Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Hi, all, and welcome to Wärtsilä CEO Strategy Call, I'm Hanna-Maria, I'm in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will discuss some of our long-term opportunities. And after Hakan key messages there is a possibility to ask questions. Hakan will show also 2 slides which are part of our road show material, which is always available on our IR cover page. My colleague, Noora will send you the slides after the call. As a reminder, we will host a pre-silent call on September 30, together with our CFO, Arjen Berends. So 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. And in the case you don't have the possibility to use raise your hand functionality, you can also send an e-mail to me. Hakan, please?

Yes. Hello, everybody, and I see the questions already starting to come in. So that's good. It's going to be a good session today. I suggest that I give a couple of overview comments on where we are and how our strategic outlook, how we see the future, and then we go over to the Q&A. So Marine & Energy, if we start on the marine side. we see a demand situation that is holding up, rather well, I would say, both on new build and services. I mean we do underline the continued message that our core segments continue to be strong. I mean, we all know the market volumes are coming down from the record 2024. But please note that even using Clarkson data, their forecast and outlook is -- continues actually to be higher than the 10-year average. And that is even more accentuated for the Wärtsilä core segments, cruise, ferries, offshore, special vessels, et cetera. So still a rather strong view of the market. I think our strategy in this space, our decarbonization journey, it's also adding or supporting the growth and of course, we see MEPC83, the vote is coming in October. If the industry will start or introduced carbon fees. That would be a landmark. Of course, U.S. is opposed. We don't know how the vote will go. After the vote, there is also a process afterwards, where the flag states also need to approve it. So there is still an approval process. And of course, nobody knows for sure how this will play out. I would say a vote for, I mean, an introduction of carbon fees on a global scale will certainly support the Wärtsilä strategy. Now in a situation where, for some reason, this will not go through. I think Wärtsilä is still rather well placed. Shipowners take a long-term perspective. I mean vessel for 25, 30 years. So they will have to have a long-term perspective. And regardless, the whole topic of energy efficiency, fuel efficiency and fuel flexibility will still be strong. Flexibility will be key because even with -- I mean, there will continue to be uncertainty. So from that perspective, a positive decision will certainly support Wärtsilä, a negative decision is not the end of Wärtsilä, so to say, rather the opposite. I think we have a very strong offering, and we will also fare relatively well in situation. But of course, for the world, it would be really good with a decision to move on with the IMO suggested framework. So core segments, decarb, it continues to play out. Services, we pointed that out last time, book-to-bill continues above 1. And we have a bit of a cyclicality on the retrofit side, but we also said this is a cyclical business. So we still have a positive view of our strategy. And then the whole focus on moving up the service value ladder, it's our strategy -- continues to be our strategy, and we do see it playing out. Our agreement business is growing and still with a good renewal rate above 90%, et cetera, et cetera. So it's the same narrative as before. It's working for us. It's really working. If I -- I will cover the U.S. tariffs later on, I do energy first and then we can certainly talk about the U.S. tariff situation. If I go over to energy, it is the narrative of balancing. And now we have a new -- and baseload and the new -- somewhat new theme on baseload is, of course, data centers, and I will come back and comment. But if we start with balancing, we do see continued growth of renewables on a global scale, even in the U.S. And I think the awareness of the need of balancing is growing in many parts of the world. And certainly, when we see the market going forward, we see also a lot of interest for balancing. Various maturity in different markets. but still strong interest. If we talk about baseload, we have, you could say, our traditional baseload, providing baseload for South America, Asia, et cetera. There are markets there. Clearly, there is the demand. And of course, it's project business. So it's a bit cyclical, and it can shift from one quarter to the other. But I think the underlying fundamentals are strong. And now, of course, we add the whole data center piece to this equation. And let's share some slides here. It's not a new message, but we can reiterate it. First of all, I get a lot of questions from analyst these days that, Hakan, what's the size of data center? And how big is it going to be? And I would say, nobody knows. And there are a lot of reputable institutions and players that are trying to make estimates. And when I look at those estimates, if you look at accumulated 5-year new installations. Those estimates vary between 20 gigawatt and 100 gigawatts. So quite a big span. So to do predictions is very, very hard. However, the underlying demand is certainly there. And there is a lot of activity. We can clearly see it. And as you've seen from last quarter, we start now also to have our first orders in the U.S. We had orders before in Europe, we had our first U.S. orders. And what is happening is -- and this slide we have shown before. Basically, if you go back a couple of years, and it's not so many years, the