Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Hello, everybody, and welcome to Wärtsilä strategic call. I'm Hanna-Maria Heikkinen, and I'm incharge of Investor Relations. Today, our CEO, Hakan Agnevall will discuss some of our long-term opportunities. And after Håkan's key messages, there is a possibility to ask questions. As a reminder, we will host a pre-silent call on October 3, together with our CFO, Arjen Berends. So let's leave the financial-related questions and also questions related to recent trading to that call. [Operator Instructions]. Thank you. Hakan, time to start.

Thank you, Hanna-Maria, and welcome, everybody. So it's time for an update, a strategic update and I would say if I sum it up in one word, it's consistency. So I think we are moving along in the direction we have set following also the strategy that we have set and we do see it's translating also to financial results, which is very positive. And I mean, it's all under the head of decarbonization, and we do see it continue to unfold, so to say, both in marine and energy. So if I give a short update on Marine and Energy and a couple of reflections from my side, and then we open up for Q&A, so to say. If we start on the marine side, as you know, our view is that the decarbonization transition -- sorry, I see -- Daniela I see your hand is up, I hope everybody is hearing us.

I can hear just prepping up for afterwards.

Okay. You're first in the line. Good, all right. Welcome. But so on the Marine side, it's very much about the green fuels. And we are well positioned there. I'll talk a little bit more about it. But it's not only about the fuels, it's also about carbon capture, which we are piloting this year, and we will go into full commercial phase next year. That is also about hybrid operations, so we continue to have about 25%, 26% market share on hybrid combining batteries with combustion, so to say. So a lot of activities on the new technologies. On the fuel side, and you know it, we are ready with the methanol and the carbon-neutral fuels, and we continue to include new engine platforms, making them methanol ready, so to say, or enabled. And then on the marine side, the Zero carbon fuels is very much ammonia. You remember, we launched the ammonia in the end of last year. And now we have the first order, which we announced pretty recently with Viridis this week. And moving on, and I'll touch on hydrogen when I talk about energy because we are still an opinion that hydrogen is very much for land, but not so much on from Marine because of the lacking energy density. We also know that the challenge with all new fuels is the availability of the fuels and availability of the green fuels. And we do see a little bit of swings back and forth. We do see that the fossil fuels will be there for decades like we have communicated before. I mean the LNG is very strong. And on the LNG side, we continue to reduce methane slip. It's a hot topic in LNG, and it provides us with retrofit opportunities to support our customers in the decarbonization journey going forward. So now we do see the continued trend, a lot of interest from ship owners, ship operators. We talked about before with the current regulations that are already in place, for instance, in Europe, the cost for marine fuel will basically double until 2030, considering the taxes and leverage that will be imposed. So it's a major shift. I mean, Clarkson's, they estimate that the retrofit opportunity overall for the industry, for the marine industry during the coming 10 years and somewhere EUR 10 million to EUR 15 million, upgrading and making sure that the fleet stays CAI compliant common intensity in the compliant. Already today, half of the fleet is not compliant. And if you're not compliant after 3 years, you have a real issue in your operations. And if nothing is done by 2028, I think 80% or close to 80% of the fleet will be noncompliant. So retrofit is a major theme going forward. And it provides interesting opportunity for Wärtsilä. If I continue with our operations, you might have seen that we issued in the press release that our restructuring interest has now reached its final stage. The so-called industrial -- industrialization plan have been concluded, where we are divesting the manufacturing to [indiscernible] MSC company and transferring the assets and the employees. And we still continue -- we'll continue to have operations in Trieste, but it's more related to R&D services, training, et cetera. So that has actually -- it has taken 2 years, but financially, it has gone according to plan. So in line with the provisions that we have are taken. Also, we already this year, we have received manufacturing last year. So the full year effect of the cost reduction is already in the run rate for this year, so to say. So that's a big step for us. On the services side, we continue to move out to service value ladder. We continue to bring customers, new customers into agreements and existing customers to more advanced agreements. So that strategy is full working out for us. And it's certainly supporting both our growth and profitable. So positive outlook, I would say. If I flip over to energy, it is the balancing story. We do see it evolving in the U.S. And actually, with good order intake and certainly, we expect a good order intake under the second half of the year. For those of you who follow our press releases, you should know that it's not always that we can make a