WRT1V.HE FY2025 Q2 Earnings Call Transcript
Date: 2025-07-18
Source: Financial Modeling Prep

Hanna-Maria Heikkinen: Good morning, and welcome to this news conference for Wärtsilä Q2 '25 results. My name is Hanna-Maria Heikkinen, and I'm incharge of Investor Relations. Today, our CEO, Hakan Agnevall, will start with the group highlights. He will continue with the business performance; and after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a good time for Q&A. Please, Hakan, time to start.
Hakan Agnevall: 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 EUR 2.2 billion, which led us into an all-time high order book of close to EUR 8.8 billion. Net sales went up with 11% to EUR 1.7 billion, and we continue to improve our operating margin and comparable operating results increased by 18%, EUR 207 million, and we are now at 12% of net sales. And on the operating results, we increased it by 11% to EUR 186 million, 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. 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, it is up 9% and cash flow, I will talk more about it, strong cash flow, EUR 460 million. If we look at a summary of all the numbers, and we can look at them from this perspective. So look focusing on the second quarter, order intake up 18%, so EUR 2.2 billion. 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 EUR 0.9 billion to EUR 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, EUR 8.8 billion. Net sales, up 11% again to EUR 1.7 billion, and we see also a mix, strong growth on the equipment side, 12% up to EUR 812 million and also strong continued growth on the services side, 9% up to EUR 907 million. Book-to-bill at 1.27, so strong book-to-bill. Comparable operating results reaching EUR 207 million, up 18%, and that corresponds to a 12% margin of net sales. And on the operating result side, up 11% to EUR 186 million, corresponding to 10.8% of our net sales. Industry outlook, Marine and Energy, we start with Marine. The activities in our -- in Wärtsilä's key segments remain very supportive. So strong ordering across cruise, container ships and LNG bunkering vessels really support Marine, 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 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 key segments, particularly, as I said, on cruise, containerships and LNG bunkering vessels. The regulatory drive, including the global carbon fee proposed by MEPC 83 is incentivizing shipowners to increase their investments in ships that are more fuel efficient and can use alternative fuel. And 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 Clarksons numbers to the right here, you can see that if you look at the overall status of the industry in the top graph, Clarksons 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 that key segments, it's even better. So we can see here '25, '26, '27, Clarksons data, it's really -- we're really looking at contracting level that is above the 10-year average. So good for that continued to 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, so positive. 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. And you've seen our first data center order in the U.S. now. 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 U.S. 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 the 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-bill continues well above 1. It's the 17th quarter that we now continue to have a book-to- bill that is bigger than 1. We also see in the graph to the right here, we are clearly building our backlog also for the future. So it's -- 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%. So net sales increased by 11%, equipment net sales increased by 12% and service net sales increased by 9%. Profitability continues to improve. So net sales 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 on 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 15 Wärtsilä, 1850 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. So 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 test on vessel together with Solvang, we can reduce CO2 emissions by up to 70%, providing shipowners with an immediate solution to meet increasingly stringent environmental regulations. And the ability to capture CO2 from the ships ecosystem has a major potential for the industry's efforts to reduce greenhouse gas emission, of course, considering the international IMO targets 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, as I said, by merchant, Ferry and Cruise segments. You can see order intake was up 14%. Net sales also up 14%, and we are now at the rolling 12% of 11.9%. Absolute, we are increasing. The major contributors is higher service volumes and better operating leverage. And of course, we are -- 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 the 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 1. We have had, if you look at the last 2 years, 10% annual growth. And then some of you asked, why is the order intake in 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 4 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. There could be movements from quarters. And if you look in Q2 2024, you see the peak there. That is now coming out of the 12 -- LTM 12. So that is affecting. You can see the other disciplines, book-to-bill far above 1. And really encouraging to see, you see the blue service agreement line is 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 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 above 1. Here, you have a little bit lower CAG over the last 2 years, 8%, but still, I would say, encouraging. And it's the same story looking to the right graph here of 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 1. And that is, you can see also here the second quarter 2024, where we had a peak. So no cause for alarm. And you see the big decline, it's well above 1. 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 tall, no doubt. Net sales down 42%. If we look at the rolling 12 EBIT, 3.5%, it's 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. And we also have higher service volumes. However, the lower equipment volumes and weaker operating leverage has a negative impact. We have -- 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 bridge, the EBIT bridge from Q2 '24 to Q2 '25. 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, Arjen, over to you.
