Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to this news conference regarding Wärtsilä's Q3 results. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Håkan Agnevall, will start with the group highlights, market environment and business area-specific progress. Then our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Time to start. Please, Håkan.

Thank you, Hanna-Maria. And welcome, everybody. It's time for our quarterly report from Wärtsilä again. And I would say, we are doing good. Order intake is up. Net sales is up. And profitability is up. So I think we had a Q3 that has been looking really exciting. Order intake increased by 21%, growth in all businesses. You could say that same time last year was a low, but we are moving in the right direction and we are growing. Also highlighting services, I think our path there continues in the right direction. Order intake increased by 14%. The net sales went up with 20%. Profitability improved 43%, so a significant step in the right direction. And still COVID continues to impact us quite a lot, both on the Marine and the Energy side. On the Marine side and cruise is still not cruising, 50% operating of the world's vessel cruising fleet. So there's still potential. On the Energy side, we do see COVID impacting still. Unfortunately, many of our core markets, vaccination programs taking time. But in spite of COVID really having an impact, I think we are moving in the right direction. And I want to take the opportunity to thank the whole Wärtsilä team, all the people that is out there with our customers, supporting, helping often in many challenging times. So in the field, in the factories, still running in the offices and at home. And as we are returning in parts of the world, COVID is still a very harsh reality in other parts of the world. So thanks a lot for the employees really. The numbers, if we quickly go through them, order intake, as I said, up 21% from EUR 981 million to EUR 1,186 million. And you can see the services growth there of 14%. Net sales up 11% from the EUR 995 million to the EUR 1,103 million, and you see the strong growth on the services side, also on the sales. Book-to-bill, above 1, 1.07. So it's going in the right direction. And comparable operating result, 43% up at EUR 87 million. That's 7.9% of net sales, moving in the right direction. Of course, we are not satisfied with 7.9%, but we are going in the right direction. The highlights is really the net sales at EUR 1,103 million with a 20% increase on the services side. The comparable operating result at EUR 87 million with 43% growth, it's driven by increased sales, a favorable mix between equipment and services and also, I would say, good cost control. And you can see the comparable operating result Q-on-Q comparisons since 2019, it's going in the right direction. If we spend some time on the markets, and we start with the Marine markets, it's mixed activity levels in the Marine -- or on the Marine side. We see a significant increase in vessel contracting, mainly driven still by containers. And the number of vessels orders in this quarter, 1,400 plus, compared to 500 corresponding period last year. So it's a significant uptick, but it's mainly driven by container ships where cruise and ferry is still very, very low on the new contracting side. 297 million orders for alternative fuels where LNG still is the major alternative fuel, increasing. But the positive news is that cruise is slowly recuperating, 20% cruising end of June. Now end of September, 50%. When I talk to our cruising customers, I would say consensus, 65%, 70%, 75% by the end of this year. On the Energy side, pandemic still impacts negatively. However, on the positive side, there is a strong demand on the energy storage side. COVID-19, significant impact on many of our core markets. The recovery will most likely take time well into 2022 for the markets. So the energy storage, it continues as a trailblazer in some of the key markets, North America, Australia, et cetera. But the slow of our core thermal markets makes us decrease our market share in -- on the thermal side to 6%. I see this more as a COVID impact than anything else. At the same time, we keep up our battery storage positioned as one of the 3 top players in the world in this space. Order intake increased by 21%, and it increased all over the businesses and all business disciplines. And on -- especially on the equipment side, it was up 29% supported by a strong growth in energy storage. And service continues a good trend, up 14%. And you see it's still a good mix between service and equipment, and I think there is growth potential further in the services side. If we look at the order backlog, we are building the order backlog slightly despite some of the divestments that we have done. Book-to-bill, above 1. And so the order backlog is building, so to say. Net sales increased by 11%. Equipment net sales increased by 2%, whereas the service really kicked off in this quarter and also a strong contributor to our profitability, growing by 20%. And you can also see that we start to get back to pre-COVID levels on the service side. And you see also the -- you could say, 55%, 50% -- 55%, 45% split between services and equipment. Technology, a very important part of Wärtsilä's DNA and also certainly part of our future, how we can evolve cutting-edge technology on enabling decarbonization of Energy and Marine. So what are the -- some of the major things that we have done in Q3. First of all, we have upgraded a classic, the Wärtsilä 20DF dual-fuel engines. It's one of our big sellers through the years, and we have now taken that to the next step when it comes to power output, reducing methane slip with 40% lower fuel consumption and also accepting a wider gas quality span. So really taking that to the next step. On the new fuels, we are developing a concept together with Samsung on ammonia-fueled vessels. Ammonia is not only about the driveline itself, it's a whole vessel design with tanks, et cetera. And we are working very closely with Samsung to develop this concept for the future. We're also working on the battery side with zero emissions and electric vessels. The first vessels fitted by the Wärtsilä battery containers, that's a concept, that's a product that we offer. And this has now started to commence operations in the Netherlands, transporting beer for Heineken. Also, on the carbon capture side, we are moving with speed. And here, we have 2 initiatives in the LINCCS project. We are working to bring a maritime carbon capture solution. And we also have our first pilot project for full-scale retrofit with Solvang in Norway, which we -- the target is to have operational in the beginning of 2024. Now today, we are also very proud to announce our decarbonization goals and we have set them for 2030. And this goes hand-in-hand with our strategy, which is very much about shaping decarbonization of Energy and Marine. And then when we have set the targets, ambitious targets for the future and for 2030, we look at this from 2 