Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Welcome to Wartsila Strategy Call. I'm Hanna-Maria Heikkinen, and I'm charge of Investor Relations. Today, our CEO, Hakan Agnevall, will discuss some of our long-term key opportunities. And after Hakan's key messages, there is a possibility to ask questions. As a reminder, we will host a pre-silent call on January 9 together with our CFO, Arjen Berends. So let's leave the questions related to recent trading and detailed financials to that call. If you have a question, please use raise your hand functionality in Teams. In case you don't have the possibility to use raise your hand functionality, you can also send a question by email to me. Please, Hakan.

Thank you, Hanna-Maria, and thank you for joining us. Christmas is coming. And also, I mean, tomorrow, we also have another investor event. I think we should advertise that a little bit. We have a dedicated event to our power plant business. So Anders and his energy team will talk more. So please join if you have the opportunity. You will learn more details about our power plant business, which is really developing in a good way, by the way. I mean I started with a short overview of the business and how I see it, also, I mean, related to the execution of our strategy. So I mean, if we start with the demand situation, I think it's holding up. I mean looking -- you know our guidance, we have guided for a better demand situation both in Marine and Energy, and I will say it's holding up in a good way. If we look on the Marine side, it is a combination of 2 major factors. One is that our core segment is growing faster than the Marine overall. And the other element is the decarbonization story that we are benefiting on top, so to say. So if I start with the first cruise, clearly, on levels higher than pre-COVID. Also you have seen that the big cruise operators, they are starting to place orders for new vessels and that will by time, of course, if we are successful, things go through to the absolute order intake. Normally there is a lead time 6 to 12 months between that the shipyard gets an order and if we are successful, absolutely, we will get an order. But the pipe looks very promising. If you look at Clarkson data, I think 20 projects will be placed. The market is up like 40% year-on-year if you look their forecast for next year compared to this year. So, positive environment. Ferrys has developed. I mean we know average age is 29 years old, so there is a need to do quite a lot of renewal. And I think Clarkson is forecasting 25% uptick to next year. We see a lot of activities. So -- and then offshore, a lot of activities. And so for on the new build side, it has been not so active, but I think Clarkson is just forecasting 14% growth similar year-on-year, and I think there will be new builds coming through, so to say. So, saw strong growth in core segments. Energy carriers is a little bit slower now. I mean, it has peaked and it's coming down. Lead times at shipyards is fairly long. But there is new Chinese capacity coming in, I would say. So let's see how it evolves further. Containers are picking up a little again. There was a peak, it came down, but now it's picking up driven by the fairly high rates and we all know the geopolitics behind that. And yes, unfortunately, the geopolitics do not seem to get easier with that latest development. So I think that was a quick expose on the segments. Then on the decarb story for Marine, we do see -- it continues, I mean, driven primarily by regulations and we know EU ETS, I mean the IMO 2023 rules, et cetera, et cetera. Our customers are looking to go green, but green is not black or white. There is not one fuel or not one solution that fits all and fits all applications. So it's very much this dialogue continues on what is the best solution for a specific owner, for a specific application. Fossil fuel is going to be there now. I think there was a lot of -- especially on the container vessels, methanol, it's swung back a little bit and on the auxiliary engines. Now it's more back to LNG again. So -- and either way we go. I think Wartsila is benefiting. On the LNG side, as you know, we keep on also investing in reducing methane slip and I think we have achieved quite a lot the last couple of years, so to say. So there is a vital business there. Retrofits, we see it will be one of the major way forward for service business and with methane slip production, fuel conversions, fuel efficiency. So that is also driven by, you could say, the whole decarb sentiment. Carbon capture, we talked about that before. We have the first pilot installation this year and we're going to go for broader commercial release next year. Hybrid systems, we still continue to be the market leader, combining battery storage with vessel -- with engines on the vessels and we see this developing also. This is also a major retrofit solution, [ UBID ] and retrofit going forward. So that was a quick expose on Marine. Energy, I think the general narrative on balancing power continues. You will hear more about that tomorrow if you join. But I think we do see positive development. U.S. is very strong. It continues to be very strong. Even the shift of an administration, we see that there is a strong sentiment for renewables, wind and solar, you could say, in the mid-section of the U.S., all the way from Texas in the south, all the way up in this mid-corridor. And it's primarily driven by the need for cheap energy, for affordable energy. It's not primarily driven by IRA or federal subsidies. And that's why we also think that there is robustness in this demand side regardless of new administration, so to say. And of course, more renewables means more balancing power. So we are working, of course, with ERCOT, Texas Power System, but also with the MISO and SPP Power Systems. Balancing -- I mean, baseload power, our traditional markets, we follow them closely, like Brazil, auctions coming, let's see, like Indonesia, like Southeast Asia in general. So there are good opportunities. On the storage side, energy storage, we also see a lot of activities in the market and there is demand. Of course, tariffs in the U.S. creates questions and uncertainty when they -- if and when they will be introduced, what magnitude, et cetera, et cetera. So that creates some uncertainties. But in general, we do see continued strong demand. Strategic review continues. Nothing new to report. It's the same sentiment, growing business, but dilutive from a group margin perspective. We want to create -- yes, we want to support our customers and grow the business to create value for our shareholders. And how do we do that in the best way? Do we keep owning the business as today? Do we divest -- possibly divest? It's the same agenda as we communicated before. We clearly understand we've been doing this now for a year. There has been a lot of activities. I can't go into the details, but the fact that it's taking time does not reflect the low level of activity, rather the contrary, I would say. So a lot of activities there. Then -- so that's energy. Then services in general. So service, both in Marine and in Energy. Service keeps growing. And I mean, clearly, the book-to-bill is higher than 1. It continues to be high than 1 and we do see a positive development going forward. And it continues to be bigger than 1 for all of our disciplines, parts, field service, service, retrofits. So we do see continued positive trend for our service business. Considering the projects and certain agreements, that could be -- it's a little bit lumpy. It swings a little bit back and forth, but the overall trend is positive. We are very clear on that. Our overall financial targets, same message as before. We are on a solid path to reach -- I mean the growth has clearly reached that, but of course, our profitability, and we have a clear path to get there. I think that was a short summary, and I leave the floor open, please.