Arjen Berends: Thank you, Hakan. If we look at the other key financials. First of all, as Hakan mentioned, let's say, a 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 EUR 190 million. 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 contribution from working capital. If we look at working capital from Q1 to, let's say, Q2, basically EUR 154 million improvement, now landing at EUR 924 million negative. If we look at the improvement areas, it mainly came from inventories receivables, while at the same time, let's say, the advances received, let's say, 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 results 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 5-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 was still -- and I did it many times before, highlight that, let's say, negative working capital is something, you 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 order growth book-to-bill ratio for the 17th quarter in a row has now been positive. And that, of course, also supports with, if you have 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 strong positive bending, so to say, and most likely not in the first part of next year either. If 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 graph slide is the Energy Storage. Clearly, let's say, the margin target -- operating margin target is within the range, 3% to 5%. But we have a challenge with the volumes at the moment, the U.S. market is stagnant, all competitors move to the more active markets and that, of course, increased 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 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, Hakan.
Hakan Agnevall: Thank you, Arjen. So you also recognized or 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 EUR 30 million 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 Systems 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 transporting 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, basically. 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, to the comparison period. On the Energy, we expect the demand environment for the next 12 months to be similar to that -- 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 Arjen and you will join back.
Hanna-Maria Heikkinen: Thank you, Hakan. Thank you, Arjen. It sounds like that we have many good reasons to smile.
Hakan Agnevall: We do.
Hanna-Maria Heikkinen: So continuing with the Q&A. [Operator Instructions]. Handing over to the operator, please.
Operator: [Operator Instructions] The next question comes from Max Yates from Morgan Stanley. .
Max R. Yates: 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 3 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.
Hakan Agnevall: So I think you should really consider the 12-month guidance. It's not a 3-month guidance, it's 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, we are giving this guidance considering also a very strong order intake in the last 12 months and an all-time high Q2.
Max R. Yates: 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 this -- 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?
Hakan Agnevall: Well, this with euro per megawatt, 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, data centers orders, we have a good price realization. But of course, it's a competitive market. But I would say they are certainly not dragging down our overall margins.
Operator: The next question comes from Uma Samlin from Bank of America.
Uma Jun Samlin: My question is on your Marine outlook. You're guiding to be better than the last 12 months. But on your Slide Page 4, you have the sort of the line 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? And where do you see the market to be better in the next 12 months?
Hakan Agnevall: So sometimes the line is breaking up a little bit. So I will try to answer the question that I thought you are posing. I mean if you talk about our core segments, we clearly see a continued positive development. Cruise, ferries, also some parts of the LNG space, also some parts of the merchant space. And you've seen the graph there, I think Clarksons is agreeing with us in their numbers as well. So that is the major driver.
Uma Jun Samlin: Okay. I was just referring to the second graph on the Page 4 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 is that -- how should we think about that? Do you see the Cruise and Ferry segment to significantly outperform that? Or what is sort of what makes you feel that it will be better than 2024 if the contracting will be down?
Hakan Agnevall: So if you're referring to the kind of slight downturn of the '25, I think look at the longer trend, so to say. And also, I restate, we see -- 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.
Arjen Berends: If I can add to that comment, Håkan, that graph that you are looking at is the Clarksons forecast. That is not our order intake. Let's say, the Clarksons forecast on ship contracting. And as you can see from that graph, let's say, if you look at 10-year average in 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. Clarksons 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 in Clarksons, 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 Clarksons forecasting.
Operator: The next question comes from Akash Gupta from JPMorgan.
Akash Gupta: And my question is on storage outlook. So in storage, you're guiding for higher activity in the next 12 months than past 12 months. And I wanted to ask how much of that is a reflection of underlying market versus the weak quarters -- weak orders we have seen in last 3 out of 4 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 U.S. 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?
Hakan Agnevall: So 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, U.S. situation is extremely uncertain. I don't think anybody can make any predictions around that. But we look more outside of the U.S. As you know, geographically, we are fairly well diversified with other strong markets like Australia, U.K., other markets in Europe. And this is behind our kind of outlook.
Operator: The next question comes from Sven Weier from UBS.
Sven Weier: It's on the service order intake in the 2 charts that you've shown on the rolling 12 months. I was just wondering if -- I mean, if all fair what you said on projects and it'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 this a cannibalization also from service agreements that you have those kind of items in there? Or how should we think about those 2 lines coming off?
