Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

All right, so welcome.

Welcome. So welcome to the CEO call. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. So the purpose of this call is to give a possibility to discuss Wärtsilä's strategy and long-term opportunities with our CEO, Hakan Agnevall. This call is not intended to be a mid-quarter update, and in the case you have detailed questions, I kindly ask [indiscernible], our CFO Pre-silent Call, which will take place on October 5. Please, Hakan start.

Yes, no. So welcome, everybody, and it's nice to be here again. And I mean, from a strategy perspective, [indiscernible] up the strategy in 1 word, it's about the decarbonization of Marine and energy. And if we look on the Marine side, [indiscernible] you know the drivers and the regulatory forces are suddenly shaping up. The latest that came out of MEPC 80, I think, even further accentuates this, and we do see the impact of CII index driving certain behaviors. We also see the EU regulations moving into, including the maritime industry, in the carbon tax regime. So the regulatory space in Marine is certainly tightening. And then the market forces are also into play, because we do see a small but growing market for green transport, and it's still being driven by lifestyle companies like IKEA, Nike, et cetera, but also by quite a few industrial companies including companies like [indiscernible] that has made the science-based target commitments or decarbonization or net zero commitments. And if you're going to live up to those, you need to look through your value chain and also transports, so to say. So that is evolving, and I think we will see more growth from that going forward. So a very strong focus on the decarbonization in Marine. And if we talk about -- I'll come to Energy later on, but if we deep dive a little bit on Marine. And you know it's -- we have this saying, [indiscernible], it's not black and white. There are no single, simple solutions. So it's about -- heavy fuel and gas will be in the industry around for decades to come, but of course, carbon neutral fuels will be there. And if you look currently, there is a very strong growth in methanol for auxiliaries in container vessels. So I think 1 data point year-to-date, if you look at the container vessels that has been contracted, 60% of those vessels have methanol capable or will have methanol capable auxiliaries. So methanol is very strong right now, certainly in container. But then we also continue our journey on the zero carbon fuels, which is -- in Marine, is very much about ammonia. Not so much hydrogen, because the energy density is not good enough for hydrogen to become a big fuel in Marine, at least in our view. So -- and we continue to evolve our technical concepts, and it's still the same message that we will have hydrogen concepts ready by 2025. Ammonia, we will launch this year, 2023. So strong trend. But it's not -- in Marine, it's not only about the greenfields. It's also about carbon capture. And as you know, we are evolving our technology and we are looking to have the first pilots in next year, and I think we are very well positioned. And we certainly have a lot of interest from many players that are interesting in technology. I mean we do -- we bring 1 piece of that puzzle. We bring the scrubbers that will kind of capture the carbon, but as you know, it's a whole ecosystem that needs to evolve. Aggregating at land and then do something with carbon that has been captured, whether you pump it back in the ground, so to say, or if you use it as material for producing synthetic fuel or something else. So carbon capture is suddenly also one of the avenues going forward, and we see a lot of interest. So that is Marine. If we go to Energy, it's -- the strategic development is, of course, the decarbonization of the whole energy system. And -- and if you -- in the Nordics, where you have a bit of a special situation, and in France, et cetera, where you have a lot of hydro and a lot of nuclear, but the big chunk of the world is really to move away from big coal-fired gas turbine plants or maybe coal-fired steam turbine plants and to renewables, wind and solar. And then the balancing narrative that we have been proposing, we do see it happening. We do -- I mean, where you see a lot of things happening on balancing, whether it's thermal or machines or its storages in the U.S. because as you know, there has been quite a few renewable projects taking place, and that is driving balancing. I would say 1 particular state that is very active is Texas. I mean, you might know, Texas has about a renewable mix of somewhere 35%, 40%, so there's a lot of things happening there. Then I would say on the general, I mean more short-term market view there. I think that the interest -- higher interest rates and also some volatility of energy prices, et cetera, and we have communicated that, that leads to certain customers to kind of evolve the projects -- sorry, to take a second look at the project, so -- but that's more short term. I think long term, the trajectory is fairly clear and we will see growth both certainly on the storage side, but also on the -- some power plants side. And then the third and final leg of this story is the Service business, and that covers both Marine and Energy. And as you know, more than half of our revenues is actually related to Services so it's, of course, a very important piece of the Wärtsilä equation and also to create customer stickiness and customer happiness, and -- but also to support our profitability. And we do continue to see both short term, but I think also mid-term, a strong growth in services partially driven by utilization, but also our strategy of moving up the service value ladder, which basically is moving from spare parts and service hours to different type of agreements and all the way up to performance-based agreements. And we do see that this strategy is helping us to grow in a profitable way. So I think this is a kind of summary of our strategy going forward, very much consistent with the message that we have been communicating since 2021. So we continue, and of course, the profitability journey also continues. And we have set our targets to 12% and we still have a gap to close, but we are convinced that the strategy that we have and the execution that we have will bring us there in due time. So having said that, I suggest we open up for questions.

Thank you, Hakan. [Operator Instructions] Daniela Costa, please go ahead.