Now there's plenty of time for questions. [Operator Instructions] I can see that Sven Weier, you have raised your hand. Please go ahead.

Just the first one is on shipping decarbonization. I was just wondering when you speak to your clients, is there kind of a wait and see for next year, kind of the level of carbon tax that is obviously going to come from IMO. Is it still the -- like your top clients only investing in decarbonization and the mass of the clients is having a wait and see for next year? That's the first one.

Yes. No, in general, I would say no. I mean, clearly, if you look at -- if we start with carbon capture, if I start there, there is, of course -- there is a lot of interest of the early adopters. I mean, if you use this classical technology diffusion curve, you have the early adopters, you have the big mass and you have the laggards. So on the early adopter side, there is a lot of interest. However, I think for getting to the broader set of customers, the IMO framework will be very important, how that evolves on carbon capture. But I -- so, on the early adopter side, a lot of activities. Then if we look at the engine, more engine-related fuel upgrades, et cetera, et cetera. I don't see the wait and see. I mean, IMO 2023 with CII index, et cetera, it does impact, so to say. So I don't see a big, big wait and see on that front, so to say. I think owners are aware that they will need to -- I mean, just using the CII and also FuelEU Marine and the European ETS, they will have to take action, so to say. Of course, if -- to your point, if IMO would to adopt a broad ETS regime, I think the whole transition will certainly accelerate. But I don't see the -- any hesitation in anticipation of MEPC.83(44) for, you could say, the general engine offering. I think the challenge with the new green fuel is still the fuel availability.

Yes. I guess we'll get some sort of carbon tax next year. The question is just a little bit how high is it going to be, right? And is that really incentivizing a shift? The second question, if I may, was just on...

If I may comment, Sven, I would say that, yes, we can all discuss what level it will be this year. But I mean, please do not forget the long-term perspective of -- on the assets. So even if it starts at a certain level that is perceived low, how will that develop over the coming 5, 10 years? That will also be an important factor in -- for the fleet owners and how to consider that decarbonization journey.

Yes. Fair. Second question was just on storage just regarding the Trump administration. I mean, Fluence had a nice chart in their Q3 slide deck in terms of domestic assembly manufacturing of the batteries. I was just wondering if you could give us an update where you stand on this. And are you still waiting maybe for what the policy is going to be at the end of the day?

No, I think we have a clear sourcing strategy for having -- first of all, having multiple sources outside of the U.S. So, sourcing from different countries outside of the U.S. and then also having a U.S. sourcing strategy. I think you need to have all of those in place, so to say, and we are developing it. Then, of course, there is a certain timeframe for this. And as we know, the cell production in the U.S., it's developing, but yes, time elements vary a bit, so to say.