typical data center need was 20 to 100 megawatts , if you are building a data center, you went to a utility and asked to have this power available. And then to back up the grid basically, you bought some high-speed engines from -- not from Wärtsilä because we don't have high speed to stabilize. And in this, you could say the old business model, Wärtsilä -- this was not in Wärtsilä sweet spot because we do bigger engines for bigger power. But now what is happening as the size of the data centers are growing, we are talking 50, 300. I mean we are talking all the way to 1 giga. We don't play there in the giga, but we certainly play in this, I would say, 20 to 400 megawatts. And when the data centers has that demand and they go to the utility, they say -- the utility says, well, through interesting business opportunity, but we need to run this through our process -- planning process because we will need to build additional infrastructure and generation and that takes 5 to 7 years. So now the data center developers are looking for -- not everywhere, but in many cases, they are looking to generate their own power. And the amount of power is coming into our sweet spot, so to say. And this is what we start to see, and this is, of course, a very interesting business opportunity for us. I think the technology that we're offering, we're always competing with the gas turbine. But we have -- also in this area, we have some interesting advantages. First is our modularity. As you know -- you might know, you build engine power plants of several engines, whereas you build gas turbine plants with a few gas turbines. And this modularity with several engines has actually helped when you want to have an affordable very high uptime reliability. Of course, our other argument of high fuel efficiency compared to the gas turbine still holds in this because it's going to be baseload. So it's a lot of energy. We don't need water or very limited water compared to the gas turbine. So those advantages that we have been talking about before. They're certainly relevant in this segment as well. And I think what is accentuated in this particular segment is our modular design. So that's pretty interesting. Now I'm sure some of you want to ask or will ask so I take that already. Okay, you had your first order in the U.S., will you have more orders in the U.S. this year? And then I would say, and as I said in the second quarter, is that we are working with many different opportunities. The opportunities are in different stages of maturity as they always are in project business. and sometimes they go up and go down. But we have more than a handful of interesting opportunities in different stages. And we could have another order. I'm not saying we will but we could have another U.S. data center orders this year, clearly. So that is a little bit on the energy side. So to sum it up, the balancing narrative is still there. We see it playing out, we have a base loan business, you saw the record quarter. This type of opportunities, mining opportunity in Pakistan. They are still there. And now we start to see the data center also coming in, so that is good. On energy services, it's a similar narrative like in marine, moving up the service value ladder, moving customers more and more into agreements. And it's playing out also with a very good renewal rate above 90% and still also with growth opportunities going forward. So that's Marine & Energy portfolio. We continue the divestments. We closed on ANCS. You saw that, we have signed on marine electrical systems, and we still have water and waste and gas solutions and that is ongoing. So that is also playing out as we've been talking about. Then, of course, tariffs and geopolitical tensions, clearly, we live in times of high uncertainty. And we underline that in our guidance as well. There is a lot of uncertainty. But I think underlying business is still developing, demand side is developing in a good way. Now if we talk about the tariffs I would say, and I've been to China, I've been to Korea, recently, talking to shipyards and customers. And we all know that U.S. part of global shipping, it's less than 15%. So I think the industry is still moving ahead, and there are still vessels being built in China and Korea for sure. And -- so I would say that the impact so far limited. Of course, if there is a global downturn of trade, international trade, that will certainly affect the industry. But so far, I would say, limited impact. If we look at our energy business, so our thermal power plant business, yes, we are exporting the engine from Helsinki and also from Wärtsilä in Finland to the U.S. And yes, we are applying the relevant custom duties. There has been some dynamics on how -- which rates and how you apply them, et cetera. I would say the impact of the most recent changes. Our analysis so far that the impact will be limited. But we also underline also this is a very dynamic topic. And I think the rules that are applied one day could definitely change the other day. But so far, I would still say limited impact on our thermal business, so to say. And then finally, on energy storage, and this is clearly impacted in a major way by the import duties versus Asia. And I would still say that the U.S. storage market is muted, which also leads to that competition in other markets is increasing. So it's a very competitive space right now. It's a tough space. We still continue with the storage strategy that we have kind of communicated earlier this year, i.e. it's still a focused growth in certain core markets, and we are executing on that. But it is a competitive space. There is no doubt about it. All right. A quick summary, exposé of the strategy and how we see the future, so to say. So with that, let's open up for questions.

