderstanding?

Well, I'm just wondering, the low-margin projects that you're...

delivering the one point the one point one point two yeah okay okay so just to clarify it yeah so this the the story is that you know we had a certain order backlog uh at the end of the first quarter in 2022. this is when we in that we saw a significant increase in inflation that was partially related to the war and also to the covet situation in china but So we were then having an order backlog that we had kind of taken at price levels before the inflation really took off. And for some of these projects, we could not renegotiate prices with customers. So we had to eat it. That's why we call it low margin. And we have now been, of course, we deliver equipment, we deliver projects, and then we kind of invoice and we eat this out. And for this year, we said that we still had 1.2 billion to invoice. And we have said that by Q3, we will have invoiced a clear majority of this. So the low margin is not related to operational performance. It's related to that they were taken before the inflation really took off.

Understood. Thank you. And if I may, just on a separate topic, in your comments, you talk about companies, shipping companies facing pressure to decarbonize, but more incentives are required to accelerate the pace of investments. I mean, what is missing in your view? What should we watch out for?

So I would say that if you take a step back and if we take it like a... 20,000-meter perspective. I think we need to create a level playing field between the green solutions, the green fuels, and the fossil fuels. And there is a need for a kind of carbon tax regime. That doesn't only cover Europe. I think Europe will actually go ahead, as you know, with the ETS, etc. But it has also been discussed on IMO level. I mean, in MEPC, there was no agreement on it. But it will need to come, so to say. So because you need to create this level playing field. Why? Because the new green fuels, they will be two to four times more costly compared to the fossil fuels. So there is the element. Now, having said that, when I talk to some of our, you know, customers on the merchant side. They say, and we've been talking about this before, that they see a small but growing market for green transport. They have customers that are willing to pay a premium for shipping green. And because it's part of their, you know, this company's offering to us as consumers, or it could also be industrial companies, they have made their carbon emission commitments, science-based targets or others. And they have made commitments to reduce the carbon footprint. And then you need to go through your value chain and there is transport in the value chain. So that's why we're saying there are two things happening. First, the regulatory context needs to evolve. MEPC was a step in the right direction, but it's far from what is needed. But it's a good step in the right direction. And then we will see a market for green transport evolving. So this is what is needed. And I would say that right now, for instance, we talked about the methanol, that we actually have a commercial breakthrough here as an industry. Many of those vessels, initially they will be running on the traditional fossil fuels because there is not enough green methanol available. That will develop over the years, but owners and operators, they want to build in the flexibility for the future. And just if you look at methanol, some data points, I think they are really, really interesting. I mean, if you look on the annual consumption of the marine industry of heavy fuel oil, it's something like 300 million tons of fuel every year. Now, if you want to substitute that with green methanol, you need double the amount. You need 600 million tons of green methanol. Today there is about industrial needs for about 100 million ton of methanol. So if we want to make all methanol in the world green you take the 600 from marine plus the 100 from industry you need 700 million tons of methanol today the green methanol production is 400 000 tons 0.4 million tons 700 0.4 so we understand this will take time but Ship owners are strategic because these are long-term investments. If you buy a vessel, you build a vessel, it's going to last for 25, 30, 40 years. So operators are already investing in this flexibility. So they are building in the methanol capabilities. Initially, it might run on a blend or it will run on heavy fuel, but gradually the methanol will come. And this is a little bit the journey also for the other green fuels. like for ammonia. It will be a gradual shift.

Thank you all for active dialogue. Before closing the call, I would like to remind you of our upcoming IR events. On September 4, we will host an R&D call together with Juha Kytölö. Juha has extensive knowledge about future fuels, which were discussed also today, so that will be a good discussion opportunity to get more information about our solutions. Then on October 31st, we will publish our Q3 results and then our capital markets day will be here in Helsinki on November 9. But I hope that you can also enjoy the warm summer during the next few weeks. Thank you.

Thank you.