And you said, of course, I mean, this seems to have an impact on how the orders are maybe awarded in the short term in the U.S. But on the other hand, you had a big contract announced last week, I think. And you were confident in the Q3 call, right, that you would have a catch-up. Is that order kind of representative of the activity that you see outside of the U.S.?

No, there is a lot of activities outside of the U.S., and for instance, in Australia, but also in other markets. So that's why, I mean, the kind of indication that we gave from Q3 is still valid, so to say.

Next question comes from Max Yates. Please go ahead, Max. Max, we cannot hear you. You may be muted still.

Sorry, we can't hear you, Max. All right. Maybe we should...

Yes. Let's continue with Vivek Midha. Max, you can raise your question a little bit later.

I had a couple of questions, both on Marine, if I may. The first was to follow up on your comments around the merchant segment. You've mentioned containers, for example. Clearly, it's been a better year for contracting so far. And I just wondered what you think about the sustainability of that demand. Would you see it continuing into '25, '26? Rates are high now. How are you thinking about that on a more midterm perspective?

First of all, I should say it's very difficult to forecast. And I normally make the comment that -- Clarkson, I have a lot of respect. They are probably the most credible entity in this arena trying to forecast. The problem is they're always wrong. And I'm not saying that we have a better crystal ball than Clarksons. So that's why I say I have a lot of respect for them. If you ask me my personal view, I think that, yes, there is new tonnage coming out. But I still think if these rates will continue, and we know the kind of geopolitical driving forces behind it, I think there is still opportunities for positive sentiment going forward.

Understood. My second question is on the decarbonization opportunity. And I appreciate this is still opaque. But if we think -- you mentioned, for example, that fuel availability is still one of the biggest constraints. But then if we talk to, say, I know utility developers, they're often having challenges with the economics of their projects in developing things like hydrogen and therefore, the sort of byproduct of that. So just -- I don't know how best to phrase it, but in terms of the economics of developing green fuels and so on, how do you see that developing? Is it a problem really at the end user level that LNG is still much more viable than, say, methanol and so on? Where is that disconnect coming from?

I think the -- I mean, it's a little bit chicken and the egg effect, and we know -- there has been some, you could say, setbacks or people pulling out of certain projects for green fuels. I would separate between the carbon-neutral fuels and the zero-carbon fuels. So zero carbon is hydrogen and ammonia. That will take longer time, hydrogen and ammonia, because clearly, it will take longer for the demand side to build up, at least from -- in the marine industry from our perspective. So that's -- so those projects are a little bit more aspirational, and therefore, they are a little bit more risk -- the risk-reward balance is different than if you look at the carbon neutral like methanol, biofuel, et cetera. So I think we will still see the carbon neutral going ahead, maybe taking a little bit longer time than if you go back 1 or 2 years. But -- and it's all -- it's -- why it's hard to predict? It's this chicken and egg. How fast will the demand and how will the supply come after? I mean, my perspective is that people that have invested, for instance, in methanol, they are contracting for methanol. And I think we will see -- it's this gradual process when you see, okay, some methanol is coming available, the methanol vessels that are fueled by methanol, they will start running. It's a -- it's not like a digital shift. And this transition will take time clearly. That's my view. And then -- but also coming back, I mean, if we look at what does it mean for Wartsila and our business, yes, of course, it affects the pickup of our carbon-neutral and zero-carbon engines. But there is a strong focus on LNG, and we are very well placed in the LNG space. So I think we still have a good position.

Next question comes from Anders Idborg.

Two questions, please, on thermal energy. Maybe a more short term first. I've been intrigued by these comments around the data center opportunity that you mentioned. So I just wondered if you had any update there.

