Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

I'm Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, we will take a deeper look at our service business. As communicated earlier, service is one of the key growth opportunities we have and also a major driver to reach our profitability target. Today, we will have 3 short presentations. Our CFO, Arjen Berends, will start by highlighting the role and importance of service business on Wärtsilä level. After Arjen's presentation, Andrea Morgante, who is Vice President of Marine Performance Services, will describe how our Lifecycle agreements are driving growth in Marine Services. After that, Markus Ljungkvist, Vice President of Energy Services, will present the key drivers and opportunities in Energy Service business. As a reminder, we will host a pre-silent call on October 3, together with our CFO, Arjen Berends. So let's leave the questions related to the recent trading and detailed financials to that call. [Operator Instructions] Okay, Arjen, let's get started.

Thank you, Hanna-Maria. If you move to the next slide, thank you. Service is very important activity for Wärtsilä for many reasons. It's a key factor that determines customer satisfaction. It's a key driver towards our financial targets, and it provides great stability to our financials. If we look at service today, we are and will be close to our customers. Our global service network is a proof point of that and a key differentiator compared to our competition. Customer satisfaction is high. And one clear proof point of that is that our service agreement renewal rate is more than 90% in both businesses. They would not renew, let's say, if there was no value in the services we provide. Do we stop here? Certainly not. We are growing our installed base. We will continue with our strategy of moving up the service value ladder because there's great results, growing our agreement coverage, leveraging digitalization to further enhance our value delivery as well to customers. There is more to get. The ongoing decarbonization that is happening in both end markets, Marine and Energy is clearly, let's say, supporting our service growth with many opportunities on the retrofit side as well. If we move to the next slide. As mentioned, service provides great stability to our financials. It's highly transactional and links to mission-critical equipment, both in Marine and Energy. And it, therefore, also correlates with running hours. For several decades, we have been growing our service business and more strongly in recent years with our strategy of moving up the service value ladder. If you look at the graph, there is a dip with the COVID. But, let's say, you can clearly see that after that, let's say, the growth has been very strong. And that's also where we changed our strategy of moving up the service value ladder and having more dedicated focus to it. So really bearing fruit. EUR 3.2 billion or close to EUR 3.3 billion is the last 12 months rolling service sales. And as you can see from a long-term history, it's moving up very well. Installed base coverage increasing. Some years back, let's say, we were around 25%. Now we are looking at 30% in both end markets. And as I mentioned already, the 90% renewal rate is something that we are extremely proud of. This value for customers, and they appreciate what we deliver to them. If we move to the next slide. Every quarter, since 2020, our rolling 12-month book-to-bill ratio has been above 1. Actually, if you look at the longer horizon, since 2006, if you take the year-end numbers, our service book-to-bill ratio has never been below 1, actually. If you look at the order intake, let's say, the growth in this horizon 2020 to 2023, 55% with a CAGR of 15.8%. And if you look at the same for the net sales, 40% growth with a CAGR of 11.8%. And of course, what we take in today is order intake is sales tomorrow. So the outlook is good on the sales side, very important. If we go to the next slide and if I summarize, service is a key driver towards Wärtsilä's 12% operating margin. It's the key driver. You can see it from the pluses on the right side of the arrow that are actually in the middle column, 3 pluses on moving up the service value ladder. So very critical in our strategy of improved profitability. It's a great contributor to sales as well as you can see on the left side, and then even greatly contributed to profitability, as I just mentioned. Let's now go look deeper into, let's say, the individual, let's say, service activities of the businesses. And let's start with Marine, and that will be presented as Hanna-Maria mentioned by Andrea Morgante, Vice President, Marine Performance Services. So Andrea, over to you.