Thanks for organizing this call again. Actually, I have a question on energy. I think given the interest rate environment, the lack of maturity maybe in some supply chains, we're starting to see investors and, I guess, some companies in question, part -- visibility of parts of renewable investments. I mean we've seen it recently with wind offshore and some of the news flow around the U.S. Can you help us sort of like understand, maybe from your customers' point of view, the attractiveness of storage from an IRR or a total cost of ownership perspective? And sort of how do you approach the pitch for storage in this scenario? And also segue from that is, you have both because you have the engines. I know the more traditional solutions to deal with flexibility, and you can offer storage. So kind of your incentives on pushing 1 maybe more than the other, how does the current environment sort of shifts that going forward? And how does that impact Wärtsilä from a financial point of view potentially?

So if we start -- thank you, Daniela. So if we start -- I mean, we all read about the setbacks of certain projects on the U.S. East Coast and offshore. And that is only -- but we should not forget that the onshore is growing quite a lot. So I would -- I mean if we take a strategic perspective on this, I'm not super concerned. Of course, it creates a bit of a turbulence there, but I mean, the renewables trend for me in the U.S. is still very strong. So it continues onshore. So that is, I think, the comment there. We do see -- I mean, when it comes to the balancing in the U.S., we do see a strong interest. What has -- what is affecting, I would say, in a more tactical way is this what is called the interconnector queues i.e. there are so many projects in the different ISOs. I mean, as you know, the U.S. power system is split in a number of different ISOs, areas of the U.S. And each of these areas, they have kind of an approval process that is needed if you want to implement the project. And right now, there are so many projects that the applications for the formal approvals are queuing up, so that's why we refer to them as interconnector queues. And that, you could say, is slowing down, you could say, in the approval process a bit. But I think we still see a very, very strong interest in the U.S., both for thermal and for storage. And to your point -- to your second question, Daniela. I think when we said that before, these 2 technologies, they cater to different needs of the system. I mean, storage is still a little bit short of time domains. I mean, it's ours. But when it comes to the longer swings, you need a thermal. And as I said before, I am -- if you look at GE, and I'm sure you covered GE as well, you would see that they have stepped up quite a lot of their gas turbine activities in balancing in the U.S., and we will be happy to take them on. And I have deepest respect for GE. They are a formidable competitor, but we have a very good technology for thermal balancing. So I think that is also a proof point that balancing is needed, and there will be different balancing technologies and the technologies caters to complementary needs, so to say.

Actually, as you mentioned, the U.S. and sort of the interest on taking on market share there. Can you talk through the situation on, like, the localization requirements on storage, which I believe are needed in the U.S. and you were in the process of positioning yourself for that, right?

It's clear. So I mean, first of all, the IRA is, of course, setting a certain framework, but it is a rather complex framework, and I would say that there will be different avenues to how much you will localize. That is our view. It will be everything from a very high degree of localization to less localization, and that will depend in what avenue customers choose to go. A little bit how that project is set up, and depending on the project set up, the customers will need different levels of localization. That's 1 comment. Second comment, yes. I mean, we are setting ourselves in our supply chain to cater to most of this type of different localization needs, so to say, so. And when it comes to the thermal side, the same type of localization logics does not apply, so to say.

Then the next question comes from Panu Laitinmäki.

I'll start with a couple of questions on the power plants. So firstly, I believe there was new regulation in the U.S. from the EPA on the coal power plants and also gas. So how is this impacting you? Like, are you seeing more demand for your solutions if they are closing the coal? And is this actually impacting like the power plants that you are setting?

Yes. So this regulation that I think you're referring to, it does not affect our technology. Because it's tied to certain operation times and certain sizes of plants, and our plants are normally smaller than what is covered in this EPA regulation. So that is 1 comment. I mean, clearly, what we see is that in the U.S., customers are investing in renewables, and why? It's the cheapest source of energy, and they have problems with the profitability of the coal plants. But then, of course, at the same time, they need a balancing because the wind doesn't always blow and the sun doesn't always shine. So yes, we see several customers. I mean as you know, U.S. is a continent, so it's very hard to -- it's a very broad stroke statement. But I would say many customers, they have clear view that they need to phase out coal faster. And normally, they are looking to replace those with renewables plus balancing.

Okay. Then secondly, on the market share in the power plant. So if I look kind of the longer-term development, it has declined quite a bit from like pre-pandemic levels. So kind of what is behind that change? And going forward, how do you expect that to develop? Like more specifically, what kind of conversations are you having with your potential customers when they choose like engine or turbine for the balancing power? So basically, why has it declined? And why do you expect it to kind of recover? And any signs of that?

So Panu, my understanding, you think -- you're talking about this, how the share of reciprocating engine versus gas turbine or the total gas -- or the total power plant?

Yes.

Now, so -- I mean, first of all, what we should acknowledge there, there are certain markets where internal combustion engines still are not used. China is 1 of them. I mean, there is no -- there is 1 or 2 small engines from Wärtsilä. But I mean -- in China, but the rest is gas turbines. It's -- and we are working long term to introduce the gas turbine -- sorry, the reciprocating engine technology with its inherent benefits, but that is a long-term work which affects regulations, et cetera, et cetera. So -- and then you understand, I mean, there are other markets certainly in Southeast Asia, et cetera, et cetera, where gas turbine is -- has 100% market share so far. And if you have a lot of contracts being awarded in those type of markets, the market share of our technology is -- goes down, so to say. I think, I mean, from when we look at our market share of the reciprocating engine technology, I think we maintain, I would say, even increase. It's well over 50%. So what is exciting is that if you look at -- and that's why we come back to the U.S. because U.S. is a huge market. And there, we clearly see reciprocating engines there and reciprocating engines are growing, so to say. Well, I mean, when we come back to this, why sometimes we are at 10% or 11%, 12% overall then it goes down 6%, 7%, 8%, and that is depending on -- if there's -- for instance, if there is a lot of power plant projects in China, clearly, our -- the share of reciprocating engines will go down.