No. I mean, no, nothing more significant to report today. I mean -- but just to recuperate the logic for the broader audience, so to say. I mean, if we go back a couple of years, I mean, okay, basically, the size of the data centers are growing. And that means a changed situation on how you would power them. So if you go back a couple of years, you were maybe looking at data centers requiring tens of megawatts, 10, 20, 30 megawatts. And the general kind of business model was then that the data center developers, they went to a utility and they asked, "I have a 20-megawatt load here. Can I have access?" And then I will buy separately some high-speed generating for backup when the grid is not working. So that was, you could say, a conventional business model a couple of years back. But now since the size of the data centers are growing, I mean, now we talk the data center sizes of like hundreds of megawatts, 2 hundreds of megawatts. When the developers, they go to the utilities, the utility says that's an interesting business opportunity for us, but can you please come back in 10 years because we are not ready to bring you on at 200 megawatts. And then this -- because basically, the grid is not strong enough and they don't have the power generation to supply the park. So then the dynamic shifts and the developers, they start to need to develop their own kind of energy production. And this is where we come in because this -- and then, it's a baseload generation and a baseload generation from 20, 30, 40 megawatts to 200 megawatts. This is our sweet spot. And it needs to have high uptime and high reliability. So that's this kind of simple logic why this is potentially shifting. But I've also been very clear that let's look at this. I mean, it looks like an exciting opportunity, but let's see how this evolves, so to say, because it's still early days. We have our agreements. We talked about that before with AVK, which is a developer of powerful data centers. And we have 2 projects with them on Ireland, so to say. So -- and these are the projects we have to report so far.

Okay. Fine. And then more generally on thermal. So when we look at those margins now, they are on solid double digits, which is quite a bit higher compared to where it was pre-COVID. And even at that time, the volume of equipment was much higher than it is today. So I struggle a bit with these big pieces in terms of, okay, service is a bigger piece now. But if we go forward, do you see the further margin potential on the services side or on the mixed services versus equipment or on the equipment side as such?

So we don't give guidance on margin and the margin development. But I mean, what has happened? What are the big changes? I think services is clearly one, but the other is that we have shifted our focus from EPC to EEQ projects. So I mean, today -- and we talk about that. I mean, today, our order backlog is 80% is equipment deliveries, 20% is EPC. If you go back a couple of years, I would say that the EPC part was like 40%, 50%. So -- and there is quite a lot of difference in profitability level in general between the EPC and EEQ contract because in EPC, of course, you run a lot of civil and installation for your books. And of course, risk management is very, very important. And this is, quite frankly, if you go back a couple of years, we didn't get this equation right. So that's also a big driver for our profitability journey. Now -- and Anders, we will talk more about that tomorrow, but I think the team, we are getting more and more robust. We have made changes to the leadership. We have made changes to the processes. And I mean, the outlook from a business perspective looks good. As you know, we have also streamlined our footprint, closing manufacturing in Italy. So we have a good team, we have a good footprint, and we have a good market. So I think there is a positive sentiment. And services will continue to grow at the same time.

Next question comes from Antti Kansanen.

A couple of questions on profitability as well. And if we start with the service business, I mean, the moving up the value ladder is the primary driver in your kind of investor materials. So, could you maybe talk a little bit about how the profitability in these lifetime contracts evolve over a lifetime? I mean, you've done kind of adding new clients to the agreement base in the past couple of years. Where are we in terms of you getting paid for the fuel efficiencies and uptime? I mean, are we in a situation where you have gone in and done a little bit of an investment into the installed base, and we still haven't kind of seen the revenue and profitability benefits coming through? So maybe you can talk a little bit about that one.

First -- I will certainly comment on moving up the service value ladder and specifically on the service business. But I want to make one general comment before we go there because as you know, and I think this is a very important part of our growth narrative in services going forward. You could say we talk about different disciplines in service. These are the steps on the service value ladder. So we have spare parts and field service hours. We have the agreements, and we have a broad array of different agreements. We have the retrofits. I commented on that already earlier. And then we have the performance-based agreements. And this is where we have this mechanism for sharing savings, et cetera. Now the good thing here is that all of these 4 disciplines, book-to-bill continues to be above 1. So the key message here, it's a broad growth of our service business. Yes, we have emphasized moving up the service value ladder because that has been a little bit of a new element or revitalized element. But I would really like to underline that all of these 4 disciplines, we are growing. One of the challenges that we have is that some of the retrofit projects, some of the agreements, they are kind of -- they are big and they are a little bit lumpy. And therefore, you can have these swings on Q-on-Q. And I know some of you are picking up and you get concerned about is service -- will service continue to grow. And it's a clear message, look at the book-to-bill for all 4 disciplines and you will see it above 1. And from our perspective, there is a continued underlying positive sentiment. So now zooming down to your question on the service agreements, and in particular, on the performance-based service agreements. Now this is still -- if you look at -- if you take agreements and performance-based -- those 2 -- sorry, together, performance-based is still a smaller piece clearly from a revenue perspective. But we continue to develop those. And I mean, the latest that we made public was our contract with Royal Caribbean. There will be an order intake for this quarter, but we talked about it last quarter. So yes, I mean, the logic there is -- you're right about the logic. When you enter those -- these could be 10-year contract. I think now with Royal, it's 5 to start with. But it's long-term contracts. And you do a bit of investments from our side in equipment, in people in the beginning. And then you have setups where you share upsides on fuel consumptions and reaching certain uptime and reliability targets. So these are the fundamental mechanisms. I can say that -- when we look at the execution of those, I mean, you could say the basis for executing in a good way, both for customers and for ourselves is, of course, big data and extracting data and using that data together with, I would say, industry-leading service team. That's the secret sauce you need to get together, so to say. But so far, I mean, these contracts, they are certainly developing value for our customers in terms of fuel saving, uptime reliability, and they're also delivering values for us in terms of revenues and profitability.