Thank you, Hakan. So the first question comes from Daniela Costa.

Two-part question. But related to your commentary on data centers. We have seen like the turbine companies, I would say, the last 2 years, they've had a lot of orders. Their backlogs are really long. So I guess, first part of the question is, why do we think we're only now starting to see the growth for engine is kind of, have the benefits that you talked about that's been developed more recently or the customers weren't aware. So just may be a bit of why we're only seeing this demand now? And then when we look at some of the turbine companies saying they're going to double capacity in 2 few years and adding more, how does that interplay with your space, how should we be thinking about that?

So I think many of the -- I mean, you should ask our gas turbine competitors, but I think that some of the really big gas turbine orders have been for the -- we talk about the gigawatt projects. These are the segments that we are not playing. And my understanding is also that on top of the data center orders, they have also had quite a lot of big utility orders in many parts of the world, which are in this giga -- in the higher power space where we are not playing. So that is -- I think that's pretty straightforward. Now when it comes to delivery times, et cetera, yes, the gas turbine guys are sold out. We are sold out for certain parts of our portfolio, but we can still deliver on 12 months on other parts of our portfolio. And I won't go into the details of that for a very competitive -- obvious competitive reasons. But I think in Wärtsilä, we have a good loading situation. And for some part of our portfolio we're sold out, but for others, we can still deliver.

And to this point, you said sort of the giga project...

Daniela, it's a bit hard to hear you because your -- I don't know if your microphone is strange or something here on our end, but.

Okay. You're hearing me like this without microphone?

Yes, much better.

So on this comment on sort of the giga projects, does that mean sort of the turbines are maybe more for hyperscaler type projects and you may be more exposed to colo, okay, what -- how exactly maybe you can help understand there?

So if we talk about hyperscalers, they do bigger data storage. I mean, super big giga data storage and they do the more midsized data storage. So I mean, there are different type of data storage. Those data storage are acquired or built or contracted by the hyperscalers. It depends where they are located, the situation of the local power system. I think the key thing here to create business opportunity for us is that, of course, you have a grid situation where you cannot rely on the grid. So you need to generate your own power. So that's the starting point. Now -- and then if you have the super big, the giga, you will go with CCGTs gas turbines, if you're in this segment, which I indicated, sweet spot 20 to 40 megawatts, Then you would be looking at engines and gas turbines. And then I would say that we have some pretty interesting advantages there.

Next question comes from John-B Kim.

Continuing on the energy theme, can we talk a little bit about the shape of the market. Now without holding you to numbers or size, if you look at your business plan or really strategy here over the next 3 to 5 years, how much would you expect from base load applications. So the examples we gave about smaller DCs running on tank of engines versus back up.

So first, I'm going to -- it's just nomenclature. We don't call it backup. We call it balancing because backup is more the functionality that the high-speed engines are providing, i.e., you have a grid and if the grid malfunctions, you have a backup high-speed engines. So we are not in that. That's not our sweet spot. We talk about the balancing when you have renewable swinging and you need to balance though, but it's a nomenclature of it. Coming back to you, what's your share of balancing in baseload, what's in your business plan, and first of all, we don't approach our target setting like that, it swings a lot, between years. I think last year, balancing was 70%, approximately. This year, I think it's -- I mean, the split between balancing and baseload is almost the opposite. It swings a lot between different years.