press release because of customer confidentiality, et cetera. But I can say that we have a very good development in the U.S. market. And in general, I think the underlying sentiment is good. On storage, the strategic review continues. It's the same sentiment as before. We've grown the business is profitable EBIT-wise, and we want to see, well, how is the best way to grow it to support customer, create shareholder value. It's taking some time. We acknowledge that, but going through the different type of ownership alternatives and variance, everything from keeping to fully divest in that is still ongoing, and it did take some time. And we understand that there is eagerness to know what the outcome of the review isn't clearly as soon as we have decided, we will inform the market about. A specific topic in energy these days is this data centers. There's a lot of activities on data centers. I would say specifically in the U.S., but also definitely in Europe and other parts of the world. And the whole thesis is that with AI, of course, the need for storage will grow, somebody is saying the factor of 7 or something like that. So there is an acceleration. And what we see, we start to see because for us, it's still early development. We see a shift, you could say, a business model for data centers for the energy supply and data centers. And if you go back a couple of years and it was very much a data center could have a power need for, let's say, 5 to 10 megawatts. And a data center will normally go to utility of the power invite and ask to hook up so to say, and then to make sure that you had a very high uptime reliability of the power supply, you will have some high-speed machines for, you can say, emergency backup power. So that was a little bit the old model. With the model that we see evolving now, the energy need for data centers goes into 2030 and hundreds of megawatts, 100, 200 megawatts. And then the whole topic of power supply becomes very much different because then you need -- if you want to have a power supply of 100 megawatts and you can go to the grid operator, they would say, well, come back in 5 years because the planning of such a big load is much more complicated matter, so to say. So data centers will need to think through their own power supply, and it starts to then to become a bit of a baseload or you could say a mix between baseload and renewables. And then you need balancing capabilities, which is a little bit of [indiscernible] tough so. So with this shift, we do see a potential for our type of machines to provide energy to data storage. And a proof point is we recently announced our partnership in Europe together with AVK, who is a provider of power plants and power to the hyperscalers. So it's a partnership for wide power plants in Europe. We have to existing owners, I can't go into all the details because we have confidentiality with our customer. And of course, we are looking into the U.S., where there's also a lot of lot of activities around the data center. As I said, I would say like we are still at the early stage. Let's see how this evolves, but it looks promising. It looks like a new avenue, let's see. And then on the services is also very important. Similar strategy, moving up to service value ladder. I would say it's playing out in a good way. I mean you know that overall, for vessel service is more than half of our business, very important. You know that about 30% of our installed base is under service agreement coverage. So there is ample space to grow. We don't have an explicit target. I mean, the theoretical target is 100%, but it's of course a journey to get there. The other important thing, the renewal rate of the agreements, 19% of in energy in Marine. And that is, in our view, a good proof point that customers feel that we are creating value for them because otherwise, they would not renew. So it's the same thesis on our service business, so to say. Finally, if we talk about our outlook, we provided outlook end of Q2, better coming 12 months, demand outlook coming 12 months. And I would say that we are still moving along those guidelines, so to say. So I would say some of the highlights. And with that, let's open up for questions. And Daniela, are you queued up first. So I guess we'll start with it.

Yes. Please go ahead, Daniela.

I actually had 3, if it were possible, 2 on the business and 1 on the balance sheet. they should be quick. But on the business, just you mentioned the storage margin that was continuously progressing. We've obviously seen that at Q2, so are we now sort of like -- because we only get 12-month rolling type data, but do you think that the margin is now at a run rate where it should be in storage? Or there's still further upside from there? That's number one. I'll ask them one at a time, I guess, it's easier.

Yes. So I would say that we are on a journey of continuously improving the profitability, bottom line of the story. So I would see us continuing that.

Okay. And then in terms of the dual fuel opportunity, I think we spoke in prior calls about the dynamics there and especially the dynamics in terms of like ASP on your original equipment. But when you look at aftermarket, the density of after market, how different the density aftermarket in an agreement when you have dual fuel versus when you just have normal because is that the more -- even more favorable than like alternative fuels and if you could help us quantify for the model?