Okay. Finally, I just wanted to ask about the retrofit potential in your installed base both for Energy & Marine, and you have given this number of EUR 2.5 billion over 5 to 10 years. So could you be a bit more specific? Where does it come from? How it splits to the divisions? And like, how big part of the installed base this is and so on?

Yes. We don't go into the details here on the numbers. But I mean, the concept is if you look on the Marine side, and I think we have a lot of exciting opportunities here, I think we will come back to this and make a little bit of advertisement for our Capital Markets Day on November 9 to shed some more light on the exciting opportunities we have. And -- but I think in general, if you look -- first of all, we have 2 stroke opportunities because as you know, we have an installed base of 2-stroke with WinGD, and we also have the service business with WinGD. We do see opportunities to -- first of all -- the first thing that will happen on the marine side to reduce emissions is slow steaming. So basically, speed will be reduced. And then many of the 2-stroke engines, they are actually over-dimensioned for the applications, so to say. I mean they have been dimensioned maybe with a cruising speed of 80, 90 knots. And now, cruising speed will go down to maybe 12, 13 knots, and maybe even lower. And then the engines are totally oversized. So a retrofit is that you can actually de-rate the engines, so you make the cylinders actually smaller and then they consume less fuel and you save carbon emissions. So that is -- other things on 2-stroke is the fuel conversions from the heavy fuel to ammonia and to methanol, et cetera. So that is on the 2-stroke side, just a couple of examples on the retrofit. On the 4-stroke retrofits, it will be the upgrades to the different fuels, and so bringing heavy fuel to gas, gas to green, et cetera. But it's also retrofit, bringing in -- building hybrid systems. So when we combine the combustion engine with the electrical batteries, and it's the same as in our personal cost. You can save fuel by using the battery to balance the combustion. So that is also, I would say, a very interesting retrofit opportunity, and we are clearly the market leader for this type of hybrid installation. I think 1 big retrofit will be if and -- not if, but when, carbon capture gets its commercial breakthrough because there is a lot of fleet -- I mean, let's say, there are 100,000 vessels overall and owners will clearly be looking at how do I address this, and then carbon capture retrofits will be the [indiscernible]. So that's the Marine side. On the Energy side, it's similar -- it's a bit upgrading from heavy fuel to gas and gas to, in the long run, hydrogen. But this is still a little bit early because obviously, we need to put the hydrogen engines on the market, so to say. So this is what it is about. And I can confirm, I may reconfirm that, I mean, this EUR 2.5 billion, we clearly see potential here.

The next question comes from Johan Eliason.

Just a question on -- you touched on the 12% margin target here. But if I look into the Energy division, which was always told historically was the more profitable part of the business in the old times when you sort of didn't disclose the profitability between the divisions. And then now, inside the Energy business, the fastest-growing is the Storage business, which we know is sort of just below breakeven. And hopefully, it will be above breakeven, but it doesn't sound like it's a great margin story in the whole scheme of it. And on the thermal parts in the Energy, I mean you talk about the renewables and backup power, et cetera, but that also implies that those engines will be used less and the service opportunity is less. And then to compensate, you obviously talk about climbing the service ladder and gaining more value from that space. But in my ears, it sounds like might sort of compensate for the lower overall service opportunity and how on the Energy side. So do you think that the Energy division can ever sort of get back to historic margins in the midterm?

So I mean, we haven't disclosed the target -- margin targets for the different businesses. I mean, what we have said is 12%. And to answer your question in a little bit maybe convoluted way, but I think you understand it needs to be that, I think -- we think we can reach the 12%, including the Storage business. We have also said that Storage has less profitability, and we think also long-term, less profitability on the thermal side. But we do think that we can continue the positive journey on the Storage side, so to say. So I mean, the whole story around 12% is including the Storage piece. Then -- and I think you alluded to it as well, with the service hours. And I think -- I don't know if you had the opportunity, I don't know if you have a lot of things on your agenda, but we had a service session, I think in June, where we show that -- and that might be a bit counterintuitive. But we see that if you look at the service hour of the fleet, I mean the Energy fleet, it's not going down. It's actually rather flat. And that for me is the first indicator that, I mean, there is a logic. If you do it more balancing, there should be less operating hours. But we do see that people tend to run the machines pretty -- quite a lot. And we are installed -- increasing our installed base, so of course, the service continues to be rather flat. And at the end of the day, it's the service hours that generates service business. Then -- so that's just stabilizing, I would say, factor. And then on top of that, in addition to that, just as you alluded to, we have this moving up the service value ladder. And there, we see we have actually a good traction in bringing more also on the Energy side, bringing more customers into the different types of agreements.

And on the Storage side, do you think you will get close to double-digit margin on that one? Or is it sort of high single digits that is a realistic sort of expectation?