Okay. Helpful. And outside of the U.S., which markets or regions are you most excited about over the next 3 to 5 years for energy?

I'm excited about the world because, as I said, U.S. is clearly a leader in -- sorry -- it's a clear leader in data centers. But we do see other parts of the world also moving on the data centers, but U.S. is the biggest. Balancing power, U.S. is also the biggest for us, but we start to see this in Asia as well. And baseload, it's all over the place. South America, Brazil, maybe Argentina, Indonesia, Australia, et cetera, et cetera.

The next question comes from Antti Kansanen.

Continuing with the same theme on the data center side. And I wanted to ask a little bit about the aftermarket opportunities in these cases. Because as you mentioned, Hakan already, I mean, a lot of the demand is created by the fact that the guys access the grid. But what do you think that happens in 5 to 7 to 10 years' time when they perhaps get the access and the grid operators have invested on their capacities? Are you still -- or how do you calculate the lifetime profitability on those projects without knowing exactly the long-term capacity factors? And back on Daniela's point on the turbine makers being sold out, you're selling scarcity. So are you getting rewarded on the newbuild side, how should we think about these things?

Yes. So I mean, first of all, you should talk to data center developers about the TCO model life. I mean, because they would know how they plan their investments. But to your point, I mean, this is like a mining operation. No pun intended. Where you run the power generation 24/7 uptime reliability is key, key, key. And I would say that we will have a very strong service business. And I would also say -- I would -- and as you said, you should talk to the customers directly. But I would say that we will have a strong service business beyond the 5 years because, let's say, in a scenario that the grid will come back. If I was a data center, I would start to export the power to the grid. You have it there. And you have it on super energy-efficient vessel engine. So hopefully, if you're lucky, which has better energy efficiency than the gas turbines, and that are highly flexible. So you're also prepared when you want to integrate renewables. Because renewables, as we all know, they are good, but they are intermittent and then you have the balancing to gain. So I think we have -- we will have a strong service business on the data center side, not only for 5 years. Then coming back to your second part of your question, and I'm missing it. Antti, can you repeat it.

Antti, I think you are muted.

It was on the newbuild profitability. I mean you're selling scarcity, a lot of the competitors are sold out, so.

Yes. No, I would say that, of course, in this situation, we have a good price realization, of course, there is a limit how far you can go because we have customers that are professional and they will not pay too much, so to say. But I would say that we have a good price realization.

All right. And then maybe I'll try to ask a little bit details on kind of, you already mentioned the project pipeline, and they are on various degrees. But if we look -- if we just look at the news flow regarding the entire kind of data center, AI stuff on U.S., I mean, last night, we saw Oracle popping up 30% on their numbers, which is very kind of driven by that market. Are you seeing kind of sense of urgency increasing on the portfolio that you are talking about, that decisions are speeding up and they are kind of more eager to get the project up and running.

So I would say I see a high level of activity, clearly. I'm not sure if it has increased the last 3 or 4 months, I would say it continues to be high or very high. I think -- as I said, projects are in different stages of maturity. There are projects, they come up, they pop down and go down again because people need to find the permits, all this -- when you do develop big projects that sometimes you run into some blocks and then it takes 2, 3 months and then you're through. So from that perspective, data center power business is like any other power business. It's -- but there is a clear demand for power for data center, and there is a lot of activities, clearly. And if compare -- I mean if we compare to 1 year ago, I mean the derivative is clearly positive.

And maybe on the time line regarding kind of executing those projects on these negotiations, is your delivery capability really the bottleneck? I mean you said that maybe you're sold out in a lot of the applications for the next 12 months, so maybe the delivery time is 18, 24, or whatever. Is that the bottleneck on those projects that you are negotiating? Or is it any way that those projects will be delivered in that type of a frame that it doesn't really matter?