perspectives. One thing is to become carbon-neutral in our own operations, so by 2030. And so this is how we run our facilities, how we travel, how we operate in Wärtsilä, so to say. And then the other perspective is how can we help our customers in their decarbonization journey with our products. And there, our goal is to provide a product portfolio, which will be ready for zero-carbon fuels before 2030. So these are forward-leaning stakes in the ground for us. And this, we are now fully committed at working on. And you also remember the communication we had about our product portfolio to have ammonia concept ready for 2023 and a hydrogen concept ready for 2025. And we take it from there. And then to have a product portfolio before 2030, a milestone event for -- in Wärtsilä. Now let's shift and look a little bit at how the different businesses are doing. And if we start with Marine Power, order intake and comparable operating result increased. And service order increased -- service order intake increased by 29%. Overall, order intake about -- up about 8%. And net sales rather flat, but still you can see a significant improvement in profit. And I think the drivers here is the gradual return on cruise to business, and it's also the mix between equipment and services. On the challenging side, the factory load situation is not optimal. We are running at fairly low load, and we also have a cost inflation pressure. But in spite of this, we managed to counteract the headwind and increase our profitability. If you look on our services side, the net sales from the installation under agreements have stabilized after the COVID-19-related decline. So we see a stabilization in a positive way. And an exciting example of how we are working with our service agreements is with Aurora Botnia, the new ferry running between Vaasa and Umeå, which is the world's most environmentally friendly ferry with the latest technology from Wärtsilä and in cooperation with the ecosystem in Vaasa and Umeå. And we have now signed a 10-year optimized maintenance agreement covering the new ferry. The agreement includes the latest digital solutions based on AI, machine learnings. And it's all about providing predictive maintenance and uptime reliability and then fuel efficiency and, therefore, also emission efficiency to really work on driving down and have the lowest possible carbon footprint. If we go to Marine Systems, the Marine Systems order intake increased. Net sales and comparable operating results decreased. And you can see order intake in -- up 10%. Major driver is gas solution, and the LNG tankers is driving demand for our gas solutions. Net sales is down 16%. The scrubber business is going slow right now, especially the retrofit, I should say, because operators are out there with container vessels shipping, and they don't have time to bring them to port and do the retrofits. On the tender activity on the scrubbers, though, for newbuilds, we see a fairly high level of activity. But the retrofit is slow. And you can see that our profit is coming down. And on the positive side, Gas Solutions is contributing in a positive way, but it cannot offset the decline in scrubber volumes. We also have had an insolvency case among one of our customers. And also, here, we feel a cost inflation pressure. Voyage, order intake and net sales increased. So service order intake increased by 75%, significant uptick, mostly driven by cruise. Overall order intake, up 20%. Net sales, up 24%. And the sales volumes is major driven by services in crews. And the profitability is going in the right direction slowly, but steadily. And we are still spending a lot of R&D to evolving our digital offering and force and the other platforms that we have. And also, we have been, in Voyage, affected by the COVID situation where it's hard to transfer from different countries to do the services, so to say. This is an important figure that we track and communicate and follow up, and this is how we grow our cloud solutions, the volumes in our cloud solutions. And as you can see, it's a rapid growth, 61% of -- if you look on numbers of vessels connected to our cloud solutions. So it's a steep growth journey. Another exciting journey, I would say, in Voyage is the Cloud Simulation Solutions. I mean the team has developed simulation solutions for COVID that you can run training through the cloud, and they are now available on Ocean Technologies Group's Ocean Learning Platform. And the learning platform aims to provide the broadest and most comprehensive range of maritime-specific digital learning solutions. And it includes instructor-led interactive simulation training, automated assessment solutions and growing library of self-directed simulation exercises. It's all about being able to do it digitally. And it's quite an extensive customer pool with 3,000 shipping companies and plus million seafarers. So it gives us the cooperation with those, and technologies gives the platform a very broad exposure. Energy. So order intake, net sales and comparable operating results all increased. This was a really good quarter for Energy. Service order decreased a bit, but it was still in a good level, I would say. You can say order increased 52%, a lot driven by battery storage, energy storage. Net sales also went up, and battery storage also being a major driver. And if you look at the profitability, it's a major shift. And do note that sales volumes really contribute, I would say, on the services side. It's the strongest growth driver. But also that we have a robust execution of our energy projects in Q3, which is very positive. And we certainly managed to counterbalance the negatives, which is a low factory load situation, and we also face a cost inflation. Here's an exciting example from our battery storage business. It's our latest order with AGL. We -- in Australia, we recently signed a frame agreement. So this is the first call of EUR 100 million plus order. And it's the first installation, 250-megawatt hour system to be installed on Torrens Island in South Australia. And when installed, this system will support a broad portfolio of generating assets, so both thermal, renewable and help Australia to decarbonize on the journey to 100% renewable future. And this is one of Wärtsilä's strength going forward, is our capability to integrate different generating assets together with our GEMS platform and really optimize the energy cost. If you look at the service agreements, the installed base covered by long-term service agreements is increasing in a good way. It's a good trend. We have one example here from Nigeria. I think it's a good one with Lafarge and their cement plant in Nigeria. We provide a dedicated supply of electricity and -- for the cement manufacturing. And the scope of the agreement includes the operating crew, the performance guarantees, plant availability and spare parts. So we have real skin in the game, and it's about uptime reliability of the power. Now Arjen, please join me here for the -- some key financials -- further key financials.