So I would say -- I mean, I give a broader answer to your question just to set the scene. I mean, one of the key things in this transition is, of course, multifuel capability or even dual fuel multifuel capability because owners and operators, they want the flexibility. We talked about it many times. Green is not black or white, there are no single simple solutions. So they have the flexibility to transition from one fuel to other will be very, very import. Now the dual fuel engines compared to multifuel engines compared to the single fuel engines, yes, there might be a little bit higher need for spares parts, but I think what is more important for the development of our service business is that the whole transition and the fuel and how to handle and how to operate, that drives more of an agreement piece. I think that is a bigger lever than that we are selling more spare parts on certain engines for certain fuel types.

All right. And the one on the balance sheet just like feel pretty much very little leverage or no leverage now probably by the end of the year. Can you elaborate a little bit on your priorities more cash to shareholders, further opportunities to grow that you can capture inorganically, and maybe give us a bit of a footprint about how to think about the balance sheet going forward?

Yes. So basically, I mean, also give me a broader, hopefully getting to the call, I mean, you noticed that we continue -- I have a very positive development of working capital. We continue to run on AMC working capital. And we have clearly said that, that is not a sustainable level. I mean, 6.-something billion running at negative capital. So I think we should expect this to come back. We haven't said when. So -- but we do -- so when we talk about our working capital, we talk about 2, you could say, 2 dimensions. One is that we are in a favorable position now, considering order intake, considering down payments, et cetera, which is really driving the working capital negative. The other dimension is, of course, that if you go back maybe 5, 6, 7 years, we -- I would say we are more focused and stringing more efficient on running our working capital, so to say. So from that perspective, there has been a structural shift of our need for working capital, but it's not down to negative. So what -- so I want to underline, it's the combination of those to the structure shift, plus a favorable position that now gives us a negative working capital. Now coming back to balance sheet. So yes, we do have a strong balance sheet. And we -- so far, we have said that we're going to maintain and keep that. We are well funded for R&D programs. I mean we are spending R&D and that's significantly more than a normal burn rate. I think we come from 3% of net sales to 4% of net sales, but we are well funded. But we are also well funded if we want to do acquisitions. I've got clear questions if we're entertaining thoughts about share buybacks, et cetera, that we are not entertaining for the moment, at least.

Then the next question comes from Panu Laitinmäki.

I have 2 questions. Firstly, on the Marine retrofit opportunity, it sounds like there is a big opportunity going forward, but can you kind of speak a bit more about how does this look like in practice like how big part of your revenue comes from retrofit currently and how quickly you could grow this capacity and so on. And also would that be margin dilutive for the Marine business going forward?

So we -- I don't think we give the share of current business, but I can say because in the CMB material, we stated that if you look at combined retrofit potential for our business, Energy and Marine combined, it's about EUR 2.5 billion of 5- to 10-year period. So it's quite substantial. I mean, it's combined marine and energy. And if you look on the marine side, what's the underlying, it's -- first of all, it's both 4 stroke and 2 stroke because we are still doing services on our 2 stroking store fleet. So on the 2 strike sides, there are fuel upgrades that are derating and making engines smaller basically because the power is not needed when the speed is reduced. On the 4 stroke, it's similar themes. It's a conversion to new fuels, conversion, methane slip production, it's installing electrical systems just generators hybrid systems, et cetera, et cetera. And the underlying driver is you could say that the need for ship owners to establish CO2 reduction plan to be CII compliant. I mean CII was established under IMO last year. And we do see that, that there is having a big impact on our fleet tunnels or many fleets tunnwla, I should say, think about the decarb strategy, so to say. So it's a direct consequence.

If you kindly take a look at our interim report on Slide #227, you can actually see these service projects. And in there, we report these retrofits and [indiscernible].

My second question was on the mix of the gas power plants orders. I mean, you said that it's going well in the U.S. on the balancing side, but I recall that earlier this year, you were talking about these tenders for the like traditional baseline power plants globally. So where are you now in terms of mix balancing versus baseload? And how will this evolve going forward?

I mean if we look at last year, I would say, 60%, 70% of our order intake was balancing related.

[indiscernible].

Correct. Fully, definitely.

And do you expect that -- I mean, any number for this year or where do you think it will.

There -- I think it will probably increase. But I say that with the caveat because, as you know, we are -- energy is very much a project business. So if you take a big order of a certain--even if it's balance [indiscernible] shift this, we can shift this. But so -- but the long-term trend is clearly more balanced.