Yes. I'm just kind of trying to get my finger on the fact that, I mean, it is the biggest profitability driver for you. But if we look at your service business, you are moving a bit from kind of transactional parts-based business, which tends to be a very high profitable business to more agreements. And then obviously, the number of service projects or the share of service projects is going. So that's not necessarily margin enhancing within the services. So should we just think about the overall sales mix that, that is the primary driver for margins that the overall level of services is growing and not specifically the agreements, even if you talk about kind of the moving up the value ladder on the primary driver?

I would -- I mean, I think a more robust way to look at it because it's to look at overall, because, yes, you have -- I mean, one of the challenges we have is the mix. And sometimes 1 of these 4 disciplines, they are -- in 1 quarter, they go up. Next quarter, something else goes up and then you see the margin swings and you are clearly trying to analyze it. And we will not split that up, sorry, but we won't for competitive reasons. So I mean, I would suggest take the overall approach and look at the growth. And I think if you look at the overall profitability, it's in a good level, and we will continue to protect it.

Okay. And then the last one from me is the new build profitability in the sense that fundamentally -- how do you look at it? Is the level of, let's say, EBIT margin or whatever P&L metric important to you? Or is it more about being stable, being cash positive, avoiding risks and ensuring kind of the installed base growth? Do you look and do you incentivize kind of new build profitability individually in your organization? Or is it just a function of the lifetime earnings?

No. I mean we -- I mean, there are certainly -- we incentivize the people working on new build on the new build side. However, what we also do -- because we look at the new build and service business from a holistic perspective. I think you could say that -- and as you know, Wartsila, we have been organized in many different ways through the years. And I think one of the changes that we made a couple of years back because we used to have one big service division. It was a separate P&L and then you have the 2 new build divisions. But as you remember, we changed. So now the Energy has both new build and service, and Marine has both new build and service. So they have the holistic responsibility for the business and improving the profitability and reach our group targets. So, they have the freedom how they optimize the business. And there is not a general rule. It depends which type of customer, which type of segment. Sometimes you might have -- go a little bit lower on the new build to secure a service business and you look at it holistically. Sometimes you go higher on the new build because the service potential is less. So there is not a general rule. The general -- well, the general rule, we look at the business holistically.

Next question comes from Sven Weier.

Just on battery storage, again, the strategic review. I was just wondering, Hakan, I mean, this has been going on for a while, as you said. What's the client feedback? I mean, do you get the feedback from the organization that the uncertainty is somehow impacting the ability to win orders? Or are clients pretty indifferent, whether this business belongs to Wartsila or not? What's the feedback you have for us?

I would say, in general, it's not a showstopper or concerns. But of course, some customers, they come back and they are concerned by the strategic review. So it's a mix. I wouldn't say it has had a major impact, but some customers are concerned.

Okay. And the other question I had is just if you assume that you keep the business, do you feel the need you need to develop the business further, let's say, also into other storage technologies outside of batteries? And also within batteries, are you pretty agnostic to the underlying battery technology because at some point, lithium-ion might run into some limitations? That's the second one.

So part of our strategy, and we keep on -- I would like to underline that, throughout this strategic review, we keep on investing into the business, developing new technologies. I mean, we put the Quantum3 on the market, et cetera. So we clearly continue to develop and invest in the business. Now -- and as part of that, for instance, you talk -- I mean to getting more and more cell agnostic, I think that is clearly a way that we are going, so to say. And that is, of course, to have more flexibility concerning geopolitical trade barriers and geopolitical dynamics, but it's also to make sure that we can have a competitive supply chain, so to say. So that is certainly part of our strategy. Now when it comes to the focus of the business, I think we are -- we will stay focused on in front of the meter, so utility scale storage. This is where we -- there are ample growth opportunities. We have had a very focused geographical strategy. I think we will keep that, but there might be some fine-tuning of the geographical scope, so to say. We don't have any ambitions to go into behind the meter, so to say. So it's focusing on the core business, I would say.