Thank you very much, Håkan. Yes, let's move to the key financials. First of all, cash flow. We had a good cash flow in quarter 3, EUR 49 million, also considering the fact that we had to increase our inventory somewhat to make sure that also the deliveries in Q4, which are expected to be higher than, let's say, historically in this year can go out and can be going out on time as well. So working capital, some increase compared to, let's say, what you saw at the end of Q2. Good cash flow also enabled us to, let's say, reduce our debt levels further in Q3. We repaid about EUR 145 million of debt. Gearing, good development, fairly flattish if you compare to Q2. 0.12 we had at Q2, now it's 0.14. And solvency clearly also better than last year and also better than, let's say, Q2, which was 37.8, now 39.3. Basic earnings per share, really good improvement, as you can see here from the numbers, both in the quarter as well as for the year-to-date numbers. Looking at cash flow. And if you look at the left-side graph, I would say it's going really well. Let's say, our really focus on cash flow is really paying off. If you look at the curve, okay, it's a little bit down. But still, if you look at the level and comparing it to the profitability levels that we have, I think above EUR 600 million is really a good level to be. If we go to the right side of the page here, profitability, EUR 50 million. Of course, you add back the depreciation and amortization, let's say, EUR 41 million, which is not cash. And then let's say, we have all the changes in the working capital. And basically, the main thing of change I would like to highlight here is what I mentioned earlier as well, the increase in inventories to facilitate, let's say, the deliveries for the later part of this year as well as, let's say, partly into Q1. But with these words, Håkan, I give the floor back to you.