Thank you very much, Arjen. So as said, my name is Andrea Morgante, I'm heading the Marine Performance Services, which is the team that sells and delivers agreements, Lifecycle agreements in the Marine space. And today, I want to talk to you more about how this is a major growth driver for Marine Services. So if we can go to the next slide. The past 12 months have seen a growth of 5% and -- on Marine services overall. And the positive trend confirms our strategic choices, and we see it propelled by 3 main factors: The solid installed base development, the continued market interest in agreements where we register and move towards higher tiers, and as shown here, we have grown by 15% in OMA and GAP agreements. OMA stands for Optimized Maintenance Agreement, and GAP agreement is Guaranteed Asset Performance agreement sales. So again, 15% growth in sales for -- propelled by OMA and GAP agreements. And then the third point is the rapid uptake in decarbonization driven retrofits, where order intake has grown by 67%. Now if we go to the next slide, I'd like to show you something that's extremely relevant in the way we have set up the service business in Marine. So the service business in Marine is fundamental part of the Marine business, is worth roughly 60% of Marine sales and is a key differentiator for us in the market. We have developed 3 integrated delivery models to bring services to our customers. And I stress the word integrated. I'll come back to that throughout the presentation as well. Transactional, the column on the left is the foundational element. It's the combination of our field service, workshops and part delivery, and truly enables our service offering throughout the vessel life cycle. Then through agreements, we come closer to the needs of the customer. We build on the strong foundation that is our service network. And we support our customers through integration with their operations. We support our customers with the increasing complexity of their operations. And a big factor also is the augmentation of our services by using AI and remote support and assistance. And then, of course, our retrofits and upgrades, very relevant. I mean, they actually -- they secure that assets, customers assets stay relevant in changing business environment. And they have become even more important due to decarbonization in the past years. Throughout the presentation, I'll try to touch again on all these 3 main things. So if we go to the next slide now, I'd like to talk to you first about our foundational piece, which is our ability to serve. And as I said, it's a highly integrated framework. And this allows us to provide customers with a wider service network in Marine. Our field services organization is really a testament to such integrations and efficiency because it's designed to serve both Marine and Energy customers with over 3,400 professionals across the globe. And now, we leverage the same foundation both for Marine and Energy, both for transaction and agreement installations. Then looking specifically on Marine, you can see that jobs starting in the field and deliveries to the field have been trending upwards, showing good reception from the market. And we believe this is really the setup that is going to secure that we can reach our growth targets. So if we move to the next slide, I'd like to open up now a bit more about agreements. This is what we call the service value ladder. And as I said earlier, we have developed an agreement offering to get closer to our customer operations and help them respond to the increasing level of operational complexity, cost of emission and fuel cost increases. Our offering range is designed to leverage on the portfolio of building blocks. And by doing this, we managed to find the best match with the customer business model while retaining internal efficiency. As we progressively integrate with customers, operations, so moving, let's say, from the left part of the picture to the right part of the picture, we move from data visualization to guaranteed performance and with many several steps in between, where maintenance planning and AI-enabled remote support are the most valued. We can clearly see that the further we move on the right side of the picture, the more we manage to create a win-win situation, where the customer gets more value out of the asset, and we are able to progressively increase our sales compared to transactionally. So if we move to the next slide now, I'd like to talk about a key building block in our agreement offering. So I mentioned earlier that a key factor for us is our field service and our ability to deliver parts. On an agreement level, we also augment our services through digital solutions. And the ability to remotely monitor and assist our customers installations is key in doing that. We've pioneered the use of machine learning, applying that to combustion engines. We have combined it with our knowledge of the product and with our experience in the field, and we have called it Expert Insight service. And through this, we augment the value of experts can deliver to customers. And I want to stress this because it's very important. It's really the combination of these factors, the human experience, data and artificial intelligence to make this solution unique. And it's a solution we offer exclusively as part of an agreement to our customer. If we look at the next slide now, I can open up a little bit more how things happen in practice. So following the same logic that I explained earlier about seeking synergies between Marine and Energy, on field service network, we apply similar logic here. Vital Expert Insight is designed and developed to support both Marine and Energy installations. And this enables us to capitalize and experience on engines, on installations on both land and sea. And we can also maximize synergies from a digital stack perspective. This solution, as you can imagine by now, is at the center of the action of Wärtsilä Expertise Centers, where our experts use it to support our customer operations, and they use it to parse through over 40 million data points we get from the field from vessels every day. And they managed to do that by using a combination of machine learning and rule-based technology that allows them to focus on what's very important. And now looking a bit on the impact towards the customer. One area that is extremely appreciated by our customers is how on the median operational level, we managed to resolve 90% of issues remotely. This level of remote support is working bidirectionally. Now these are conversations with the crew. And it can be that we initiate the conversation because we see that something might require attention or the crew does it and sees our Expertise Center is a place where they can get comfort on how to proceed with the potential concerns they have and what they're seeing on board. Then of course, this and many other aspects of the agreements have also an impact on what we call planned and unplanned maintenance. And this effectively results in higher uptime and asset availability for the customer. And then last and certainly not least, we see we positively impact fuel consumption and emissions, of course. And that's just because it's proven that a well-maintained and optimized engine consumes less. And this is something that we do, particularly we are capable of achieving, particularly with the highest tier agreements we have in our portfolio. If we move now to the next slide. Now we've seen building blocks of our agreements. Now if you look at market response, we see that the market response is very good. And here on this slide, you have several figures that can confirm it. The number of vessels under agreement continues to grow steadily. Even more exciting, the interest in our top-tier agreements has never been stronger. You can see the number of vessels under OMA and GAP agreements. So Optimized Maintenance and Guaranteed Asset Performance agreements is growing faster than the lower tiers. About 1/4 of our 2023 sales were linked to GAP agreements. And then, okay, Arjen already mentioned, we are very proud of the renewal rate. I mean, we believe it's a great proxy for -- as an indication of customer satisfaction, over 90% of the vessels under agreement are renewed for another period. Next slide. Now we've been talking about customers. I'd like to bring forward 2 customer examples that excite me very much. This one, the first one, I find it exciting because combines the 2 pillars of the Marine strategy. The combined service growth and decarbonization. As mentioned earlier already that upgrades, retrofits have increased importance to customers due to decarbonization. And this case here is about the recent upgrade that we brought to the Marine market. It's what we call the refit for 55 conversion package. It's a package that leverages on a technology that is being developed originally for the Energy business. And therefore, it's a proven technology that Wärtsilä has been now deciding to take to the Marine customers because we see that it can support the challenge on decarbonization side. At the core of the upgrade, it's what we call a Spark-Ignited Gas technology. And we see that when deployed to LNG carriers with the dual-fuel diesel electric installations, it could have a positive impact up to 70% of reduction of greenhouse gases. And on the chart here, you see an estimation of the impact that, that can have in terms of fees customers would save because of the cost of carbon that is coming into the market. And these calculations are, in particular, based on EU regulation. So this would assume the vessel operating in EU waters. LNG carrier is, therefore, taking cargo to EU waters. What is also interesting and shows how much the market is seeing positive about this is that we presented this solution earlier in 2024, and we have already received the first order. I see this is also linked to the agreement business because we have a large portion of Wärtsilä DFDE LNG carriers under agreement. And we believe that combining decarbonization driven retrofits and service agreements will further strengthen our partnership with customers throughout the vessel life cycle. So this was the first case I wanted to talk to you about. The second case is related to the cruise segment. Now if you can go to the next slide. I'm really happy to tell you that Wärtsilä and Royal Caribbean Group have signed a Lifecycle agreement. And the press release came out just minutes ago about when we started this call. And this is for us a landmark deal. We actually started the year by renewing the existing agreement we had with Carnival and now, in September, we are signing, with Royal, an agreement in this case that covers 37 cruise ships. It covers both scheduled and unscheduled maintenance. It leverages on Expert Insight technology we've seen before. It has performance-based elements that incentivize improved maintenance. Wärtsilä and Royal have been long-time partners and work on the development of new solutions for many years. And yet, we think that this agreement -- and actually, this is something both companies think is not just another milestone in a successful relationship, it does actually give us the opportunity to integrate -- I mean, work closer with each other to develop, to join efforts and develop more reliable and sustainable operations. And at this point then, I would go to the last slide I meant to present today, which is a short summary. I hope that I managed to show you why we believe that the service business will continue to grow, driven by climbing the service value ladder and decarbonization driven retrofit. In terms of addressable market, we see decarb-driven retrofits and upgrade as a key driver. And we also see supporting solid growth of our installed base. And in terms of market share, which, of course, for us, is -- the market is the Wärtsilä installed base, we are convinced that our strategy of moving up the service value ladder is the right one, and it's paying off. We have gone -- we have increased sales to gain installations since January 2023 by 26%. Today, I could share with you about the Royal deal. And I think that shows that leading marine time players select us as their Lifecycle Service partners, clearly seeing the benefit and opportunity of an agreement. And we also see the opportunity of combining retrofits and upgrades with extension expansions of agreements going forward. This concludes my presentation, and then I will give the word to Markus.