Next question comes from Anders Idborg.

Yes. Just wanted to talk about the service sales in thermal energy. I mean it's been very impressive for, say, in the past 5 years, it's been growing 7%, 8% even as sort of the new equipment that you put into the market has been on a lower level than it has been before. And I take your point there that you're only at 30% agreements and there's some way to 100%. But do you see that the lower pace of deployment just of new equipment could make it harder to continue to grow at this rate in service.

So good questions. But before I answer the question, I would like to promote and an investor event that we will have here in September.

Yes, it's next Monday. 11 o'clock finish time.

So next Monday, 11 o'clock finish time. We will have a separate session on services Marine and energy. And you also have the opportunity to meet with some of our leaders of the service business. I just want to make a push for that. Now coming to your question, I mean, you will see there. I've seen the material. So you will see there, and this is -- we made an uptake. We did a similar service call about a year ago. And first of all, our installed base in terms of megawatt is going up. So it's still trending up. But if you could say that the growth is moderate, so to say, but it's still there. But the interesting thing, considering the shift to balancing, if you look at the overall running hours of the fleet, it is also stable or I would say, on the border line of trending up. Because there has been a concern for many that if we have more balancing, you may should run less and then your hours will go down. But the hours are holding up. And why are they holding up? It's because our machines are very efficient. So customers like to run. And even if they like to run them for balancing, they also run them for baseload after a while already from the start. So in general, I would say that our installed base is growing in a moderate pace. The operating hours is also holding up, borderline of growing. So that's the base. And then you add a whole narrative around moving out the service value ladder, which is helping us to grow. So even with the 30% coverage on the installed base, we still think that we have ample opportunities to grow. And on top of that, I mean, as you say, you may remember the fourth and final step of the service value ladder. And that's about performance-based or in energy, we call decarbonization type of services. And there, we are still at an early stage there. But we do see that space evolving in a promising way. So short answer, we still see an interesting growth opportunity in services. In Q2, I got the question also because it seems you do with Q-on-Q comparison for Q2, it seems like we are flattening out. But then you should consider that Q2 last year, we took in some pretty big service projects. So that skews the comparison. So we're still on the growth.

Okay. Yes. Just maybe a shorter follow-up. You mentioned the process around storage, but could you mention what's happening on the process around the portfolio businesses as well if we should expect any news there soon.

Yes. So portfolio business is just to stop broadening them. So I mean, we put those business units which we clearly have said we're going to divest. Our intention is to divest. We have 4 business units there. The processes are ongoing. It's a little bit different starters for different business units. Some we are still turning around. Some we are in an M&A process. So I think it's progressing according to plan, and we should see some activities this year. We should see some activities next year, and it might also take -- it will take a couple of years, but we are making progress. And why it's taking some time is that, of course, we wanted to have a good realization but also turning around the businesses that have been lost.

The next question comes from Sean McLoughlin.

A couple from me. Just coming back to services to understand this a little bit because if I look at the slides from the H1 presentation. We've seen the -- in the energy business, we've seen the actual megawatts under agreement flattening. We've seen that curve in -- in the Marine Services net sales agreement installation is also starting to flatten. So I mean, is there a wider I guess, slow down as you suggest, in service growth? Have we reached maybe a point of saturation, given how strong service has been over the past few years. And I think just to also put that into context maybe of the H2 guide where you're also talking about a slowdown in margin versus the first half.

No. So the short answer is no. We do see continued growth on services. And it's looking rather promising, I would say. Because of the forced reasons, moving out to service value ladder up, the base is still growing, and they are also holding up. So the fundamentals are there. Then coming to our guidance or guidance, I should say, a comment on second half versus first half. And we tried to articulate. I mean, both new build and services will grow, but new build will grow faster. And that's why we say we see -- we will not see this normal. We don't expect to see this normal seasonality effect that we normally have in Q2. But it's not a signaling that services have stopped growing because that is -- service continues to grow.

Very clear. And then just another question on the balancing opportunity. Because you talked about your expansion outside of the U.S. and into Europe. I mean how concrete is the balancing opportunity outside the U.S.