Yes. Thank you, Arjen. And let's run this up before Q&A with the prospects. And so the -- while market conditions remain uncertain, we do expect that the demand environment for our offering for the fourth quarter will be considerably better than of the corresponding period this year. I think that's a positive outlook.

Yes.

So having said that, I think we open for Q&A. Before we do that, we should also remember that we have our Capital Markets Day on the 18th of November, which we all hope you can attend either physically here together with us in Helsinki or digitally through the Internet.

Thank you, Håkan, and thank you, Arjen. So now handing over to the operator, let's start the Q&A session.

[Operator Instructions] First, Andreas Willi from JPMorgan.

Håkan, Arjen and Hanna, I have a question on the Energy business and the performance in Q3, particularly on the service side, where revenues seem to be about 20% above the level prior to the pandemic. Maybe you can comment a little bit on that. Is that the new level you expect to cruise that? And if so, why is that substantially higher? Or was there something unusual in Q3 that drove that very strong service activity, which I assume was also the main driver for the stronger profitability than we maybe normally see.

Yes. So I mean, you're right in the sense that services was a major driver for the stronger profitability. I would say that, in general, we see a positive trend on the services side. But I would say that Q3 was a little bit of extra because we had certain, yes, retrofit projects and similar that took place in Q3.

Well, Is that COVID catch-up as well in terms of things that haven't been done in the last 12, 18 months? Or is it just random volatility from one quarter to the other?

I would say it more as -- when you look at our operating fleet, you can identify certain intervals where you need to do retrofits, et cetera, and that is happening right here, right now. And that is happening not only over one quarter, it's happening over a little bit longer time as well.

Maintenance cycles, basically. Yes.

Yes.

Next question on the line, please, you can ask your question, Sven Weier, UBS.

The question I had was on the energy storage business as well and your plan to strategically develop it, right? I mean do you think it's best developed within the current setup? Or when we think about the example of Fluence, which is now listing obviously, do you think that it could also develop better in such a constellation going forward?

No. I think we see a journey going forward within that, so to say, because -- and that's coming back to what I perceive. When I listen to our customers, one of our core competitive advantage is our capability to integrate different generating assets together with the battery storage. So our ICEs, wind, solar, together with the storage and together with GEMS, optimize the operations, so to say, in various aspects. So I see a logic for a very interesting total solution offering from Wärtsilä.

Next question on the line, please, you can ask your question, Max Yates.

I just like to follow up on the Energy margins. So it looks like the margin will end up somewhere between 7% to 8% for this year. And I think you've been kind of very open in saying that the battery storage business is a growth business. So this is almost as much a kind of housekeeping question. Maybe if you could just give us an indication of how much of your Energy backlog, energy storage is, is today and how maybe that will look as a share of revenues into next year. And as we kind of understand that business today, do we think that kind of the balance of utilization picking up in the Energy division can offset the negative mix? Or actually, should we expect a temporary dip in margins as we go into next year?

So I won't do any forecast for Energy's year-end results, so to say. But I mean having said that, it's clearly so we have communicated before that the life cycle profitability of storage is certainly less than on the thermal side. I think we should also say that if you look on order intake for Q3, if you look on the Energy newbuild order intake for Q3, over 90% was energy storage-related. If you look on the Energy newbuild sales for Q3, over 40% was storage. Then to your point and as we have communicated before, this is a growth business when you look at it from a profitability perspective. We invest in R&D. We are ramping up. We are scaling up the business. And from that, the profitability is what you would expect from a growth business.

Okay. And just so I understand, so if we look at sort of year-to-date orders, I mean you obviously gave us the megawatt hours, the megawatts of gas and oil. But just if we look in absolute value, it's fair to assume that I think you said 90% of orders are energy storage this year or in Q3.

About EUR 280 million.

Yes, in Q3.

Yes.

Okay. And does that figure sort of stand for the full year? So 80, 90 is probably what we would expect for the percentage of orders year-to-date? Or is it very different this quarter to H1?

No, you cannot draw that conclusion because it's highly -- as we all know, these are project business. So it very much depends on which orders we take when. But Q3, we are clear on this one, but you cannot draw that conclusion for the full year.

Next question on the line, please, you can ask your question, Antti Suttelin from Danske Bank.