Thanks, Andrea. So hello all from my side as well, Markus Ljungkvist, and I'm the Vice President for Energy Service. And as Andrea, I would like to share also how we see we have been performing and also what are the growth drivers we see going forward. So let's start with, let's say, the agreement coverage. So yes, thank you. So this is the numbers what we see. So we have a steady growth in our sales. And I would say, in addition to that, we have an increase in order book and a positive book-to-bill during now a long period of time. But if I go to the drivers and what I will talk about in the presentation here today, it's mainly around the things on the right corner here. So it's about increasing agreement coverage. It's about growing our installed base. And we have a bit more long-term possibility in the upgrades with sustainable fuels. And we also see the outcome-based agreements as wanting to further develop and do. And we are also expecting quite stable running hours still for a fairly long period, at least. So if you go to the next slide, you can see our agreement coverage. So we have from 2020 now to Q2 2024, we have gone from 24% to 30%. At the same time, our sales has gone up from EUR 780 million to, let's say, the last 12 months is EUR 1.1 billion. We have about 30 -- about 90% renewal rate as Marine, I think, a bit over. And the sales from this 30% is -- of our total sales, it's about 56%. So if we move to the next one. And here you can see the value ladder in the types of agreements we have. So we have about 7 giga in performance agreements. This is agreements who attempts and guaranteed asset performance and outcome-based agreements. We have grown, I think, in gigawatts as I saw from 12 to 18 giga now. So the growth has been about 52% over these years. And one new agreement type that we launched was Parts Predict and this was to get existing customers back. So this is that we do the planning of the parts. We do, let's say, for all the maintenance the customers have. And we also normally include our Expertise Center Services. So we do monitoring and go through the customers. So it's a bit lighter agreement, but it's very appreciated by customers, let's say, who has been doing it on a transactional basis before. One thing that I think is also good to share is that our NPS scores or customer satisfaction correlates very well with our value ladder. So that also tells us that we are on the right track here. So if we move to the next one. Yes. And here, you can see our installed base development during the last year. So quite stable. I think we have added around 1 giga per year. We believe that our new build potential going forward is big, and it's extremely big, let's say, in the balancing sector. So if you look at -- I think from -- we have presented these figures before. So you can see our base load is quite stable, but the balancing portion is -- there's a big growth there. And we also shared with you here now the running hours. So you see we hover around 4,000 hours, which is, let's say, in the middle. It's a bit -- just below 50% capacity, and that's on the whole 60 gigawatt installed base. So if we move to the next slide, please. And then we have decarbonization services. So we have learned now from our customers in micro grids that they face challenges right away when they start to introduce renewables into the system. But the real problem is when they get to a certain point, and that depends from grid to grid, but the more they put into the system, the bigger the constraints get on the reliability for them, which makes it very difficult to optimize the, let's say, the LCOE of the plant, the cost of electricity. We believe that we have all the ingredients to actually solve this. So we have all the technologies. We have an extremely good energy management system. We have engine power plants, and we have battery storage, which are, let's say, very fit-for-purpose products for balancing a grid. I think also we have -- I will show you in the next slide that we have also managed to turn customers now to do -- can we go back still so -- yes, thanks. So we have managed to do also outcome-based agreements now on this because we are optimizing the grid, which means the dispatching of all units in that grid. Then the market potential. So we have analyzed, let's say, our 60 gigawatt installed base and around 14 giga are in micro grids. So Wärtsilä have a fair share in micro grids. And these are captive micro grids for industrial segment and small-scale island utilities. We also see, let's say, an interest coming, especially then in the captive industrial segment when a new mine, for instance, is built. Customers want to build it with renewables from the beginning. And then they see us as a very logical partner since we are good at integrating all these assets. So now if we move to the next slide. So here, we have 2 customer cases, one from each segment. So we have had an O&M in Madagascar for over 15 years. And the customer then contracted an IPP to start to build renewables and also storage, but they had a big problem to optimize this. So they had all the assets, but they didn't have a working EMS, so energy management system for this. So they contracted us now with a new O&M and included the energy management system of the whole grid they operate. And this grid is in the smaller range. It's about 12 megawatt operating grid. The other one, a bit different is our utility, Aqualectra. And here, the situation is a bit different because they have quite a lot of renewables and more coming. However, they also have load growth demand. So they needed to have also more firm capacity. And they didn't have a storage system, so they have difficulties also to optimize the system. So I still have actually now then got started to work with Aqualectra so both on new power plant on storage and the optimization. So I think these are cases showing that when you get to a certain level and you start to have problems with, let's say, the grid. And I think it's really the reliability of the grid that turns it to our -- when we can come in because that's when it gets really difficult. So I think we have a really good opportunity here. Then if you take next slide, and we can talk about our -- where we do, let's say, investments, so our R&D work, so to say. The first 2 ones here are a bit of a combination where we see that to become really competitive in the balancing market, we need to start to look at adjusting our power plants a bit. So it's from the design of the new -- also on how we do the service. We think that we can go all the way and have a remote autonomous operation of our power plants. And we believe that's going to bring a lot. And the second thing, which we do together with Marine, is around our digital services. Here, we are working, of course, a lot on how to ensure that we have predictability and really good reliability of our plants because that's where we can add most of the value for our customers. The last one is around clean energy or sustainable fuels. So we believe that -- if you can go one back, please. So yes, about clean energy production. So we are preparing ourselves now to actually for many different fuels. So we have ethanol, methanol, hydrogen, ammonia. So I think we are mapping out and making sure that we are able to convert the existing power plants when these fuels become available. I think our track record is good here because we have already converted 1.7 gigawatt of plants around 25 countries. This has been mostly going from HFO to gas. But going to another fuel is going to be according to us a bit the same thing. So when the fuel is affordable and available, that's when we see we can have a good business here. So it's going to depend on that -- on the Energy side, but we will be prepared. And if we wrap up with the last slide. So this is how we see it. And if we talk about our addressable market, I think we're going to grow our installed base. We are quite confident that, that will happen. We also see that we have increasing opportunities in the decarbonization service. Many countries or, let's say, utilities, which are in these cases, many time countries, we see. And we have a huge pipeline on projects we are working on here. And this is a need that they will have, for sure, this integration. Sustainable fuels, I think, is something that's going to take some time. We are still working on gas conversions. But I think the sustainable fuels when these are going to be ready, that's a huge opportunity for us. But by far the biggest is still climbing up the value ladder. So we -- that's still the #1 focus for us in Energy. So that was it from my side. So over to you, Hanna-Maria.