So you stay in batteries basically and not mechanical?

No. I think these are completely different technical disciplines, which we don't have the competence. And also when we evaluate, because, as you know, there is a pretty vast array of different energy storage technologies, I mean, pumped water, different type of thermal storage, et cetera, et cetera. I mean, in the battery storage, is a competitive technology in terms of energy efficiency and also in terms of cost per kilowatt hour, so to say.

If I may, can I just follow up on what you said earlier on container shipping? Because we all know that the geopolitical tensions have taken out more than 10% of container capacity, longer trading routes. I mean let's paint a scenario. We get some deescalation, Middle East, ships can travel through the Suez channel again, obviously, with the corresponding impact on the container fleet. I mean, how important is it these days, the container on services and on new build? Do you think this has been a positive driver in the last 12 months for the business? Or would you not really feel change into the other direction?

No, I mean, containers -- and I think you have at the end of our normal quarterly material, I think containers is probably -- if you look at it as a share of our service business, I'm looking at Hanna-Maria here, but it's probably 20%, 25%, maybe 20%. She will check it, so we have the right numbers. So it's an important part. But of course, cruise is normally bigger and the other segments, they're also big. So we are -- I mean, our service business, and certainly not our new build business, is not depending on containers, so to say, rather the opposite. Have we had a positive kind of support for our business because of the unfortunate crisis and the logistics -- change of logistics change, et cetera, as you mentioned, yes, it has contributed in a positive way. But it's not -- if this would go away, so to say, it -- in my view, it will not have a significant impact on our service or new build business.

Any other questions? I don't see any hands raised. Mikael Doepel, please go ahead.

I just had one question really on the carbon capture system. So well, you mentioned you're going to do a bit of more of a commercialization next year on this one. Just wondering how do you see this infrastructure situation now around this business? And we talked about this before in terms of the infrastructure at the ports and all of that. So maybe you could just give a bit of more color of how are things developing there? And when can we expect this to become -- get a meaningful boost, you could say, and develop in a bigger way going forward?

So I take a step back and then certainly zoom in on your question. So carbon capture, I mean, first of all, we -- what is it for us? You could say it's an extension of our scrubber business. So we scrub out not only the sulfur, but also the carbon. And of course, we can aggregate this and store it in the tank on the vessel. This is what we do in this value chain. But the rest of the value chain in terms of, okay, how do you aggregate then at port and what do you do with the carbon that you have captured? Do you pump it back into a well, so to say? Or do you use it as a raw material for producing something, I mean, green fuels or something else or carbon neutral fuels. So you could say that we are doing our piece of the equation. And of course, we are talking about it. But the whole ecosystem that needs to evolve around what do we do with the carbon and how do we actually -- physically, how do we deal with it. There is still a lot of development. And I would say that -- and there are tests, pilots, but there isn't -- if you're looking for a commercially operatable solution, and as far as I know, there are very few, if any. So this is an area that is evolving. And here, I think we will also see some cross synergies with land-based carbon capture. But it's evolving space. So you could say we are very early. What we have said, as you might remember, for us, we consider this as a EUR 10 billion business opportunity for us during the coming 10 years. So that's the timeframe. Even if we go for a commercial launch next year, I do not expect a boom of this because the infrastructure needs to evolve and the whole commercial equation around carbon capture needs to evolve. Also the IMO, as you probably know, there is a discussion in IMO, how should carbon capture be regarded from a regulatory perspective. So there are still quite a few pieces of the equation that needs to come in place.

Okay. No, that's fair. And then maybe just if you could expand a bit also on the competitive environment in this space. So I think you previously said that you've been kind of a frontrunner here. How is the competition evolving? Do you see new players coming in here? How would you describe the overall situation in the market and your kind of positioning right now?

I think we are still one of the pioneers for frontrunners. I think there are definitely competition is there. I'm not sure that there are even more players coming in right now, but there is competition. At the end of the day, how do you create a competitive edge in this business? I think one important part is this, how much can you capture versus how much energy you need to put in because there will be an energy penalty taking [indiscernible] CO2. So that routes you. That will be important for your competitiveness. And the second one is that you can service and support your customer on the services of this equipment. And I think in both of these areas, well, we think we are, let's see, but we think we will be leading.

The next question comes from [ Josh Miller ].