This is Antti. A question on the energy side and services specifically. I'm just looking at your order intake for the traditional business, so to say. And it looks like, yes, it's not doing very well. So I wonder, at what point is the installed base starting to fall? And how should that impact your services business?

So far, the installed base is not falling, I can clearly say that. And as I said, I see interesting growth opportunities on the services side. And when we talk -- both Marine and Energy, but if we zoom in on Energy. And it's -- you have the transactional business, which we are now addressing even more proactively than before. We have the service agreement, which we are really structured and focused. And I would say the new Wärtsilä organization, which was put in place before I came in, with an end-to-end responsibility, has put even further focus on services. So if you talk about the spare parts, very strong focus. If you talk about agreements, very strong focus and we see good growth trajectories there. And then we have been talking about moving up the performance value ladder. And here, we are still at an early stage in Energy, but we do see some interesting potential. We have come further on the Marine side with the PBL contract, et cetera, et cetera. But we do see that we can bring some of those concepts into Energy as well.

So you wouldn't expect the installed base to start falling basically at any point? Or how do you see that?

Well, if we continue -- I mean if we continue -- because you're fully right in the sense that we have a low thermal newbuild order intake right now. If that would continue forever, of course, it will go down soon or later. I mean but we still -- and we -- in our communication, I would put it like that, that COVID has affected our core markets. I would say, right now, we see actually quite a lot of interesting tender activity in thermal. In a number of places in the world, still no orders. But there is interesting activities.

Next question on the line, please, you can ask your question, Antti Kansanen from SEB.

Hello, Antti.

Antti Kansanen from SEB.

Can you hear me now?

Yes. Now we can hear you, Antti.

Good, good. Yes. Sorry about that. So the question is on kind of your traditional equipment business, if we exclude the storage side and maybe focus on the marine power and the thermal energy. How should we think about going into the next 12 months if you look at the cost inflation that you are seeing? And I guess the pricing pressures that are logical given the poor level of demand and then considering the workload situation going into '22. So facing of all of these, I mean, I guess your backlog to sales conversion has been a bit limited during COVID times. So perhaps there's a bit of a catch-up on the revenues. But as a big picture, how should we think about timing of these perhaps adverse impacts for your equipment business?

So first, I would say that -- and you know this since you've been following Wärtsilä for many years, that we have normally a kind of periodic business over the year where Q4 is a strong one. And I think we can say that it's fair to assume that Q4 will -- this year's Q4 will be a little bit in line with what other strong Q4 has been. So that's one thing. Then when it comes to the kind of cost pressure and supply chain, yes. And as you know, certain parts of our supply, we have locked in with long-term agreements. Certain parts of our supply is more like on spot. And yes, we are feeling the cost pressure. If we look on our kind of pricing power, I would say that in existing ongoing contracts, of course, we are locked in with the prices we have. On the newbuild side, it's still a competitive market, but I do see some opportunities. And then on the services side, I think there is more opportunity to pass it on to the market, so to say.

So shorter cycle, right? Yes.

And what about kind of the workload situation on the engine factories? How concerned should we be regarding kind of '22 when we look at the marine power and the thermal energy order development?

Yes. So I think we are running the factories with a low load right now. I mean we have taken measures to have a costume that fits us now. I think short term, we actually will have increasing activity level in our factories. But a little bit mid, long term, yes, we constantly need to monitor the situation and adapt our costume, so to say. A little bit like that we have done in the past. But I see this more in the light of continuous improvement, so to say.

Next question on the line, please, you can ask your question, Tomas Skogman from Carnegie Investment Bank.

Yes, this is Tom from Carnegie. I would like to get a better understanding of the risks you take in these energy storage projects because it's a really new item and a business ever strongly and have been up a lot order backlog. To my understanding, this is not really like a walk in the park. Many companies that refuse to take responsibility for integrating batteries, et cetera. So I just want to make sure we don't end up with loads of cost overruns in the next years because you have done something wrong.

Thank you for that concern. Now I feel -- here, we have, I would say, a cutting-edge approach once again in GEMS because we are monitoring everything in our batteries, what is going on, in a real-time manner. So we have a significant database -- sorry, there is somebody driving something.

Or vacuum cleaning.