Thank you, Markus. So then we will continue with the Q&A. [Operator Instructions] But then moving to the questions. So first question comes from Vivek Midha.

So my first question is a follow-up on Marine. You commented that 29% of the fleet is covered by service agreements. Do you have any statistics on how this varies by vertical within Marine? We know that there are some where maybe you're further along the journey such as in cruise. So any idea about the penetration rate in cruise compared to, say, other verticals would be very interesting.

Thank you for the question. Yes. Well, we have always been transparent on the fact that we initiated the journey in agreements from 2 main segments, the LNG carrier segment and the cruise segment. Those are the cornerstones. And that's also why the announcement today for us is so important. I mean, to see the company like Royal believes in us and to continue in that direction. So I would say it would be fair to say that when it comes to segments like cruise and LNG carriers, we have been able to demonstrate very well that we can create value for the customer. We have been initiating several years ago a strategy of expansion into other segments. That is also why we have created a portfolio of building blocks because obviously, different business -- different segments measure value differently or they value different type of services from our side. If you've been seeing the press releases this year, you might have noticed that we have communicated about at least 4 of these deals in the ferry sector, and that's a sector where we believe that agreements can do very well. We are also pursuing merchant actively, container ships, for instance. In general, I would say there is no segment where we are not developing agreements for. Clearly, there will be always customers that prefer to have a self-maintenance strategy, if you will. But in all fairness, that's how many of these conversations started. As you can imagine, many of the companies we have agreements with have the same strategy in the past. So for us, it's a challenge and is part of our normal sales process as well.

My next question is on the Guaranteed Asset Performance agreements. So clearly, those add a lot more content, a lot more value, but potentially some longer-term risk around the performance of these assets. So how do you balance that? And how have these agreements been performing relative to your expectations so far?

So when looking at the potential risks that we take on with performance guarantees, I would say that they could basically either be penalties for nonperformance or outcome-based risks such as bonuses or malices. We are confident on taking on these agreements because, first of all, the old logic is to perform well. You would not see renewals if you wouldn't be performing well. So -- and we have an extensive experience combined with digital technology, that's a big factor also. That's why, for instance, as I mentioned, we provide Expert Insight solutions only to agreements. There is a relationship there as well. So I would say, we -- if I could put it on 3 main factors. On one hand, you have people, competence and understanding of the technology. I mean all these performances we signed are related to things where we can very well control, and the use of technology and of course, also strong contracting policies. I wouldn't comment on the individual performance of the contracts. As you can imagine, we cannot do that. But definitely, it's something that we see is very well appreciated by our customers.

Markus, would you like to comment this from Energy perspective?

Yes. I think in Energy, we have been doing [indiscernible] and GAPs for over 30 years. And I think our experience is good here. We see that we can manage this. This is a technology risk that we should know because we talk about that. So I'm very confident about that. And I think I would like also to add what Andrea said that, however, contracting policy also has developed very well around this during the year. So I think we are in a really good position here.

The next question comes from John-B Kim.

Could we speak a little bit about your ambitions for penetration of your respective fleets? If the fleet is, call it, circa 30% penetrated by some level of multiyear service agreements. We know that some segments self-service, what have you. But where do you think that 30% could go over the next, call it, 3 to 5 years? And would you look for most of the value creation coming from simply getting people on a service agreement or migrating them from a low agreement to a higher agreement?

Andrea, would you first comment from Marine perspective and then Markus continue.

Yes, absolutely. So the 30% figure roughly is a megawatt figure. And of course -- and that's why we're also looking at a number of installations we're bringing on board. The ambition is to continue along the path we are currently on. Rather than setting an exact figure or how far we can take this, we see that more and more customers are interested in this. You know that in the Marine industry it is also very important to conquer the trust of the leading players because they act also as a confirmation of a trend for others. So having these major agreements is clearly a beneficial factor for us. At the same time, as I mentioned, there are also specifics of the segments that are different. So we are not trying to have one approach and then try to fit it to everybody else. We are really trying to develop solutions that make sense. For example, the merchant sector that has very different requirements compared to the cruise one. The way we look at it going forward is that we believe our strategy. We are seeing confirmations of it. So we see positive potential to grow. And sorry, you also asked about -- there was also a second question. Yes, we also see that. We also see that customers that have a lower level agreement, let's say, then progressively believing what we have to offer and want to have a further integration in it. So they climb the service value ladder within -- selecting a higher tier agreement.

So from Energy side, I would say that historically, it's been around 1% a year that we have been growing. I think it also will depend on how the new build develops because it is always easier in Energy to sign up the agreement before, let's say, they have started. That's the easiest time. So we have normally the highest penetration with the newer installation. That's clear. So it will depend a bit on that. Overall, we feel confident that we have the right things. And I think this decarbonization aspect is also giving us an opportunity. If I take these cases, they also come from customers who doesn't have an agreement today. And let's say, the whole energy management system is offered as a service. We don't offer that in any other way. So it will come under an agreement, which gives us another opportunity here, I think.

Perhaps if I can add a few words here because it's good to remember for everybody that, let's say, the contracting model in Energy is different from Marine. Where in Energy, new equipment and agreement is typically with the same party. On the Marine side, new equipment is sold to the yard where you have the agreement with the operator or owner of the vessel. So there is a little bit of difference in the mechanics, how you contract actually.