I won't go into those details. What we have said is that clearly, it will be -- I mean the margins will be lower than in thermal. But if they would be double digit or not, we have not said. But we have said that the margins are improving, and you've seen the trajectory. Another quarter, and you can calculate backwards exactly quarter-by-quarter where we are on our EBIT.

Next question comes from Tomi Railo.

Tomi from DNB. A couple of questions on the Storage. We have seen recently lithium prices coming down. Have you seen any meaningful uptick in customers' activity quotations or indeed, in a way, signing of projects?

Yes, no. So I mean if we -- if you remember from Q2, we actually said that the decreasing raw material, especially lithium product, they actually led to that many of our customers, they wanted to wait a bit because, I mean these days, most -- the clear majority of all the contracts, they have a material close in themselves, so to say. So there were some customers, if you go back in Q2, that said, okay, let's wait a little bit and see if the raw material prices continue to go down and then we will make a better deal. But now, we see -- we are out of that, so people are moving ahead, so to say. So that hesitation is gone. Then when it comes to will we make an upside on -- because we have sold for 1 price in the room? No, we will not because most of the contracts, they have a pass-through within this process.

That's clear. Maybe also a follow-up on -- still going back to the second quarter. I mean, I think we were able to calculate that the storage profitability turned positive. Was there something extraordinary in the second quarter? And the second part of the question, can you comment if the business can be profitable for the full year '23?

So I mean, was there something extraordinary in Q2 when it comes to sales and profit? I would say no. I mean, order intake was a bit special, clearly, because we had 1 big order. You know which one it is, I mean, in Australia. So that was -- but if you -- I think more of your questions relates to was there some special projects that we invoiced and therefore we had to be, no, I think it's perhaps nothing special from that perspective. Then no, I'm not going to give any guidance for the full year. The only thing that we are saying that the turnaround generally continues in the right direction, in a positive way.

Next question comes from Anders Idborg.

Just if we could have an update on the production consolidation, Trieste, Vaasa, all of that? I mean, it's been a bit more than a year. You talked about EUR 35 million of savings. Just be interesting to hear a bit more about the end game there? What do you think the break -- how this will affect sort of the breakeven level at lower volumes, et cetera, and where sort of that engine manufacturing profitability will be eventually?

Yes. So good question. So I mean, when we set out to do this, this was -- made a decision for that, and it was not an easy decision to take, considering our long history and the proud history interest related to engine manufacturing. And when we set out, I think you remember, we did EUR 132 million provision, and we also said that I think the upside were in that magnitude, EUR 35 million, I think we also said by 2025 or something that. And I think that type of time schedule still holds. Then of course, there is a journey from where we were in 2022 to 2025 in terms of positive operating EBIT impact. Where do we stand? I think -- I mean, the manufacturing has now ceased interest. I think the challenge for us, we did a lot of good -- and the team that did a lot of good groundwork, but we launched the process the same day as the Draghi government resigned. And that -- I mean, that whole election process, et cetera, et cetera, triggered change of laws actually based on the -- that of the process which created, of course -- yes. When you try to do a structure change like this, you want to have laws on the game plan and the game plan changed a bit because the law changed. But I would say the time schedule holds together fairly well. I mean by now, as I said, the manufacturing has ceased. By now, we have the remaining manufacturing staff is on furlough, which is a mechanism where you share the cost with the Italian government, and the so-called reindustrialization process, which is a process -- it's part of the overall process framework where we are trying to find a new owner of the product and the people, I mean the manufacturing people. That is still ongoing. We had some candidates in the beginning of the year that for various reasons, it eventually did not work out, but we are now working with more candidates. So Trieste, I think step-by-step going in the right direction. But it will take time, and I think processes of this type takes time in Italy. When it comes to the overall footprint, we, as you remember, we had 2. We had STH, I mean, the new sustainable technology. If you haven't visited, it's a great place to visit. And we had the old factory in Vaasa. We have closed down the old factory in Vaasa. There, we had some -- still some costs during last year and a bit in this year, but this is slowly coming to the right place. So I would say, I mean, when we communicated this EUR 35 million to 2025, I think we are in a good path to reach that.

Okay. And what we've seen in the last few quarters, it's still been sort of a net negative for profitability in terms of -- is that [indiscernible]?

Yes. No, I mean that is related to this. You could say that we have had 2 factories in Vaasa, and of course, we have also been running. I mean, now we have ceased the manufacturing. But during the first half of this year, we still have been running manufacturing interest. So we have had a bit of an overcapacity.

The next question comes from Sven Weier.

First question is coming back on your CCS comment. I think you said it's going to be a commercial product maybe in 2025 in an earlier conversation. I was just wondering, if I look at the space at the moment, it seems already quite busy right now with a lot of different players working on the solution. I was just wondering where you see your competitive edge? Is that largely coming from experience on the scrubber side? Or how would you put that? That's the first one.