So I mean, it's very concrete in certain geographies like the U.K., like Australia, like a couple of other geographies. And in some other geographies, it's a bit muted. And why is it muted? There is a need to have market mechanisms, providing the right pricing mechanism for balancing power. And in some markets, it exists, so some markets are like Texas or [indiscernible] is very regulated. So I mean, we will see -- we have been saying this I know for quite a while. But I think we will prove ourselves right. We will see this as the share of renewals will grow, the need for balancing will grow. And why I can say this with such confidence is that some of the markets that really has a high share of renewals like Texas, Australia, et cetera. They see, and some of them are our fastest-growing markets.

Next question comes from Antti Kansanen.

Yes. A couple of questions from me as well. Maybe I'll start with the Marine newbuild side and the yard capacity. So Hakan if you could comment a little bit which of your core segments, the yard capacity is currently leased of bottlenecks because in some areas, I guess, it is.

All right. So I'll I give a broad answer in terms of Marine. So this is about job capacity. I think -- since 2020, we've seen yard capacity starting to grow again. I mean, there was clearly over-establishment, there was a contraction. But since 2020, it's starts to expand again. And I would say that this development continues. I mean Chinese shipyard capacity is expanding, not as fast as in the heydays, but it is expanding, and the Chinese are entering the LNG carrier space, et cetera, et cetera, so to say. So it's a very -- I understand your logic, but I mean what is the lead, I don't know. I mean, cruise -- the cruise is back, definitely. I mean there are 20-year orders from big cruise versus being placed. There are only -- you would say, basically, there are only 3 yards in the world for the big cruises. So that will be filling up 26, 27, 30 and beyond. We should now acknowledge that the lead time between placing an order for a vessel until if we are successful, that will materialize in order to us. And therefore, the order intake is about 6 to 12 months. LNG carriers is -- obviously, that is probably one of the more challenging areas because of yard capacity, especially Koreans are sold out. But we do see Chinese coming in. Container vessels, not so -- I mean there is capacity in the container market is actually coming back. Offshore is still has a lot of activities. We see that in our service business. But given the past history, there is a little bit of carefulness for the new, but we think that the new [indiscernible].

And is it still kind of the similar lead times? I mean, are you seeing some of the clients ordering a bit earlier, your engines? Or should we still kind of just look at the delivery times and calculate from there when you are likely to get an engine order.

I think that is the best pros. We do see a little bit of preordering. I mean, I would still use the general rule though.

Okay. And then the second one was on the carbon capture launch next year. So could you talk a little bit more about that? What does it look like in terms of getting clients, getting production up. What type of trajectory you expect for the business in the next couple of years after '25.

So basically, I mean, the first pilot customer is public and that is Viridis Bulk, and we announced that, and we will go operational this year. And then we will do the commercial launch next year. I think the technology to extract the carbon is clearly and a storage on the vessel is clearly there now and will be there. I think -- and the technology certainly for the land operation is there. But of course, the whole ecosystem, especially, okay, what do we do with the CO2. We pump it back, Do we use it as raw material for something else that is still evolving. And I think that will define a little bit the speed of carbon capture and the growth of carbon capture. There is, of course, another important element, which is regulation, and it's also there is I would say ongoing IMO discussion on how should IMO view carbon capture. So I think those are the drivers. We are ready, We will not be a coveted and both making production capacity, et cetera, et cetera. It's more the regulatory side and also how is the ecosystem and also so people can -- and operators can do something with CO2, whatever it is. Then we have said, I think, overall, I'm looking at Hanna-Maria, I think we've been talking about the size of this opportunity publicly. So we basically we said that the whole market is probably a EUR 10 billion opportunity over 5 to 10 years. So that -- and I don't -- that's the whole market, and I don't assume that we will take 100% market share. But we kind of sized it up in that way.

And regarding kind of building up the infrastructure for the carbon, I mean, who's ultimate responsibility that is? And what are you kind of hearing on any initiatives on that front?

So the -- I mean, there will be different type of operators that will do. I mean, we are not integrating into that. So we focus on the capturing of the vessel and a certain extent storing on the vessel. So the land infrastructure, we are not involved in. And what we see, there is a plethora of different tens opportunities all over the world, I would say. And people are trying to pump it back in to gas or oil wells. But of course, there are also other pilot projects where you thought about using CO2 as an input for synthetic fuels, et cetera. I think there will be a lot of learning. Let's be frank about that. I mean cleanliness, what the whole -- how do you make sure that what specification should that be? So you can really use that there's a whole ecosystem of? Tere's a lot of activities.