The next question comes from Johan Eliason.

I was wondering, Arjen talked about the services being an important driver of the profitability as well in the group, which I can understand. But I was wondering a little bit, is there any significant difference between the profitability of the service business on the Energy side vis-a-vis the Marine side. I mean the business logic, as Arjen pointed out, how you sell it is different. And obviously, in Marine, you have assets moving around. Whereas for Energy, the assets are fixed in one position, which I guess, has a significant impact on the service operations. So is there any significant margin difference -- profitability difference between Energy and Marine?

I can comment on this one. We are not opening up on margins, first of all. But let's say, it's clear and I think that's not unique [indiscernible] the respect that spare part is making the biggest margins. And I would say that's the same, whether you go to Energy or to Marine. Of course, when you go to projects, service projects or retrofit projects or overall projects; every project is unique. We don't have a standard margin per project. There are differences all the time. But we are not opening up on single projects. I would say overall, there are differences, but they are not significant.

Okay. If we talk about these agreements, I mean, it was quite interesting. You mentioned you have 30% of energy installed capacity on the agreement and they represent 56% of your service revenues. Is the main driver for the agreements to capture the sales opportunity per installed capacity? Or will this additional revenue also improve the margin profile of the service business?

Yes, you can go ahead Markus, no problem.

So I think it helps a lot because you can plan. When you have an agreement, you can introduce planning, and you can be a lot more efficient. So it helps a lot also on our internal side, on the logistics and so on. So that's a huge advantage. If I look at the sales, as I said, I also see that the NPS correlates very well. So you get a more satisfied customer. And I think overall, you get also paid for the performance which means that you have a better chance to do well, so to say. So if you would say percentages, you're not going to have the same percentage, but you're going to have a very bigger amount on the euros, so to say. So it makes sense. Otherwise, if we didn't do it. I mean that's clear.

Okay. Excellent.

I just wanted to add that in terms of percentages, agreements in Marine Services is worth 30%. The 60% in the presentation was that services account for 60% of Marine sales, of which 30% is agreements. I mean in the slides that we showed, just for propriety.

One comment to add, and Markus mentioned it already, let's say, it clearly supports also working capital development in a positive way, like planning, logistics but certainly also the receivables.

Thank you. The next question comes from Sven Weier.

The first one is just a follow-up on the renewal rate. I mean, I think you have a great outcome with over 90, but what about those agreements that are not renewed? What's the reason for that? Is it because you're losing that to competitor? And can you also service the competitor engines in the agreements? That's the first one.

Markus, would you like to start?

So let's say, if I go through the ones we have lost this year, I can give an example how it is. It's a customer who gets grid connected and haven't [indiscernible] and electricity becomes way cheaper. I mean, that can be one reason. Another reason is that if you have IPP customers, so independent power producers, if they lose their PPA, it's over, I mean. So these are normally the things, I would say, extremely seldom because of nonperformance. That doesn't really happen. I think we have a good way to support our customers when we have the agreement in place.

I would say similar for us, very similar situation, we would add maybe changing -- I mean, the vessel change hands and therefore, there is a new negotiation to start with the new owner, but the new owner might have a different perspective or takes anyhow time. So I think it's quite natural that there is a certain percentage that we are not able to renew.

And is it on the agreement all Wartsila Engines or can you also do -- or do you offer to do the service also for like MAN engines?

We serve Wartsila and [indiscernible] on the Marine side.

So on Energy, in some countries, some -- it can be that the customer have 3 plants and one of these 3 plants can be another make, and they really want us to do it, then we help them with the maintenance. You don't sell a performance contract, but it's more of a maintenance contract when the customer get the parts for us and then we do the maintenance. So it would be more like that, I would say. But we have some of these.

The other question I had was just on the Royal order that you announced. Could you just help us again on how you book these orders? And is there any size reference that you could give us in terms of what this order could actually be worth?

I mean, what I can start saying is that the contract starts in the beginning of next year, so we will book it in Q4. Now size wise, I don't know if we have ever provided this kind of information. Okay.

We cannot reveal it.

And very finally, if I may, is just on the basically increasing the agreement basis with the alternative engines. Do you see a higher attach rate for agreements for the dual fuel engines.

Yes, absolutely. I would say, generally speaking, now speaking Marine and Markus [indiscernible] should comment on the Energy side. From a Marine perspective, we see customers appreciate the level of service we can provide -- even higher level of service of assistance we can provide when it comes to new technologies. We've seen this with dual fuel. We are seeing this also for the new alternative fuels that are coming to the market.

It's same on Energy. If you have new products, new technology, it's easier to get agreement, so to say. Customer is seeking more help normally then. So it's very logical, I think.

Next question comes from Antti Kansanen.

A couple of questions for both guys. Maybe I'll start with Marine and on the retrofit side. So could you maybe talk a little bit about what you've seen so far in terms of what type of customers have started to move regarding kind of the regulation that is upcoming? And I'd be interesting for the next couple of years. What is really kind of your addressable market, your core competence where you have kind of the best advantage when it comes to technologies or subsegments within the Marine. Are we talking about the traditional segments where your competencies are high? So how should we understand the opportunity?