Yes. No, thank you, Sven. So actually, in 2024, we will probably have the first, at least, pilot installation. It seems like. So where do we see our edge? And it's -- for us, this is our scrubber business 2.0, and so it's the extension on the next step of the scrubber business. The normal scrubber business is fairly commoditized these days, but we do see the extension here. And our edge is, it's going to be a balance of how much CO2 do you capture, 30%, 40%, 50%, 60%, 70%. And I would say that many customers, they will maybe not -- they will start low, maybe with 20%, 30%, and then they will increase as they need to follow the CAI index because as you know with the CAI index, you need to reduce your carbon emission every year. So it will be a balance between how much carbon you want to capture and how much energy you will need to invest to capture that carbon, so there is this energy efficiency factor. And here, clearly, we want to have the leading product in terms of being the most energy efficient to capture. And as you rightfully pointed out, I think there are a slew of different -- both Western and Asian players that have communicated, but at least according to my knowledge, nobody has -- well, has had energy efficient, to put it that way, carbon capture equipment on the market so far. So I think we will be one of the -- if not the first, one of the very early that will bring a solution to the market that is really energy-efficient, robust. And that, of course, will be supported by the industry-leading service network.

Next question comes from Antti Kansanen.

Coming back to the power plant side. And if we go back to start of this year and you looked at your pipeline for this year, I mean I guess the order intake in first half has been a bit disappointing for you guys as well. So could you provide a little bit color on what sort of delays have you seen? Any comments on certain market areas or key countries for you? And what is now the outlook for second half and going into '24? I know the timing is a bit difficult to estimate, but what are kind of the moving parts for that pipeline converting to actual orders?

Yes. No. I mean you're right in the sense that the first half year has been a bit slow on the order intake on the thermal side, and we have also communicated that we expect the second half year to be more active. And we say that based on what we have in the pipe, so to say. I don't -- as I said, interest rates and gas price volatility has created some people to slow down a bit. I talked -- in the U.S., I talked about this interconnector queue has also slowed down certain players a bit. I don't see it as people are turning away and saying we are not going to do the projects. They postpone them a bit. And 1 key factor is also, we have certain markets like Brazil where you have these auctions. How there was a change in government, sometimes this auction slide, and then of course, the order intake slides a bit. So -- and there are auctions in other countries. But we do see that certain markets like Indonesia is picking up. I mean, Indonesia has been heavily affected by COVID, but it's coming back now. And U.S., there are still things coming, so yes. First half year was a bit slower, but we do see a second half -- we expect second half to pick up.

Yes. My follow-up was on kind of the pickup on the second half. Is there some kind of a concrete time lines that you have on the public auctions? Or are you expecting kind of the Senate bills in Texas to start to support your orders already now? Or is there something concrete in behind of seeing a sequential improvement?

No. I would say it's a little bit too early to make statements on the bill of Texas, how fast it will impact. I think that is premature. But a general comment, we do see a lot of activities in Texas, but not only in Texas. I mean there are quite a few states that are really moving ahead, so to say, with both the thermal balancing and the storage -- I mean, the battery balance.

Okay. And then the second question was on Trieste, and you mentioned the furloughs that you have in place now. And kind of -- is there any time frame on the reindustrialization process? And also, kind of the furloughs that you have in place right now, how much cost savings have you achieved from those compared to, let's say, last year and so forth? I'm just trying to think about the dynamic if you can't find a seller for the asset and then you need to start to ramp down, how would that path look like for you guys?

No. I mean, we don't communicate the details of the furlough, but I would say that we get a significant support from the Italian government for the salaries, so to say. We still pay some ourselves, but it's a significant support. And we -- and this -- and I cannot go into all the details because obviously, we have made agreements with certain third parties, and some of these agreements are confidential. But I think this furlough will cover as well until we find -- it sounds drastic, but the solution or the final solution, so to say.

But I mean, I would imagine it's not an open-ended bill from the government perspective on the furlough, so is there [indiscernible].

Normally, no monies are open-ended, but sometimes also things can be extended, so to say. So I don't want to go into the details of it.

Okay. And then last question from me would be related to the domestic content on the U.S. storage business. So kind of, what are you looking into from the sales, packs, racks, kind of all of the electrical components from there? What do you think is realistic in terms of U.S. domestic production? And kind of how long would you think it will take to have a competitive kind of a battery pack manufacturing in the U.S., even kind of including the subsidies that the government is providing? How do you look at it from kind of a 5 years perspective?

I mean you would -- as I said before, the IRA framework, if we start there, because that's the key driver of the localization and the -- by America's content. It's a complex framework, and it leaves also room for different interpretations. I think we will see customers, depending on how the project is defined and how they kind of source the other equipment in the projects. We will see different needs, different needs -- I mean, needs of different levels of localization in the U.S. by different customers, and I think it's fair to say that higher levels of localization will probably drive up the costs. So therefore, one needs to be careful in formulating on how much localization is the appetite for a certain customer because customers will have different needs. So -- then if we look at -- and of course, we want to cater to our core customers, so we are definitely looking at localizing. That is, I mean, working with partners on the sales aspect, but also looking at our own equipment, I would say, on a fairly broad basis. And to do this localization, it would take a couple of years. And I don't go into the details for competitive reasons.

So you are not willing to comment on whether you have anything concrete in place of kind of already securing the best supply?

I don't mean -- once we can go public, we will go public. I will not do that.

Next question comes from Erkki Vesola.

Just 1 question regarding the former Voyage business turnaround, it laid minus EUR 38 million comparable EBIT in '22, but -- before integration to Marine Power. But where do we stand now? Is it already a profitable leg or close to that?