Arjen Berends: Yes. A few comments on that. Yes, of course, the more agreement you have, a part is shifting. That's a fact. I would say, overall, let's say, I think as we have said many times before, if you keep your book-to-bill ratio above 1, you're growing. And there will always be fluctuations between, let's say, single quarters on, yes, something is up or something is down. It has a lot to do with timing. Now when it comes to the retrofit projects that Hakan 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, we -- and that is confirmed both by Energy and Marine. We have good opportunities also on service and upgrades. So as Hakan 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.
Sven Weier: 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 service. So there is a cannibalization with the agreement.
Arjen Berends: There is always, let's say, if you do an agreement and you do operation and maintenance, there is, of course, a little bit moving from, let's say, field service, for example, to agreement sales. So there is always a little bit of movement in between the lines, if you look like that, but it's not majorly.
Sven Weier: And not so much on the spare parts bit?
Arjen Berends: No. Less on the spare parts.
Sven Weier: And how do you see that? I mean, again, if you look at those lines also on spare parts, it's coming close to 1. 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?
Arjen Berends: I would say it's more periodization. What is crucial, of course, for transactional service business is the running hours of the fleet. And the ships are running, 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. So -- and that, of course, offers opportunities. If you then get more agreements and propose solutions from a great 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 1, that's the sign of growth.
Hakan Agnevall: And also to complement Arjen, 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 starts to running it more and more and more, which is, of course, good for running hours and for our service business.
Operator: The next question comes from Vivek Midha from Citi.
Vivek Midha: 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, in the mix should be moving more towards equipment. So how should we think about energy margins over the next, say, 2 years? Is there much upside here given those developments?
Hakan Agnevall: So I mean, we have 2 kind of things that is happening. I mean, certainly, 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 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 are improving. So -- and I think there are two major factors we highlight. I mean 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 EPC, but also some of the structural changes that we have made, I mean, ceasing manufacturing interest and working with operational excellence. And all those factors contribute to a more positive margin development for new build stand-alone, so to say. So it starts to get a more mixed picture in a positive way, I would say, because margin in new build is improving.
Operator: The next question comes from Panu Laitinmaki from Danske Bank.
Panu Laitinmäki: I wanted to ask about the strong energy equipment orders in Q2. Could you kind of provide color how did those split between base load balancing and data centers and if you look about your expected pipeline going forward, how does that split between those 3 segments?
Hakan Agnevall: So basically, I mean, we talk about balancing a 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, Reko Diq baseload application, some of the other -- I mean, data center baseload, some of the other orders baseload. So -- but this will vary from 1 quarter to the other. I mean, going forward, both balancing and base load will be important.
Panu Laitinmäki: 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 or is there anything...
Hakan Agnevall: 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 1 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 and you could say the normal base load business.
Operator: The next question comes from Antti Kansanen from SEB.
Antti Kansanen: It's Antti from SEB. Just one question for me related to the power plant side and I guess the U.S. markets. You mentioned that on the data center side, there's various decrease 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 U.S. in booking those kind of the U.S. orders, data centers or other kinds?
Hakan Agnevall: Yes. So good question. I'll 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-percent-ish 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 delivers.
Antti Kansanen: Yes. 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?
Hakan Agnevall: No, I think in general, and 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.
Operator: The next question comes from Sven Weier from UBS.
Sven Weier: Yes. 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?
Hakan Agnevall: 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 -- and Sven, you have been with us, showing the advantages of reciprocating engines compared to gas turbines. And that is the journey we are on. And now as we talked about before, that data centers are moving in because it used to be less power, now it's -- 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, 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 have -- 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, some, you could say, intrinsic advantages, which we feel really excited about. But it's the good old story of taking our customers -- new customers with us, show the benefits, show that we can deliver. But I really like that journey, I must say.
Sven Weier: 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 size the opportunity here?
Hakan Agnevall: I mean, it's more than a handful. The challenge is it's a very dynamic space. So there are opportunities coming up and then they 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 these are power plant contracts. They take time to negotiate.
Operator: The next question comes from Antti Kansanen from SEB.
Antti Kansanen: Yes. I mean I think this was referred a little bit on the presilent calls, but given kind of the vast data center opportunity and I guess the positive impact that it has on the margins, profitability, I mean it's likely a good business. How do you kind of 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 kind of project time lines, to be able to address that now that the lead times are getting kind of longer and longer?