Okay. So if I try to answer the first part of the question first, on the retrofits. We have seen interest and demand from the maritime industry as also shown by the order intake, decarbonization being the major driver. I mean, in order to meet the decarbonization targets, you need to operate on the existing fleet. You cannot just think about new builds. And we have a wide range of solutions that can tackle this problem. Going from the propulsion efficiency upgrades, some of which have been around for quite some time. I would say, technically speaking, a customer will always go for efficiency first before switching fuel. It makes sense, right? I mean -- so anything that can gain efficiency will be interesting. From this perspective, also electrification projects of various size and complexity. And we have seen in North Sea already years ago, some kind of hybridization of the PSVs, for instance, and construction vessels. One area that's been very successful lately has been the radical power derating. And that's typical for 2-stroke powered vessels that were designed to operate in a certain speed and now are operating at lower speed. Container ships could be a good example of that. So this is definitely something that is encountering a lot of attention from the market. And of course, then alternative fuel conversions. I mean, we have done the first retrofit. I mean, we've sold the first retrofit for methanol and the ammonia one was in the news just a few weeks back, also very exciting with [indiscernible], in this case would be a PSV. Then to say where we see this, it depends very much on the type of retrofit. I mean, when it comes to propulsion efficiency upgrades, I would say that it's very common in emerging segments. Alternative fuel conversions, it also depends maybe on the support the customers can get locally to go through some of this. I mean, [indiscernible] PSV for instance, in Norway or the -- I mean, the radical power derating in that case, I would say it makes sense for the customer. So it's just -- of course, there is an impact on the carbonization because by reducing fuel consumption, you also have emission reduction, but effectively regaining efficiency for large vessels can mean fairly short payback time. The one I talked today, the SG conversion is another example where we see a technology. As of now, we would see fitting very well in the LNG carriers because the LNG carriers burn the cargo they carry. Many carriers bring cargo to the EU. The EU regulation is already out. The EU ETS extension was already enforced in 2024. And we see FuelEU, the directive out of 4 that were brought in with the EU Fit for 55. FuelEU becoming more expensive as we progress. It will start in 2025 by setting a target of minus 2%, but we get to minus 80% by, remember now, by 2030. These drivers, of course, are prompting customers in that trade to look at options. And SG can really make a difference. Will NSG be relevant for other segments, we don't know. But at this point, we see clearly an interesting case there. We'll see how the market reacts to that. I don't remember the second part of the question, to be honest.

No, probably me either, but maybe I'll ask again in a sense that if you think about kind of the client discussions that you've had, I mean, and sometimes in the marine industry, there's a bit of a wait and see thinking around your clients. How is it -- I mean, you've seen growth but from a relatively small base. Do you still see a lot of clients who are kind of on the fence and waiting in terms of that this business could be much more bigger going into the next couple of years? Or are people starting to activate a bit more now? Or what's the overall sentiment?

In relation to decarbonization, you mean?

Yes, the decarbonization retrofits, I mean, being compliant going into next?

Clearly, I would say the -- and this is the message I think we have brought forward several times. Clarity on the regulation is key. And therefore, we see customers moving where they either see a clear benefit for reasons not necessarily related to regulation or because they want to test the waters and understand -- gain a position and understand the technology. But there has to be clarity on regulation at international level. Today, I would say that EU has brought clarity with some regulations, and we see that where that happens, you can also see the interest of customers. But I think with the IMO, then we will see a big change when the IMO will bring forward clarity on things like carbon cost and so forth.

All right. And then my question for Markus was related to the running hours, which have been very stable in the past couple of years. And I just wanted to better understand what gives you the confidence of expecting stable hours forward because you're clearly seeing a much higher growth on the balancing side where obviously, I guess, naturally, the hours would be a bit lower. So maybe a twofold question. I mean, have you been a bit surprised how stable it has been in the past couple of years? Are there any explanation on that one? And why should they remain so?

It's a good question. What we see is that even if we sell -- U.S. is by far the biggest balancing market because it's an open market today. But what we see is that, well, if they expect something now, they normally run a bit more. Our technology is better than -- they have a need there, and our technology is better than turbines. We believe that in this market. So we think they run more because of this. And this we have shown in Australia and U.S., which are markets where -- and this is one of the reasons. The other is we, of course, still have a mix between balancing and base load. And it's going to take some time only with 4,000 hours because that's still -- it's below 50% capacity. So it's still not that high. So the change is going to take quite some time. Last one is also on the decarbonization side. You see on islands where they have a lot of penetration, but you still need to run engines to keep this grid going. It's very difficult otherwise. So we still see that we will have a good role for many years to go, and we believe it's going to be quite stable. After 2030, okay, we don't know that. But until that, it looks pretty good.

Next question comes from Sean McLoughlin.

A couple of questions. Firstly, on Marine, the Red Sea impact. I mean, you've been talking this year about ultimately the opportunity for more service from vessels traveling longer. I mean, Maersk is talking about the ripple effects of this disruption. Could you maybe quantify what impact you've seen year-to-date on service and maybe your expectations through 2024? I'm assuming this is all transactional? Or is there also a way of locking these into agreements as well? That's the first question.

Well, as communicated earlier, we have said that it's impossible to quantify it. But maybe, Andrea, if you want to elaborate with drivers behind this.

I have to be honest, I would also -- I wouldn't be able to quantify it, but in terms of drivers, of course, if the vessel operates for longer periods and the interval -- the maintenance interval will occur earlier or there might be additional support needed, but I wouldn't be able to comment on how much that impacted, to be honest.

Service correlates with running hours and more running hours or service.

Have you already seen service intervals closing of -- some of your customers that are asking to bring forward service? Is that another way to maybe think about it?

Again, not specifically connected to this event, at least now that I know of. But again, also perhaps on the transactional side, there is more visibility of this. It is on the agreement side. I have not heard of connection to this.

And secondly, on the Royal Caribbean, just if I could probe it a little bit further. I mean, how might it compare in size and in terms of upfront payment to the Carnival deal?

We are not commenting on that. We are not commenting commercial terms.

Very good.

Then next question comes from Johan Eliason.

I was just a bit curious, you mentioned for the agreements that you have initially focused on the LNG and the cruise segments. Now I was wondering about LNG, you are not anymore supplying the main engines in most cases. I mean, if you only have the auxiliary engine on an LNG carrier, would you still sort of target these types of agreements for that part? Or how does it look like in that case?

Yes, absolutely. We do that, and we also support 2-stroke engines made by WinGD. So in many cases, the 2 combine into an agreement. And this -- obviously, the scope of the agreement will be different. If it's an auxiliary engine or a main engine, there are different requirements. But we are doing this already now.

Okay. And the value, if it's a WinGD, would that have been as high as if it would be one of your 4-stroke engines?

I wouldn't be able to comment on this.

I think it's also very difficult to say because it depends on running hours, what kind of agreement you have, et cetera. So...