Yes. Good question. So basically, just to recap for everybody, we made a change where we basically -- we separated Voyage, the Voyage business, in 2 parts. One part, which we now call Voyage Services that we integrated into the Marine Power side, and that part was very much related to how do you create fleet optimization solutions and route optimization solutions. It fits very well to our kind of digital offering on the Service side. Then we have the other part, which we call ANCS, Automation, Control, Navigation Systems, which we have moved to portfolio business for divestments, so that process is ongoing. Now to your question, this is still a loss-making. I mean if you aggregate the 2, we have not moved them properly, but if you put it all together, the turnaround is going in the right direction, but they are still in the loss-making.

But you don't give -- going to give any ballpark figure? Are we closer to breakeven or still making?

I can say the turnaround is going in the right direction, but still loss-making.

Next question comes from Sven Weier.

And sorry, Hakan, I got disconnected during your CCS answer, so I'll take a look at the replay for that. The 2 follow-ups I had were actually on the energy saving devices where you cooperate on the lubrication on the wind assist. I mean, I was just wondering now that these applications are really taking off commercially, lots of demand for that, you feel that a partnership is still good enough for you? Or is it not more interesting for you to offer that on your own?

Well, so far, I think we -- I mean, to answer in a broad stroke way, I think we still remain with the focus strategy because, yes, there is clearly more interest from customers in energy savings solution [indiscernible]. Still a little bit early to see which will really be the solutions that will be -- will have a commercial breakthrough. So activity is high. But so far, no, we are remaining with the focus strategy.

Understood. And the second follow-up I had was just when we think about your mix, right? We've been talking a lot about how the backlog is getting better because the legacy orders are fading out this year. I mean, is there anything you foresee then in the coming year that is maybe, mix-wise, working against you? When you think about the Marine backlog, any changes within the end markets between cruise offshore? Or is it also actually that your engine manufacturing is as sold out for at least a year as some of the odds?

Yes. No. So I would say, just also for the benefit of everybody, I recap a bit. You're right, Sven, that we communicated that we have an order backlog that was heavily affected by inflation, and we said that there still remains EUR 1.2 billion to be invoiced this year. We have also communicated earlier by end of Q3, we should be out of this, so we can remain with that statement, so that still holds. And then if you look at the mix between service and newbuild, I would say that both -- which is positive, both new build and services, both in Energy and Marine, are actually growing. And I would say it's -- I would say that -- yes, I think I'll leave it at that because otherwise, I might say something that I shouldn't say, so to say. So -- but -- both because we should communicate the right thing. So basically, both newbuild and services growing currently and in a profitable way, and I would say that services is growing faster in both Marine and Energy than newbuilds, so to say. But I think what is encouraging is that newbuild we also foresee growing because, obviously, that will generate service opportunities years down the line.

And you mentioned earlier on services, if I may ask this, you see it continue to grow nicely, short-term, mid-term. There's been a bit more cautious comments from Accelleron, right, that they said there was a bit of a pent-up in the first half and now, things are kind of normalizing. You don't see any of that?

I mean, clearly, I would say it's a mix. I think in containers, I think that will come down a little bit. Still a high level, but it will come down. But then we have other segments like offshore that is picking up. So if you look at the overall balance, we continue to grow.

Sounds good.

Next question comes from Panu Laitinmäki.

Yes, I still had a few on the margins. So I mean, you say that services is the biggest driver towards 12%. Is that mainly a mix impact? So if it's growing more? Or do you also see like potential to improve in Services? And I wonder how the Services profitability overall has changed over time?

No, I would say that service profitability is rather stable in a good way, so to say, so top line continues to grow with growth profitability. I think what we will see going forward considering that -- I mean, considering the efficiency measures that we are taking on the newbuild side, I mean, last we talked about already, the turnaround of storage, the turnaround of voyage. I mean also moving out of those legacy projects, the distressed projects, et cetera, I think we will see also improved profitability in the newbuild side.

Okay. And then secondly on margin still, I mean, you have said many times that the Storage margin will be lower than in the Thermal business. But in that comment, do you include the Service as well? So we cannot compare like the power plant delivery to Storage?

Well, when I made those statements, so comparing like-for-like. So newbuild plus service for thermal, compare it with newbuild plus service for storage.

Okay. So if I ask in that way, that -- do you expect Storage as a whole to be more profitable than newbuilding in Energy -- like the power plants?

Now you're too specific.

A final 1 for me. I mean, you had said that you are top 3 in Storage, but if I recall correctly, you said you are top 5. So what happened? And do you think this is, like, permanent?

Correct. No, that's correct. I mean there are a little bit of different provider of statistics, I mean, Bloomberg and S&P, et cetera, et cetera. But I would say it's fair to say that we earlier said 1 to 3, we probably more say 1 to 5 now. So what has happened? I think some of the newcomers have -- some of the earlier -- they have been aggressive on the market. We continue to clearly focus on growth, but it needs to be profitable growth in the core selected market, geographical market, in the core customer segments that we have chosen. So we could continue to grow, but some of our competitors are growing faster because they are more aggressive on the pricing side. That, I think, is the major driver.

Next question comes from Antti Kansanen.

Yes, I wanted to follow up on the last comment on your selectiveness on storage side. So what is your core? If you look at 10 years, 5 years, like is it a certain application? Is it a certain market area? And what really kind of dictates the profitability or risk profile for you guys that makes it an attractive client or project for you?