So can you hear us? So basically, with GEMS, we have a real-time and artificial intelligence tool that really makes it possible for us to track what is going on and also backtrack if we have issues. And that means that the relationship that we have with our partners and suppliers is -- and they are well-established big suppliers, are very, very clean, I would say. So that's one from the supply side. Then on the project execution side, to your point, because many of these projects is EPC, so there is civil installation, what we are doing now when we are building up because we are ramping up the team is that we are transferring competence and people from our thermal business to our storage business. And I mean, to run projects, I think that is something that we have done in Wärtsilä for many years. Some of you will tell us that, yes, some of the big ones were not so successful. We know that. We have dealt with that. But I think in general, we have a strong culture on projects in Wärtsilä and we are transferring that -- some of that into battery storage now.

Yes. So you're obviously -- it's a unique part of your offering that you're better positioned to take care of these risks. But I still don't really understand what are the kind of the key difficulties we integrated. Now we overcome those challenges. It's just this GEMS software that is further developed than competitors offering. Or what should we think?

Yes. So I mean if you -- because you are asking about how we do risk mitigation, and this is to have full control. Like we do on the Marine side, we have full control of the equipment, we can take proactive actions, da, da, da. That's the risk handling. Then when I was talking about how we can add value with our power system optimization concept, competence that we have, it's the -- because you could say, well, anybody can hook up a battery storage, yes. But if you want to optimize it when it operates with a wind farm, a thermal and something else and get the lowest total energy cost, that is discipline in itself. And I think here, we have something, at least what our customers are telling us, something that really sticks out. And that is based on our DNA and where we are coming from. As you know, we have been working with power system and power generation for decades. And you can say that, that knowledge is manifested in GEMS. So GEMS is a software platform, but it's, of course, the knowledge that goes into the platform that makes the difference.

Next question on the line, please, you can ask your question, Nancy Ni from Goldman Sachs.

Just kind of on the back of that, I have a question regarding Fluence Energy, which is listing soon, and I understand it's one of your main peers in storage. So could you give some detail on where you think your market share is versus them and how your profitability of the business compares with that?

Yes. So I mean, market share, I think there are a lot of data out there, so to say. And I mean, it's -- I think Bloomberg has a good dataset. So I think -- and it -- I mean, if you ask me this question today, I would say one number. If you ask me in 2 weeks, it could be another number because there is a lot of order spinning around. And I would say Tesla is biggest, and then I think it's a battle between Wärtsilä and Fluence. We are all in the top 3. And when it comes to the profitability, as I said, you should regard this as a growth business. We are investing heavily in R&D and scaling up.

Okay. Makes sense. And just really quickly on Marine. I think consensus has been quite kind of overexcited about it and you sort of mixed expectations. So do you see a significant acceleration of the business in kind of the next year? Or will it mostly take multiple years?

If you ask me on the Marine side, cruise, when I talk to our customers, is coming back step by step. But of course, it's hinging on how COVID evolves, and I think there are -- we all know of the uncertainties around that. But I think there is a positive sentiment in general.

Next question on the line, please, you can ask your question, Colin Moody from RBC.

So just a relative quick one, and I'm sorry if you answered it already, but are you seeing much in a way of significant logistical disruptions and deliveries to customers, just given the nature of your products and your relatively global customer base?

So far, we've been handling our customers, I think, in a good way. So we have managed our supply chain. We have also, of course, had disturbances in our supply chain. But with a lot of hard work from our team, we've been managing to deliver to our customers.

And let's not forget the logistics as well. I think logistics is also a challenge. I think that's not only for us, but I think for many industries in the world. And a great compliment to our logistics teams that gets all the stuff on time inbound and outbound so far, at least.

And another challenge, if we address the challenges that has been during COVID is, of course, normally, we send service engineers all over the world. And with COVID, you really need to have a very structured and conscious approach because of quarantine rules, et cetera, et cetera. So that is also hampering our operation currently.

Next question on the line, please, you can ask your question, Manu Rimpelä from Nordea.