But there's no necessarily disadvantage basically. I mean, it's not you selling the license anymore for the WinGD part.

No, it's included in the service volumes, correct.

Good. And then I was thinking about this, the contract expansion. You said that it's obviously easy to sell the agreement when you sell a new equipment and you have higher coverage on the new capacity. I was just wondering a little bit why the older capacity then doesn't have the coverage. Is it so that you didn't really have this agreement focused when you sold the capacity, I guess, a decade or 2 ago? Or is there sort of an attrition rate as the equipment age naturally. So you don't tend to have these agreements after 10 years or so. I mean is there a window of opportunity for these agreements in terms of the age of the assets?

So I would say like this that as long as it has a critical role in the grid, it's easier to have an agreement. If the role becomes less critical then it's more difficult. I would say that's very clear. And then I think the rest is, if you have an older installation, they have also learned how to do it, the customer. They have found a way if they have been doing it for 10 years. That's why it's not always easy to get them back. You need to find something that really attracts them or they have some problems or some mismanagement. That is normally when you have a chance to come in, I would say, that's how we work.

Next question comes from Akash Gupta.

I have two, and I'll ask one at a time. The first one is for both Andrea and Markus, and that is on competitive landscape in service. Maybe if you can talk about where do you see a higher level of competition and who these companies are? Are these OEM competitors? Or you also have some competition from large customers, and are there any pirates selling spare parts for your engines in both Marine and Power Plants? So that's the first one.

So I can start, Andrea. I would say the real competition, the toughest competition is always in the new build phase. So when you sell -- when they compare the technology to others so turbines or other engine makers, that's when it's toughest. When the installation is on the ground, there is always competition. It can be many times then -- but many times in Energy, it's local companies in that country that's the competition. I think where they struggle to win over us is since we have -- we are still the O&M and we have the digital and we have good offerings. So many want to stay with us. So I would say no real global unless it is in the beginning when we actually offer a product end-to-end.

And I would say that in terms of service, we have always pursued the strategy of being able to offer the best service network to our customers. And that's something that makes us different. And of course, new technologies also make it interesting for customers to talk directly with us. At the same time, there is always ways to do things more efficiently. So we are alert of smaller companies, maybe trying to be more flexible and we continuously innovate in our services. This is -- so continuous improvement in synergies. I mentioned several times potentially -- the synergies we are trying to capture also between Marine and Energy. All of that comes from the culture of continuous improvement that is deeply rooted in our company.

Okay. The second one is for Markus. So basically, we have heard about competition between large engines and smaller gas turbines when it comes to providing power generation. And one of the consideration for customer is often service. So maybe if you can talk about when it comes to service, what are the advantages with power plants compared to, let's say, gas turbines that the customer may prefer to go with power plants for their requirement instead of gas turbines.

Yes. I would say one of the biggest differences is the starting time. Still, it's also about -- on the maintenance side, the turbine normally has, they call it, starting equivalent hours. So if you're in a balance, you might have to start a couple of times a day which becomes very tough for the maintenance part for a turbine compared to an engine. An engine is better suited to be started and go up and down, it doesn't matter really. So there, we have a competitive advantage. Also then, I would say turbines, they need to go to another type of turbine if they're going to go to the balancing market. So we see -- we are competing more with our derivatives today than we did before, which is more expensive for them. And I think we can also bid them on efficiency. So if the fuel price is high, we can bid them or you have to pay for CO2 for instance, we bid. So I would say we feel comfortable with our product and solution.

And then maybe just a quick follow-up to that. When it comes to service, I mean, I've heard that in some cases, when it comes to turbines, the customer or OEMs need to bring turbines to their service center site. And then only they will be able to do service depending on what's wrong with the turbine. Is that the same case with these large engines as well that you depending on the type of fault you might need to bring in your service center and then do the fix or you can just do it on the site, no matter what is the issue with the engine?

I also the difference also in technology is that turbines do fewer, but they do really big ones, which means that it's like you say, then you need to bring them away. We never bring anything away. We do all services on the engines in the power plant. We don't have to take away anything. So we have a bit more often, but they are smaller ones, smaller services than compared. So that's why I think that's a difference in technology.

And maybe just a quick final one. When it comes to cost, so let's say, if I have a 200-megawatt gas turbine versus 200-megawatt engines, when it comes to aftermarket, is it fair to say that the engines would be a lot cheaper to service over time compared to gas turbines? If you have any thoughts in mind.

I think it's going to depend on how you run too much. You need to understand how you're going to operate it. So I think for sure, turbines are going to be better than us on certain profiles, and we are going to be better than them on certain. That's how it works but mainly, I would say where they always have an advantage is, of course, if you run full baseload and on gas. I mean, then that's -- and it's really big. So let's say, when you talk these giga projects, so 1 giga, then yes, turbines are the choice in majority of the cases, that's how it works. But if you go down and running hours a bit more up and down, you need more flexibility, you need more reliability because for us, it's easy to add units. So if you have 100 megawatts, you add 1 or 2 units more and you can have full availability. And that's our advantage. That's more difficult with turbines which are bigger.

Then I have received one question by e-mail, and this is about Energy Services, so for you, Markus. Could you describe the further opportunities you are seeing in parts predict program in Energy? Has the program been received more by base load or balancing power customers this far?

I wouldn't say I have seen a difference in operating profile. I think it is more customers who still face some issues, normally that they want to improve their planning, so to say, of how to do the maintenance. And I think they are really good at helping that. That is the main driver, but no difference in running profile, I would say.

Then moving on to Sven Weier.

It's just on the utilization of the agreement workforce that we have. I was just wondering if you announced contracts like the Royal contract today, does it come with a dedicated workforce from you guys? Or can you kind of implement that within the existing workforce? How does it work?

Well, we -- of course, as I said earlier, we are striving to use the existing field service organization as basis. And of course, if there is more work, we have more people. I mean there was a chart I showed where we -- you could see, we have increased the number of field service engineers, which I think is also a good sign of the work that we are getting from the field, from customers.

And so finding the right people is also not a limiting factor for you in the business?