I think fundamentally, we will not be the lowest price supplier. I think we cater to the customers that put value on consistency in project execution, consistency in product quality, consistency in safety and risk management, like the fire. We probably have the leading products for fire safety. So these type of customers, this is where we want to be strong. Also combining it with our power system knowledge so we can also contribute to making sure that the assets are operating in a very good way. So that is, I would say, long term, our focus. Now you could say, short term, our geographical focus as it stands now, and we communicated that earlier. It's clearly U.S., Australia, U.K., a couple of those markets, but that is -- that focus is also driven by that we want to grow step-by-step in a controlled way. I mean there are plenty -- there are so many opportunities. You can easily find a lot of business in many, many different countries. But I think 1 needs -- or at least our view is that you need to be humble and grow your competencies and capability step by step. So therefore, short term, there is a certain geographical focus. But more long term, as we build up our organization and our capabilities, is really to focus on the customer type that I mentioned.

Yes. And I mean, we always talk about the margins and the margin profile on Storage. But if you look internally, like what are kind of the financial KPIs for you? Is it capital returns? Is it cash flow? How do you look at the quality of the storage business or a storage project? What determines that it's kind of fixed into your strategy?

It's a combination of growth and profitability, EBIT -- and we talk profitability, EBIT more.

Next question comes from Johan Eliason.

Yes. Coming back a little bit to [Technical Difficulty]

We can't hear you. I think you are muted.

I think you are muted.

Sorry, yes, it was a loud speaker here. Just rephrasing again. On your margin, you mentioned that the 12% margin is obviously including the Storage business. Now if you look at the Marine versus the Energy side, is there any of these business you think will be more profitable than the other one going forward?

And we don't give guidance for the different businesses, so to say. But I mean, some are lower than the average, some needs to be higher than the average.

Okay. It's worth a try.

Next question comes from Anders Idborg.

Yes, I just had another one. Hakan, just be interested to hear your thinking, but there's been a lot of sort of one-off cost over several years in [indiscernible]. It's been sort of legacy projects. I mean the latest one was in gas system, there was a bit on the nuclear side, et cetera. Are you -- I know it's a difficult one to answer, but when you look at sort of on turnkey projects, are you -- do you feel comfortable basically with that portfolio? Is there nothing less to -- nothing more to worry about there?

No, I think I fully understand the question. So if we look on our product portfolio -- project portfolio, sorry, I think we are step-by-step getting into a good balance between risk and benefits. I think -- so I do see the situation improving. And as you know, and you mentioned, I mean we have had our challenges in Gas Solutions, we have had our challenges on the Energy side. But I think a common denominator is that many of these projects that were taken quite a few years ago. And they were taken in a different strategic context, i.e., many of these markets, we are not operating anymore with that type of approach or even certain products like LNG terminals, et cetera, we are not operating anymore. So therefore, it's fair to say that the quality of the project portfolio is getting better step by step as we work out these legacy, so to say.

Hakan, now, I do not see any thumbs up.

I think I see one hand.

Yes, one now. Mikael Doepel.

Yes. Just a couple of questions on the storage business. I'm just wondering if you could talk a bit about the competitive environment there? Has something changed recently? How are the key competitors behaving out there right now? That would be one question. And the second 1 would be on your own storage business, you seem quite confident in improving the margins from here. I mean, as you already mentioned, you did a positive margin on EBIT in Q2. You seem to be confident in improving from here. What would be the key drivers for margin improvement from here on? Is it volume? Or is it price? Or is it something else?

So key competitors, I think we are seeing a little bit more maturity on the pricing side of certain of the more established players. But of course, we have quite a few newcomers in certain markets coming in, and they can be very price aggressive. And I think now we are starting to learn a little bit that, that only works for a while, and then you run into an execution problem, so you run into some problems. So I would say there is a bit of a discipline with, I would say, some of the bigger players. But now some of the newer players, they are still facing pricing issues. So what is our key drivers of profitability overall? And I think it's the same that we talked about before. There is clearly a volume element because it's about distributing fixed cost of a certain volume. I think that is a key driver. We keep on investing into building this business. We keep on investing in R&D. We need to do so, and we have been positive from a gross margin perspective for quite some time. We talked about that in the past. But as we grow, we see, of course, that you get leverage from the increased volumes.

Right. Maybe just a follow-up on that. I was wondering about the GEMS software that you have, which I think you mentioned has been quite crucial and a front runner. Do you see any need to invest more heavily into that? I mean, we've seen some of the competitors at least lagging, good, good similar software that they are now pushing on. So just wondering if you see a need to be -- to do a kind of a bigger overhaul that software integration?

No, not a big overhaul. I would say we continue to invest into GEMS, and it's clearly important. But I think we have also been fairly clear that we think that fundamentally, this business will have a significant [indiscernible], meaning the long term as well. So -- but we still keep on investing in the software pieces, so to say. We still believe in the power system optimization as a key difference for Wärtsilä. But as I said, we think that there will be a relative -- even mid- to long term, there will be a relatively big share of hardware related to software in the Storage business.

Next question comes from Erkki Vesola.

Just another angle on Storage. If some of the guys have turned out to be more aggressive, should we conclude that you are ready to sacrifice market share just in order to improve profitability, and hence, grow slower than the market in total? Because some time back, we talked about the market growing 30% annually until 2030 or something like that.