You talked about Q4 this year seeing a normal type of seasonality, and I'm not sure if I fully kind of registered where you were thinking about it. But should we think that, that should be in line with this kind of typical 50, 60 -- or 5 to 6 percentage points higher margins in Q4 compared to the third quarter type of a seasonality? Or how do you see that? Because we know that from the backlog of deliveries, you will have strong Q4 sales and you're also pointing to a very strong order intake in Q4. So it really boils down to the kind of margin. And how do you see the moving part from Q3 to Q4? So just kind of trying to understand that, one, it would be obviously very helpful for you to give us more guidance on the fourth quarter with that being your biggest quarter by far, and we have a lot of uncertainties around. So anything you can say on that would be extremely helpful.

So -- and as you know, we don't guide on EBIT. I can only say, if you look on the prospects that we are bringing, I would say it's a positive, considerably better on demand side. And we have a positive outlook. What do you say, Arjen?

Yes, I would say we are very confident in that outlook. And let's say, coming back to the question on delivery, I would say our order book, both in newbuild and services, really supports, let's say, a higher Q4 also from a deliveries point of view. Of course, there is always a lot of stuff that needs to come through in and out through the quarter. And that's also back then referring to, let's say, the comment I just made on the logistics chain. So we need to make sure that, let's say, logistics is not disturbing, let's say, our plan of delivery too much. But if everything works according to plan, I think we will see a good Q4 in that sense supported by the order book. But margins, as you said, we won't comment on.

Okay. And maybe just to follow up on that, I mean in terms of the key moving parts between the third and the fourth quarters, obviously, we know the deliveries will be very strong. But what else is there? Obviously, we will see higher storage deliveries, I guess, burdening the margins compared to what we've maybe seen in the past. But anything else that could make it different from the kind of historical fourth quarter difference between third quarter type of...

Well, I think, as we said, we see a positive outlook on storage. We see a positive outlook on services. There are activities on the thermal side.

Yes. I think it's basically everywhere. It looks quite okay, actually. Of course, there are areas that are not moving that fast forward. We have challenges in scrubbers, for example. But I would say, in general, it looks quite good.

Next question on the line, please, you can ask your question, Johan Eliason from Kepler Cheuvreux. Johan Eliason?

Can you hear me?

Yes. Now we can hear you, Johan.

Okay, sorry. I was just wondering a little bit about the margin in the energy side. I mean you have taken a lot of provision over the last couple of years. Did you release any of those provisions to any significant degree in this quarter? Are there any more left to impact earnings going forward?

So coming back to that question, I mean -- and as you remember, I mean the last couple of years, we have had a number of challenging projects, big complex projects, primarily -- not only, but primarily on the energy side. And we have had the negative deviations that you are referring to. You also remember that in Q1, we did an assessment of the most riskiest part, most complex part of our project portfolio. And as a result of that, we did a net provision of EUR 20 million to basically bring the risk level of the whole portfolio to a risk level that I personally would consider to be in line what we would expect in a project business like Wärtsilä, because a big chunk of our business is project business, and you will always have some projects that are doing very well, some less well, but you really need to avoid the outliers on the negative side, so to say. And that assessment of the risk level, we have not changed.

Next question on the line, please, you can ask your question, Andreas Willi from JPMorgan.

To come back on the comments you made earlier on energy storage, if you get a typical projects like the 250 megawatt, 100 million order, what's a typical breakdown of sourcing material? So batteries, balance of plants, services, logistics, all of that, relative to the value add in terms of the project integration and the GEMS platform?

So I don't think we give a detailed breakdown, I think the competitors would love that. But we don't. But I mean, it's no doubt that the battery in itself has a major portion of the overall cost structure.

But some general comments on, is it 50%, 60%, 70% of the total project that is basically bought in services and costs?

I think it depends also a little bit by project, but I would say around half is probably the right number.

In that magnitude.

Yes, yes.

Next question on the line, please, you can ask your question, Max Yates.

I was just trying to understand a little bit around what happens into next year as the sort of -- and I realize I sort of asked this, but I guess this is more from a sort of engineering and management standpoint. You're obviously going to have your kind of traditional factories where you dissemble your thermal engines are going to be emptier realistically than they were this year. But then conversely, your kind of energy storage. And I'm trying to understand actually how your facilities work. Is it in the same facility that you will -- I don't know, do you -- I mean, what do you assemble? How does that actually kind of end up looking from a capacity utilization standpoint in your existing facilities? Is it shared production? Is it elsewhere? How does that actually work in practice?