Just a couple of questions, if I could, please. Firstly, on the balance sheet. So it looks like you guys are going to be net cash by the end of the year. Could you maybe run us through your sort of plans and priorities for using that cash? Would you prefer to hold a net cash position given that at some point, you're going to see working capital unwind? Or is there potential for incremental returns to investors? Yes, just how you're thinking about that, please?

So, I mean, we are running currently at a negative working capital situation. And it's pretty -- that's very positive, I mean, a EUR 6 billion-plus company running on negative working capital. And -- but we've also been -- although we are proud of this, we have also been clear that we don't think it's a sustainable situation. I mean, structurally, we think that we have managed with good work to decrease the normal level of working capital from where we were, let's say, 5 years back. But certainly, it's going to be a positive need -- that we will continue. So it will normalize. Then coming to the capital situation and the strength of the balance sheet. Yes, we have a strong balance sheet. So -- but when we've been talking about our M&A agenda, we have continuously said we are looking more at bolt-on acquisition, acquiring certain competencies. We are not looking for these big strategic moves into new type of businesses. And that still holds. We are well funded for R&D. As you know, we have increased our R&D a bit. I mean we are currently running at R&D rate of 4% of net sales. So I think we are well funded on that. And then we will see how the balance sheet and how the cash flow evolve. And of course, at a certain stage, there could be considerations of giving money back to the shareholders. But that is premature to talk about. So we have a strong balance sheet, which gives us a lot of freedom, and let's see how we evolve going forward. It's also, of course, tied to the strategic review, what could happen there. So it -- yes, we have a strong position, let's put it that way.

Great. And maybe just a second one, if I could. Just you touched on the lag in the cruise segment. I think you said 6 to 12 months earlier in the call. I wonder if you could give any more detail around lags in some of the other ship segments, for example, container ships where we've seen very strong contracting this year through 2024. And I guess on the back of that, as a result, is there any reason when you look through to 2025 within your Marine OE business that, that won't be a very strong year of equipment ordering for your business?

So I would say the lag is about the same, independent of segments. So I would still say it's 6 to 12 months. And I would say -- I won't comment on potential order intake in specific segments. I would just say that -- I mean, you've seen our demand prospects, and they look better coming 12 months, et cetera. So I think that's an indication of how we see the market.

Thank you, Josh. And then coming back to the earlier question related to our service exposure in container vessels. So actually on our roadshow material, if you go to Slide #89, you can see that 26% out of our service order intake year-to-date in Marine is related to merchant segment and that merchant segment is including the container vessels, but it's including also bulk carriers, cargo and RoRo vessels as well as tankers.

Thank you, Hanna-Maria for filling it. So magnitude-wise, I was okay.

Then Tomi Railo has raised his hand. Please go ahead, Tomi.

It's Tomi from DNB. Coming back to the profitability question or discussion, I would just -- would like to hear a comment if you are making money with the equipment and if there is a difference -- meaningful difference within Marine or energy equipment. Now I'm talking about the thermal equipment rather than the storage equipment, which we can see from your numbers, but that would be helpful.

Yes. I mean these are very valid questions, but we will not go into the details of profitability of our new build and our service business. I know that there are quite a few questions about that. But we hold -- we still hand -- still do not give out the numbers there or the indications. One thing I can say, though, and that is that -- and you have observed it, we have improved the profitability, both of our new build and the service business. And that is driven on one hand by operational improvements. We talked about some of them, ceasing manufacturing in Trieste, but also many of the operational improvements, the rebalance of the risk profile in Energy. And then, of course, we have the second element, which is, of course, the decarbonization. We are bringing new technology to the market, which gives us opportunities for price realization.

As a follow-up, it would -- it sounds -- and it would be nice if you could confirm that you are not making losses in the equipment in either side of the business.

We will not go down that hole. Sorry, Tomi.

Second question, I mean this is a strategy call and -- do you have any thoughts about sort of short, midterm '25 strategy? What's on top of the agenda? I know storage, of course, but M&A, we talked about bolt-ons and so on. How does '25 look like from a strategic point? Anything urgent? Any changes you predict? Is the demand picture kind of changing? Is there risks? What elements do you need to further improve your profitability from a strategic point of view?