I would say that in the maritime industry, in general, if you talk with ship owners, you will hear that crewing is always a concern, but we have managed to find competent people to our organization. So it's not something that necessarily comes easy. But if you're good at what you're doing, you can get it. And of course, the company [indiscernible] is also appreciated by people working in the field.

I mean, the reason why you, for example, also on the energy side, where you grow 1% each year, is it also because we have to manage the growth from your end a bit and not just also finding the right clients, but also be able to manage it internally?

No. I think we could run faster. It's not easy as you say. As Andrea said, you need to put a lot of efforts to bring people in. But I think we have a lot of training. We are training also a lot of our customers. So we have a good training facilities around the world. We have really good teachers. So I think we have all the ingredients to grow this and I wouldn't say no to a deal because of the capacity on people. No, I wouldn't do that.

The next question comes from Antti Kansanen.

Yes. It's a follow-up on the previous question on the service competition and on the pirates. And I mean, in Marine, those clients who will never naturally be targets for your agreement based who are more like transactional, only buying parts. Is there any number on what's your coverage ratio on spare parts, on those type of clients? And is the pirate spare part competition? How is that nowadays?

I would say that, as also Markus mentioned, probably the biggest challenge with customers who currently don't see the value in agreement is because they pursue a strategy of having all the knowledge and perhaps even a riding crew in the organization. So in those cases, it's on us to show that we can actually deliver more value. And those kind of discussions take longer times. On the piracy, we don't know exactly how to comment, to be honest. And I don't know if Hanna-Maria, we have used -- we have any...

We have not opened up on that. It's, of course, also very difficult to quantify, let's say, how much do you lose to pirates. But you know -- because they didn't buy it from you.

Well, maybe another way of asking it, what's your strategy on kind of the pure transactional parts client? I mean, parts business is good from a profitability point of view. And what's your strategy on those clients who doesn't really make sense for them to buy agreements, but would be a very lucrative parts clients. Is there a way to make that business bigger? Or is the focus fully on the agreement side?

No, of course, I mean, we value all the possible business we can have from customers. And while agreements actually bring a certain type of value of customers, if customer prefers something else, we are developing solutions for that as well. I mean, in terms of -- and I would say, particularly on the long tail of customers, that by occasionally, we are trying to make that easier for them to do so, and there are measures in place also for that. So development, of course, is in terms of service innovation, happens across the entire spectrum of the service business in Marine.

But Andrea, I think it's also fair to add that, let's say, the digitalization will give us much more opportunity and big data on, let's say, approaching customers in advance, let's say, for spare parts, selling, et cetera, et cetera, and not wait for them to, let's say, search the market, find perhaps a pirate as being, let's say, first to approach them and say, hey, looking at your running profile, et cetera, et cetera, you need parts pretty soon.

And I think we have an account management model also. So for transactional, you have account managers taking care of them. So in a way, they are working a bit like an agreement manager, to be honest, because they keep the relation, they know what they want, they try to help them also with planning and other things to keep them close and provide technical support and so on. So you have a lot of things still that is, let's say, sticky for Wartsila because all the technical knowledge is on our side and normally, we can have a good also transactional business. We just don't have an agreement, but we actually work very much like with an agreement.

And I would say, what I tried to say during the presentation is that we don't look at this as in a position to each other. A customer has a good experience as transactional customer is more likely than to value what we can offer as an agreement. So transactional customers for us are important.

Okay. Then I actually had a follow-up on Markus as well on the 4,000 hours, the running hour number. I wanted to maybe understand a bit better what's behind the average. I mean, in your cases, it's not always clear cut what is base load and what is balancing. But what's the typical range? I mean, how much of your installed base nowadays is something that can be classified as base load and what type of running hours is that? Versus, let's say, you sell a new U.S. balancing plant and what type of running hours is that client planning to have?

If I say how we do, it is, take the total megawatt and do the average on the running hours compared to the megawatts. That's the only thing that makes sense for us. So that's how we do it. Then our classification, especially in the communication material is used 3,000 hours. So above or below 3,000 hours. However, there are very few engines that reach, let's say, the potential of over 8,000 because you have an in-plus configuration with high reliability or you run a bit up and down during the day. So some engines will stand. So even if we have baseload, there are more around this 5,000 to 6,000 hours, I would say. The typical balancer, I would say, when it is solely, it's around 1,500 hours, that's normal. And it can be also permitted to that. So that we see in some countries when you read tenders, you see that. Then in other, they say this and then we see they run 3,000, 4,000 even a year. So it depends really on case to case. But we use 3,000 and I say a very few under 1,500. If they are at least newer plants who have been, let's say, who have a still a payback period to be done.

And then I have received one more question by e-mail. So this is Andrea for you. You were a bit hesitant to comment on the growth prospects of Marine retrofit business volumes in the future as you refer to the need of IMO and other regulators to bring more clarity. Assuming that such clarity is achieved, which would be quite a lot, and costs of noncompliance are made clear at the vessel owners. Is there scope for radical de-ratings of 2 stroke vessels, so 2-strong vessels and propulsion retrofit to double or triple in volume for Wartsila over the coming 2 to 3 years?

The -- in terms of growth, what I think we can absolutely say is that we believe in the strategy that we have. And we clearly see interest from the customers on retrofits. And we see also the customers -- see those retrofits as a confirmation that Wärtsilä is a leading technology company that will be with them throughout the life cycle of the vessel. I wouldn't be able to comment on what the volumes would be. I don't know if we've shared that before, but it's -- I think that the kind of offering we have today, it's clear to the market. I mean, I saw we shared in the previous marine update a slide where showing what is the potential value of the different retrofits and what they tackle. And I think I couldn't be clearer than that. For each one of these, we see customers interested.

So for those who are interested, maybe you can go to see the material related our Marine team call from May. And in there, we said that total investments in retrofits are estimated to be EUR 15 billion to EUR 20 billion over the next decade, and this is based on Clarkson estimates. So it's quite a big figure. So thank you, everybody. Unless Arjen, Andrea or Markus, you want to add still something?

No, I think.

Otherwise, many thanks for your presentations, and thank you for all of the good questions and active dialogues. So looking forward to meet you in pre-silent call on October 3.

Thank you very much.

Thank you.