No, I would say the bottleneck is more than our customers that they need to get their -- because our customers are selling to the hyperscalers. So we have us as an OEM, you have the power or data center power developer and then you have the hyperscalers. So of course, this -- you could say it's a middleman. I mean, I underplay the role, but there's -- in the middle between the OEM and hyperscale. And of course, they need to contract with us, but they also need to contract with hyperscaler. So there is a lot of negotiations ongoing. And of course, they are building a power plant. So they need the environmental permits, the building permits and all the other permits and of course, this is never a linear process. This type of project development dynamic, this is what is really setting the pace, I would say.

Next question comes from Sven Weier.

Few question from my side, please. But I'll start with marine, and then I also have a question on data center. On the marine side, just curious about cruise. I mean we've now seen Clarkson data 3 months without any cruise orders, at least in the current data. I mean it's a lumpy market, we know that. I was just wondering what you see in the forward pipeline? I mean, is this just a pause, the usual lumpiness? Do you see more projects? That's the first one.

And the answer is yes, it's lumpiness. I think we see our underlying demand side that is strong. And of course, there is limitation on yard capacity. I mean there are 3 big yards that are the dominant in place. And of course, they are selling their slots but I see strong underlying demand. So I would talk more about lumpiness than anything else.

And at the same time, offshore was pretty good. I mean, was that in your neighborhood for your type of offshore exposure? Or should we take comfort from the data?

Yes, I think that -- a short-term data -- as you know, Sven, I think you should take -- you need to discount them with a very high factor. We talked about that. You need to see the longer-term trends. And I think for us, and I know you're seeing it but in our quarterly report, we always show the volumes there, and we show what the Clarksons forecast is and how it compares to the 10-year average. We have -- you have a top graph and the bottom graph on that slide. And you see we have done. What's the Clarkson data for Wärtsilä core segments? And you see it's way above -- even if Clarkson have revised down, but the current levels that they are predicting is still way over the 10 years. And I think this is the -- what is important.

The follow-up question I had on data centers is, again, on the claim to say, look on energy efficiency. We are relatively similar. There's not much difference to the turbines, honestly, it's a little bit difficult at least on my end, to always have the evidence, right, because different people say different things. I was just wondering on the U.S. example, was that a project where you are competing against the turbine and you won the project because your solution is better? Or was this a project where they had a problem getting access to turbines because they're sold out. Can you give us a little bit more insight into this very specific project?

So there is -- I will try to sketch something, I cannot go into the details because this is an anonymous customer and we have signed an NDA, so I need to respect that. But I would say we're always competing with gas turbines and even in data centers, okay? So the dynamics is very similar to what we have on balancing in baseload. So it is about our fuel efficiency. It's about low water consumption. As I said, the additional element on data centers is our modularity, and more engines than gas turbines, it has an impact how you calculate the reliability. And then -- but it's also clearly, it's the CapEx, OpEx, some people put more focus on CapEx, so sometimes that emphasizes the advantage of the gas turbines and then we have, of course, delivery times as well, where some of the gas turbine manufacturer sold out, not everybody sold out, but some are. So it's the same complexity in the customer's decision metrics like we have on balancing and baseload. Maybe with the caveat there that the modularity is something that plays out extra favorable in this high uptime reliability application.

So the projects that you have now in the pipeline in the U.S. that are not signed yet. It's not a case of the turbine guys can't deliver. So you're in the game. It's a level...

It's a mix, Sven. There are those, clearly, but there are those opportunities where the customers really see the benefit of what I've just been talking about for our engines, so to say.

And maybe the final one, if I may, is just on what you said on storage because you said things are getting a bit more competitive outside the U.S. But I guess everything is still in line with the kind of strategy that you had. You told us that short-term margins would be a bit lower in the long term, 3% to 5%, I think it's still -- everything is still very much consistent with that, I guess.