So I mean, I think for strategic execution for 2025 and beyond, I should say, because I think the keyword is consistency. I mean we have set the strategy. We are executing. We see it's giving results. And the demand side is holding up as we have indicated in our guidance. So what are the risks? I mean, what are the drivers continues to be the same, service business. And I really underline, and I think we will talk more also about that in the future, book-to-bill bigger than 1 in all the service disciplines. So service is still certainly a growth driver. I mean profitability on the Marine side, in general, with the -- helped by the decarb and the growth of the core segments. On the Energy side, balancing, improved profitability. And then, of course, storage, let's see where we land, so to say. And then I would say that we will continue the divestments of our portfolio businesses. It's also taking some time, as you know, but I do see that we are improving profitability. You see it as well and kind of positioning these type of businesses for divestments. So that's why I say consistency. Now what are the risks, what are the potential challenges? I think one, and I know it's very broad, is geopolitics because as we all know, it might disrupt supply chains, it might disrupt the global shipping industry, how will interest rates and inflation play out, et cetera, et cetera. Potential tariffs absolutely could have an impact. Not so much if you talk about U.S. tariffs, not about on the development of the renewables. I think that will still go ahead. But of course, if there were import duties, we produce our engines in Finland, they could be affected by tariffs, so would our competition be, I would say. So -- but still, it's something to observe. So those are clearly risks. And of course, tariffs impact on global trade. That is another -- certainly a topic of uncertainty these days. Then I think a general observation, the speed of the green transition is, of course, a risk and opportunity element for Wartsila. I think the faster it goes, the more focus there will be, the more growth opportunities we'll have. And on the other side, if we now -- and I think in certain areas, we do see a questioning of the green transition. I think the good thing for us is that if you look at our offering when it comes to gas and our fundamental offering, it still holds true and is strong. And I would argue that especially if you look on the energy side, the transition to more renewables, it will continue, definitely. You might discuss on the speed from 1 year to the other, but it will continue.

Then next question comes from Akash Gupta.

I had a question, and I think you briefly touched in your last answer, and that was on manufacturing footprint in Energy business in the U.S. on the thermal side. I mean, as you rightly pointed out that your competitors are also non-U.S. companies, and therefore, it's everybody's problem. But then when we look at the whole energy landscape, you have gas turbine guys that have U.S. production, you have some backup generator guys like Caterpillar, Cummins that has U.S. production. And all of those guys have seen quite big uptick in their book-to-bill in the last couple of years in the U.S. We have seen some -- not the same sort of like commercial activity in your side. But given this is more of a strategic call, I wanted to ask like -- is this -- I mean, U.S. energy market is going to be quite active in the medium to long term because of the data centers. So are you looking at some sort of like adding some factories in the U.S. so that in future, you can better -- like you can provide more local content and also position the portfolio for any impact that might come from tariffs? So any commentary on how do you see about the manufacturing footprint developing in the medium term? And what does it mean for CapEx of the business?

So I mean, this is a tool in the toolbox that we could use if we find that the business case is there. Now I mean, -- and you're clearly right that we consider our major competitor in the U.S. market certainly is our gas turbine competitors. And some of them have manufacturing in the U.S. However, you will have to ask them, but I think all industrial companies this day, we have a global supply chain. So I think they will be affected as well on the tariff side, but you will have to ask them. We would certainly be affected. Could we localize? Yes, we could localize. But I think this is still a topic that we follow very closely because, as you know, there is a lot of uncertainties around which tariffs on what categories, how high will they be, et cetera, et cetera. So let's see how it evolves.

I mean just a follow-up to that. Do you see...

Sorry. And another comment on the -- because you're right, many of our gas turbine competitors, they are -- they have very long lead times, which actually benefit. And it's because they have been taking some -- I mean, now I'm generalizing, but I would argue that one of the major drivers is that they have been selling some really big gas turbines in certain markets on the globe, and this is not a segment we are in. If you look at what we have been selling in the balancing space, I think we have a fairly interesting market share. So -- yes.

Yes. And just a follow-up to my earlier question, like given the uncertainty on the tariff side, when you are engaging with your customers for new order, how you are talking about it? Like who will be at the risk, let's say, if tariff gets hit in the middle of execution?

And this is something that needs to be negotiated. But I mean, we would normally not take the risk of tariffs. We can't predict them.

Thank you, Akash, and thank you for all of the good questions. I'm afraid that now we are running out of time, but I would like to remind you that tomorrow at 11:00 Finnish time, 9:00 Central European Time, we will host the call together with the President of our Energy business, Anders Lindberg. That's a great opportunity for the deep dive in our energy power plant business. So hopefully, we will meet you there. Thank you, Hakan.

Thank you. Thank you, everybody.