Hakan Agnevall: So basically, we should -- just to complement one thing, Data centers are interesting certainly from a new -- from equipment but also a 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 free reserve capacity. And then on the capacity side, on top of what we already talked about utilization and the lead times for certain parts of our product portfolio extending, you also saw in Q2, we went out with a EUR 50 million investment, primarily in R&D, but also in manufacturing capabilities. So of course, we are investing and we are expanding our capacity.
Hanna-Maria Heikkinen: We still have some 8 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 helped you to gain service sales in the long run? How important is the connection between equipment sales and service relationships.
Hakan Agnevall: It's a very strong connection. And of course, the newbuild equipment will certainly generate service profit going forward. And I think a very positive trend the last couple of years, we are becoming -- we have become better on 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.
Arjen Berends: Especially because Q2 order intake was all baseload.
Hanna-Maria Heikkinen: Yes, exactly.
Arjen Berends: That's even better.
Hanna-Maria Heikkinen: 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?
Hakan Agnevall: 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.
Hanna-Maria Heikkinen: Thank you. Now it looks like that we have some additional questions on the line.
Operator: The next question comes from Panu Laitinmaki from Danske Bank.
Panu Laitinmäki: 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 equipment? And how much do you expect -- how much potential do you see for that to improve going forward?
Hakan Agnevall: So I won't compare Marine and the Energy Newbuild margins. I would say that the key -- I think I mentioned it before, the margins are improving on the newbuild 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 haven't shrunk our footprint. We have worked hard on good old continuous improvement and that journey continues. So the margin is improving.
Operator: The next question comes from Tom Skogman from DNB Carnegie.
Tomas Skogman: This is Tom from DNB Carnegie. I was also going to ask about the same subject or the service share of sales is higher in Marine, and you are kind of a very high delivery volume levels, thereby 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 market or is it that you have a wider variety of products that are outside the core on the Marine side or how should we understand this?
Hakan Agnevall: So I would say, I mean, it's different type of customers. It's a different type of markets. I think 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 more into agreements, it's been a very strong trend in energy I mean taking U.S. as an example, we -- in the past, we didn't do agreement in the business in the U.S. Now it's really growing and taking off. So I mean -- and we also continue this positive trend of -- we have 30-plus percent now of our installed base under agreements, renewal rate is still above 90%. So this story is really working out for us.
Tomas Skogman: 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 orders, what is -- is that...
Hakan Agnevall: Yes, I mean, you could certainly -- on the Marine side, there are certain -- and for instance, in cruise, where we have fewer but very bigger customers. And that, of course, creates a certain kind of environment. But Marine, 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 1 every 5 years, et cetera. It's a little bit more opportunistic, so to say. So there are differences in characteristics.
Arjen Berends: And also the, let's say, the customer you talk to is different. In energy, you talk about the new equipment sale as well as the life cycle agreement with one customer, the benefit comes to that customer. But in Marine side, the operator gets the benefit of your machinery while the yard is negotiating the newbuild contract. It's a different dynamic. Much more complicated on the Marine side, though.
Tomas Skogman: And is there any difference in payment terms that would explain the margin difference?
Arjen Berends: I think payment terms are never the same in any contract, I would almost say. It's so unique case by case. And then 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 and that's clearly, 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 our salespeople go out and sell basically. That's what we aim for. We succeed more and more. We have not always succeed, but it's trending in the right direction.
Tomas Skogman: And then finally, would you be more optimistic about potential to expand the margin in Marine or in power plants if you have to choose one?
Hakan Agnevall: No, we can expand margins in both I would say..
Arjen Berends: Yes, I would say so. It's also good to remember that our manufacturing footprint, our R&D footprint is shared between the two. So if you make a saving in your manufacturing footprint, it benefits both.
Operator: The next question comes from Louis Billon from AlphaValue.
Louis Billon: 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?
Hakan Agnevall: So Navy overall is less than 4% of Wärtsilä 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 maybe will grow, but we should also acknowledge that Defense business take a long time. It's a long time between decisions and execution and then you see the full impact of this. But there is potential.
Louis Billon: Okay. And maybe a follow-up. Is it -- are you selling main engine or auxiliary engine for the Navy business or it's the mix of both?
Hakan Agnevall: No, it's primarily propulsion-related equipment, not so much engines.
Hanna-Maria Heikkinen: 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.
Hakan Agnevall: Thank you. Have a nice summer.
Arjen Berends: Thank you.