Okay. And then the last one for me is on the data centers and looking promising in the U.S. Could you talk a little bit from a technical perspective? I mean, what type of alternative solutions are you competing against? I mean, from a technical perspective, which are the options your type of engines, what else is out there? And what are kind of the hurdles to clear for making a major business for you guys?

So I mean with the past business model that I talked about before, if we have 5 to 10-megawatt hooking up to the grid, then you reduce high spend. So it will not be a segment that will be interest for us. Now we are moving into this higher power needs, so let's say, 20 to 200 megawatts. And then it becomes a bit of a base load or a mix between base load and flexibility. And there, we will see the same competitor as we do in our normal energy business, like the gas turbine gas [indiscernible]. Ad in the narrative on our side, will be the same. We have higher energy efficiency, and we have better on flexibility.

The next question comes from Tom Skogman.

I wonder about the batteries. Of course, battery metal prices are down a lot, but also the cost of manufacturing are going down very, very steep and have seen some comments that perhaps you could use battery for storage 1 hour 1 year ago, and now it's up to like 8 hours or so. What do you see? I mean, do you see this business eating into your balancing power plant business eventually.

No. I mean so far, we haven't seen -- we still see it as complementary technologies. I mean even if it moves from 1 to 4, 6 or 7 or 8 hours. I don't see a major cannibalization. I mean, you're right in the sense that the cost of raw material is coming down. I mean looking at lithium and et cetera, I think the prices are down year-to-date like 40%, so when you look at our storage business in the other storage business, we are delivering more megawatt hours than ever, but of course, the price of megawatt hour has come down. Now I've been also very -- trying to be very clear that, that is not eating into our margins, so to say, because with the pricing mechanisms related to raw materials, this is a path -- so it's benefiting our customers. It's not a positive, it's not a negative for our margin.

But how many hours do you think you can have now in, I mean, with sensible financials.

W deliver -- I mean, the biggest storage we deliver are gigawatt hours, so to say, and then how they use it in some time how they choose to use.

In the Q2 news conference, you said that execution is still more important than volume for margin. But you really did not open up this. I mean it sounds like you still have a lot of execution issues which means that if you have cleaner execution next year, the margin on equipment could improve a lot just from that, that's how we should understand your comment from the second quarter this quarter.

So I guess you talked in general now, are you specifically referring to storage.

General.

General. No, I think that -- I mean, we continue -- if I take [indiscernible] it's more what I was referring to probably. I mean, we do see a continued high share of EEQ, I mean, equipment versus EPC. So that continues. We do see continued good project execution capabilities. I mean if you go back 2018/'19 and if you remember, we came with big profit warnings, et cetera. I think we are out to that now these things. So -- and the theam is on a journey of continuous improvement in a much better risk reward mix in the portfolio. And that journey continues.

But it's not that you expect a smoother execution next year, but you still have trouble this year with certain projects. I mean we are a project business. And if you have a portfolio project, you will always have some that are performing well, some are performing average, and some are performing a bit poor. I think the key thing in many project businesses is to make sure that you have or the really bad outlines. And that requires proper risk management. And I would say that is now in place.

Okay. Then my final question is on power plant orders from emerging markets, mainly base load. Why are they so low compared to the level that we saw before the pandemic. It appears to me that they are very, very small compared to 2016, '17, '18 levels.

I mean, you could say that these big sometimes swing in a year when you have large orders from Bangladesh or Indonesia, et cetera. They are not something of the past. They will come, but they are very much depending on the political situation, auctions. I can give one example, Argentina. There is a lot of things happening. As you know, there is a new administration that is revamping the whole -- a lot of in the Argentinian society, including all the principles for the energy sector. So Brazil is the same. So there will be options coming, but they might go up and down, they might shift in time because of the political climate, so to say.

Next question comes from John-B Kim. I think there may be a technical challenge. So then let's continue with Erkki Vesola, and John-B, you can send me also the question by e-mail if you have some technical issues.

First, a couple of housekeeping questions from me. First of this EUR 10 billion in capture market. Is this what the shipowners will purchase? I mean, none of the infra is involved in this number.