No. So if you look at the battery storage assembly, it's not in our engine factories. So from that perspective, it's not that we -- you move staff or -- I mean, assembly is there from one type of manufacturing to the other. So then on the engine side, yes, we are at a low level right now. But I would say also that, yes, let's -- we have a fairly optimistic outlook of many areas of our demand side.

But just -- sorry to sort of labor this point. But if your sales, currently 60% of your business is from thermal energy this quarter and orders are only 10%, then your book-to-bills going into next year are going to be under quite a lot of pressure. So surely, that suggests that your traditional thermal facilities are going to need quite significant adjustments to manage down that capacity as battery assembly. Or maybe I'm misunderstanding that, but that from the outside is just how I would interpret what is likely to happen next.

Yes. And to the point, but then you also know the demand guidance for Q4 where we say that we see a considerably improvement.

At the same time, I would also add that, let's say, we have taken also, historically, measures to adjust if we feel it's needed to adjust. With temporary layers, we added recently in Q2 in Trieste factory. So if we feel that it is too extreme, I think we will make adjustments again, being temporary or something else.

Okay. Understood. Where is your battery storage facility? Where actually geographically is it?

I think we do assembly in China, in India, in the U.S., various places.

Next question on the line, please, you can ask your question, Tomas Skogman from Carnegie.

Yes. This is Tom. I have two questions. How many employees do you have in engine assembly? And then my second question is regarding the power crisis that we see now. You kind of [indiscernible] to see better demand. But please open a bit more in terms of geographies, et cetera. We see extreme kind of -- the market is scared of power shortages, et cetera, now. So give us a bit more granularity about what you see in Germany and the U.S., et cetera, where we ever had really big problem for last year.

Yes. So I don't think we give out how many assembly staff in certain factories, so to say. But if you come to the market and the energy side with the current high gas prices, and that's a global trend, I think what we see short term as a consequence of that, that there is actually more heavy fuel power generation. And we see that as a short-term phenomenon. I think long term, the high -- currently high gas prices, they will accelerate the shift to renewables. And there, as you know, we really think it's necessary. And we also see a very interesting opportunity for balancing energy, both thermal and battery storage. Now how -- exactly how this will play out in different countries, then we would -- because it's different context all over the world. I would say, there's a lot of exciting things going on in the U.S. right now on the power systems side. I would say both on battery storage, it's clearly one of the major growth drivers. But I will also say on the early stage of thermal, there is quite a lot of activities. I would say there are some upcoming activities in South America. We see storage being very strong in Australia, we talked about that. And we also see some thermal opportunities there. If you look at Europe, I mean, U.K., it's a very active battery storage market, but there are also some thermal opportunities. So I think -- if you -- and we talked about that many times before, power systems looks different. And if you zoom in on Europe, as wind and solar will continue to expand, there will be balancing power needed. But that development will probably take longer time in Europe than in the U.S. and other parts of the world.

Next question on the line, please, you can ask your question, Sven Weier from UBS.

Hello, Sven, we can't hear you.

Can you hear me now?

Now, we can hear you.

Yes. Sorry for that. There was just one follow-up question from me on your order book delivery schedule, right? Because if you look at the status at the end of September, obviously, deliveries for next year are still quite a bit below where they were a year ago. And of course, consensus has like a 10% sales increase next year. So I was just wondering, given your upbeat Q4 order intake guidance, I mean should that graph look quite a bit different than at the end of Q4?

I think that depends a bit, let's say, what we take in and not. But let's say we have a good outlook for order intake Q4, as mentioned in the prospect. We have also good outlook for, let's say, our deliveries. So then there's a question of, let's say, the book-to-bill, right? Let's see what it ends up with.

So there's a good mix in the delivery schedules of the pipeline that you have. Because on the marine side, I think things tend to be having delivery times of maybe 2 years sometimes. So -- but it seems like a good mix between the delivery dates.

Yes, correct.

You're right. There is a good mix.

I'm afraid that we are now running out of time. So thank you for a great presentation, and thank you for great questions and good answers. Just as a reminder, our Capital Market Day in November 18. It will be a great opportunity to learn more about Wärtsilä operations, strategy and future opportunities. So hope to see you there. Thank you.

Thank you very much for today.

Thank you.