Yes. I mean, clearly, we want to reach a certain profitability, and clearly, we will not go in price competition all over the world with all different type of customers. I mean, we have a more focused strategy and we have had that growth, so to say. We want to focus on the customers that value our attributes, and we talked about them before and are willing to pay for it, so to say.

So we probably should be modeling slower growth than the market in total for -- in years to come?

It's up to you. It's also how you define the market because do you consider India, do you consider China? We are clearly not in India and China, and we have been very open with our focused geographical strategy.

Next question comes from Daniela Costa.

Just actually a quick clarification. I believe in 2017, you got into some liquefaction projects, which then caused some issues and you sort of exited that after some charges. And I've noticed recently, you announced this major project in Finland, which you said was going to be booked in Q3, Q4, which is related to liquefaction. But I'm sure that technologically, what's involved is quite different. Can we talk about whether this is an intent to go into liquefaction? Or am I mixing up things here perhaps?

Yes, no. It's a bit of mix of everything. But to clarify, I mean, we are in liquefaction primarily on the Marine side, but there's an equipment supplier. And this is the big -- I mean when we went into the 2017 that you're referring to, Daniela, we went in as an EPC contracting, and clearly, we did not have the bandwidth. And then also, this was a business where we had no own technology and very little service business, so that's why we exited. We didn't think it will meet the profitability requirement. But for other liquefaction, when we have the equipment to be an equipment supplier, that is we are still working on clearly.

No, I do not see any hands up. [Operator Instructions] [indiscernible].

Yes. Thanks. Just briefly on Marine Power and the group-wide margin target, just trying to piece together sort of where we're coming from and going to, and looking at another revised numbers on Marine Power. And when I put any -- what I think, sensible guesstimates on what the service profitability should be in Marine Power -- it's quite obvious that' the equipment side of business in Marine Power is running on negative profitability, so it's loss-making. Just thinking, is it enough for you to work through the backlog and get this Trieste facility out of the way? And the new production set up running to sort of have this running at positive profitability levels? Or is there more needed to turn it around such as higher vessel contracting levels or something? Or are you dependent on the Voyage part that was added into that business to turn around before your Marine business equipment side will be profitable?

Okay. So first of all, we don't communicate on the profitability of newbuilding services, so just to say that. Secondly, I mean, Voyage Services, at this stage, clearly does not contribute to the average profitability of Marine Power because it's loss-making, as I mentioned. And then we are in a turnaround journey, so to say, over a couple of years. I think it's fair to say that considering the growth, as I mentioned before, I think profitability on the newbuild side will continue to develop in the right direction. That I can say.

Any further questions? Johan Eliason.

Yes. Maybe, just 1 question when we were sort of on this Voyage Service discussion. Competitors -- are your competitors like [indiscernible], where they sort of plan the route through the weather forecast, et cetera? Or who are your competitors in that space?

I would say if we look at this, what we call Voyage Services, as you remember, we said, one, we keep Voyage, we divest. I mean if you look at the divest that we will divest if we start there, I mean, it's more hardware-related business. So you have competitors like [indiscernible] and et cetera, et cetera. If we look at the business that we keep, it is actually a fairly fragmented space. So the people that you mentioned, they are clearly [indiscernible] there. There are quite a few people there. And I think this was 1 of the kind of logics behind our business, I mean around Voyage services. We think that the key lever of this business is to integrate it into our service offering. It's not necessarily to sell a lot of software licenses. It is to integrate it in our service offering and create value by providing uptime reliability and fuel efficiency and emission services to our customers.

But if you take this [indiscernible] as a competitor for the Voyage service, to my understanding, it's quite profitable. Why isn't your Service -- Voyage Service business profitable in the same way?

That I cannot answer, so to say. I mean I don't know how [indiscernible] has accounted for things, so I cannot comment on that. I think -- I mean, if we talk about our own business, I think we invest in a lot of R&D. We also clearly need to make sure that it has the right overhead structure, and then we will leverage it from being part of the overall kind of asset offering. That, you could say, are the major drivers to profitability for the [indiscernible].

And the next question comes [indiscernible].

Yes. On Service growth, you gave some interesting data on the subsegments of Marine services and their growth. And when I look at the rolling 12-month numbers, I can see that looks like cruise and ferry side of things has kind of flattened out, so that is no longer driving growth. It's rather the merchant segment, which is a broad -- there's a lot in it. So wondering if you can give any more detail as to what's happening in the merchant side that's driving this growth? And if you expect that, that will continue? And is that, mix-wise, good? Or would it be better to see some other Service segments that are growing?

I mean it's contrary to what you said there. I think we still see growth in basically all segments except for containers. The containers is part of merchant, but as you point out, there is much more. So even if you -- I mean, you said that cruise is tapering off, I think we do see a lot of activities in cruise -- I mean, service activities going forward.

Okay. Sure. To the extent merchant keeps growing, is there -- are there some particular drivers within merchant that can be singled out?

Sorry, I'm not going to make a very smart -- intelligent answer. I would say everything except for containers because that is clearly slowing down.

Now it looks like that we don't have any further questions. So thank you, Hakan, and thank you, everybody, for great questions. So like Hakan said, we will host our Capital Market Day on November 9, and then on October 5, we will host a Pre-silent Call together with our CFO, Arjen Berends. So hope to see you there. Thank you.

Thanks a lot. Thank you for the time.

Thank you.

Bye-bye.