No, our estimate EUR 10 billion of carbon capture that's related to the type of equipment that we will provide as [indiscernible].

Okay. And secondly, about the retrofit market size, which is only EUR 2.5 billion in 10 year, which sounds pretty small.

W have said, 5 to 10 years.

Okay. But still it sounds a little bit kind of a small number divided in 10 years.

[indiscernible].

Okay. And then finally, this moving up to service study later. I mean the initial assumption was the moving from transactional if that is EUR 1 per megawatt the performance base, which is 3x that. Where do we actually stand now in this journey in relative terms? Are we still much closer to 1 than 2. And there was the speed of change that you see there.

So we don't do a weighted average, and we are now at 3.5%. So it's more of a strategic concept. I mean I think the -- I mean one kind of you could say, KPI that we follow is the share of service agreements. And as we said, 30%, it has been growing with about 1 percentage unit every year so 29% to 30%, hopefully to 31%, et cetera. And I think that's a reasonable pace. I think the positive thing is that we have these 4 steps in the service value ladder. So the first step is the transactional side with spare parts and service hours; second step, the agreement; third step retrofits; fourth step, performance basically. And what we are doing. Ys, we are moving customers up that service value ladder, bringing the first transactional customers into agreements, people or customers will exist in agreements into more advanced agreements. Some customers to retrofit or even to perform a space. So that's one development. But another development is that we are actually growing each step in this value ladder. So if you look, for instance, on the transactional side, I talked about that before. [indiscernible] business, and you see it in our numbers because we break it out is evolving in a very positive way. I mean, one is, yes, it's about running roughly, it is running. But also, we have changed the way we work with the transactional business. We use much more today in digital tools, which makes it possible to us to cover a broader set of our customer base. I mean before we didn't have in the same way as we have now a structured way to work with our small customers because all customer interaction, of course, takes resources and time, et cetera, et cetera. So we have actually been growing our transactional business, not only by having high fleet utilization, but also having another way to work with our transactions. Agreements, we talked about. We put a lot of focus on agreements and bringing customers into the agreements, the decarbonization story is helping us because customer is new fuels. It's a new type of recruitment. So they want to come closer to us. On the retrofit side, we talked a lot about that already, the green decarbonization, CII index, bringing in [indiscernible] right, bringing in the hybrid batteries, fuel conversions, that's really growing that step. And the performance base, we didn't talk so much about it today. and it's growing. It's a relatively small step, but it's growing. And here, and it's a little bit the agreements we have with our customers. Some customers want to be public only, some don't. But it's a growing step. I mean the most public example we have mentioned in the past is Carnival. It's working out. We continue to work together. I think both parties are happy with it. And we continue to bring new customers into performance-based [indiscernible].

So if we talk about these 4 steps, where as it seems that there's an action on every single one of them, where do you see actually the growth being fastest? Is it on the technical management, optimized maintenance or guaranteed asset performance?

I would say performance base takes the longest time because it requires quite a lot of time to find each other and make a proper deep analysis, et cetera. So that takes the longest time. I would say stockpiles have been growing a lot. I would say, agreements have been growing a lot. Going forward, I think that the retrofits will accelerate because of the regulatory [indiscernible].

I have received a couple of questions by e-mail. So 30% of service base is on multiyear contracts, right? So as you know, this is -- that is not based on the agreement, and that's correct, roughly 30%. So where is the target level for penetration here?

No. I mean, joking say, that is the theoretical limit, but we haven't communicated publicly where we have a certain target. What we have said is we see ample growth opportunities continuing.

And yes, additional color. I assume some customer segments or concept non-adopters.

Yes. I mean there are certainly customers that we say we want to do this ourselves. So that's why we will have to reach 100%. And of course, there is also an element of how old is the fleet and where do you want to invest if the vessel is too old, maybe you don't consider it, et cetera. So there are many considerations. We will never reach 100%.

How much of transactional service revenue is tied to dry docking? I this a pinch point right now?

So far, I have not heard about it being a bottleneck. But if we look forward, let's say, 5 years, 5 to 10 years, I think this is something that needs careful considerations because there will be a lot of need for upgrades and retrofits. Let's say, there are 100,000 large above 2,000 gross weight to lessors in the world, what share of those would be worth upgrading, investing in. I think I haven't did the same Clarkson number on that. So I wouldn't guess, but it's tens of thousands. And -- and that will tie up quite some dry docking and down capacity to upgrade all those vessels. So I think there will be some dynamics going forward. If we take a little bit longer perspective.

Any color on vessels used to build offshore wind, wind that also [indiscernible].

Once again, sorry, I missed the question.

So any color on vessels used to build offshore wind.

Offshore wind is certainly there. It's there. It hasn't been exploded in terms of demand, but it's certainly there. It's a little bit up and down every quarter. I think it's slowly growing, but it's not exponential growth.

Then Antti Kansanen has a followup question.

I wanted to follow up a bit on the marine retrofit opportunities because, I mean, obviously, we've seen orders on the service projects growing. But -- but are you still seeing some kind of a hesitance and wait to see type of thinking from the ship orders that they are still kind of waiting to decide what to do? I mean it would be quite obvious for them to low speed and then you need to do all of these configurations. So how do you see it in the near term? Are they still kind of hesitant waiting for it and there's a big kind of potential boom coming when then suddenly capacity to retrofit might be kind of a compromise like where are we in this kind of a retrofit opportunity trend in a sense.

I would say we are still early stage in my view. It is first of all, the driving force is the CII index. And I would say also a little bit further down the line, the realization of -- especially if it's in Europe, that with the less that are coming in, the price for marine fuel will skyrocket. So that kind of realization is dawning. And some customers, they adapt very early. Some have a little bit more wait and see and some -- maybe a little bit of denial. So that's why I say in our retrofit business, we are still with a, you could say, the early adopters. And I think we will see an acceleration because more and more are realizing the impact of CII, the impact of increasing fuels and more and more realizing that this more and more will become a global trend. And it's not something that will slow down.

I probably should know this, but regarding the CII, are there some kind of specific dates still -- I know that it has been -- it's already in place, but are there still certain time lines that could trigger these more hesitant clients to actually suddenly start to act.

So basically, I mean, end of the framework, I mean, we know it's a classification system from ABCDEF. And if you're in the higher classes, you have about 3 years to remedy that. And if you don't, you don't have a license to operate the vessels on you. So of course, the regulations come into for 2023. So they are somewhere there 26, 27, there is certainly 1 sharp deadline.

Okay. And then a second follow-up on the aftermarket profitability, especially on the marine side. And obviously, we don't know exactly what it is, but you sounded pretty happy about kind of the margin levels that you have achieved. But it has a pretty sizable parts business to a fairly critical piece of technology and engines. So -- just looking at kind of your segment margins, it would appear that you could do better on the aftermarket side. Do you agree and this kind of moving to more agreement base, is this more of a focus to get more occurring revenue base and a bigger share of wallet? Or is there kind of a notable margin upside, let's say, 5 years out on the marine side?

So I would say, and I can take a general comment, I think we are growing clearly. I think -- I mean, my ambition is that we should continue to evolve the margin as well.

The next question comes from Mikael Doepel.

Yes. I just started to think about the margins. So I think you said already previously that I guess it's a mix question about mix into the second half. The margins can come down a bit. But you have had a quite good development already in the last couple of quarters. And looking ahead, I guess, your target is to reach 12% or more. So just wondering what would you -- I mean, and you have multiple things going on in the company, right? That's probably going to support a higher margin going forward. But what would you say is the most important driver for you to get to 12 and beyond?

So -- and I would say that it's consistent with what we communicated. The primary driver of EBIT improved the service business. So that's the first one. It's not the only one, that is the first. Secondly, I would say it's the new build business on the marine side with the new fuels, with the new engines that we are putting in, and that gives opportunities. And also, not only the decarb, we talked about Deca, the growth of our core segments, cruise, ferries offshore. So that's the second. The third is the margin expansion on the Energy business, and that is very much driven by the discipline and the project execution, the right risk reward balance, more of EEQ less of EPC. The fourth element and is storage and the turnaround of storage. So those are the major drivers.

I think we have still time for one question in case there is somebody who wants to raise it. It seems like that there are no more questions. So many times, Hakan.

Yes. Thank you, everybody. Have a nice day. Bye-bye.