It is, but I would add that competition has increased. I mean there are 2 things. We didn't predict Liberation Day, and also, we didn't predict that some of the battery cell providers, they are moving -- integrating forward. They are starting to compete with us in a stronger way and that is a consequence, maybe of the first one because when the U.S. market is muted, of course, people are still trying to push that volume. So that tends -- people have stopped to think how do I compete in other markets. So if I sum that up, the difference between when we launched our financial targets to where we are now is the competition has increased, but we are still sticking to our strategy.

Next question comes from Max Yates.

I had a couple of questions. Just on the tariffs on Section 232 and what came out over the summer. I guess one of the dynamics is components and now kind of products with high steel content are now captured under the tariff. So I guess, the very simple question is, are the engines with potentially high steel content. Are they now facing 50% tariffs as per the agreement? Or is it still sort of they're facing the tariffs coming out of Europe because I guess that's a relatively straightforward question of what tariff are you trying to push to your customers?

And the short answer is much closer to the 15% than to the 50%. I mean this is rather complicated. It goes into the custom code. It comes into material choices and weights, et cetera, et cetera. So I mean -- but to answer your question, it's much closer to the 15% than to anything else.

Okay. Maybe just the second question is how you're thinking about capacity in Wärtsilä because I guess, if I look at most of the gas turbine companies in gigawatt terms, they're increasing by anywhere between kind of 30% to 50%. So I guess 2-part question. How able are you within the kind of brownfield confines to do that in Wärtsilä and at what point would you actually start to do that? Or is that very much kind of moving up the plan?

So we have ample space to expand in Wärtsilä. We are actually expanding as we speak. If you visit Wärtsilä, which I encourage you to do, and I know we will arrange things. You will see that the digging machines and it's happening. So -- and we -- I think in April, we announced that we are expanding R&D but also manufacturing. So we haven't said how much, and I won't say how much, okay, the gas turbine, competitors they have given you those numbers. But we are expanding, and we have capacity -- I mean we have capability to expand further.

Okay. Very clear. And just thirdly, how quickly can you do that? If you were to add sort of 30% capacity, is that a sort of 1-year, 2-year, 3-year project? And are there any constraints on the supply chain that would make that impossible.

So if I start -- I mean when you expand capacity, to your point, I mean, we are -- you could say our industrial system, we do final assembly, we do some in-house manufacturing of some critical components. But to ramp up our capabilities also very much related to ramping up supply chain. Can we do that? Yes, we can do that. How much time does it take to add capacities? I mean there is no -- how long is a road, but it's a year, it's 2 years, it's 3 years, in that time domain. It's not 5 years, it's not 1 year.

Okay. Just 2 more quick questions. So if I look back at kind of when this business was at its peak in terms of what you were taking in order intake. I think you were somewhere in the region of kind of 3.5 to 4 gigawatts annually, given the capacity that you have and the lead times, can you ever get back to that kind of stage? Or at what point does it just become ridiculous that you're taking orders that are so far in advance because of capacity? What is that reasonable from what is physically possible and where the lead times are acceptable?

So I mean if you compare -- I mean, you're right. I mean I think we -- if you look at the maximum gigawatt we ever delivered, it's probably somewhere in 2018. And since then, we have also, of course, closed manufacturing in Trieste in Italy. So now when we talk European -- of course, we have our JVs in China. We have capacity there. But if we talk about the energy space, those engines are delivered from Finland. Now what's our capability in Wärtsilä and how can we expand? I am saying we can -- we have such a team there. We have such a strong support from the city, from the region, from the whole cluster. The sky is the limit. Then we should do this in a wise way. I mean as you know, we are well capitalized. So we have the financial firepower to invest and we are investing. We have the ecosystem there to support us. I think we have good suppliers also to support us. So we will take our capacity to where we see the market going and what becomes attractive, so to say. So -- and as I said before, we are already expanding and we -- and that is even public. If you go back to the April announcement, really.

Okay. Just final one. Just to focus on the energy storage comments. Because I guess you do have some visibility on what the sort of price per megawatt hour and the kind of pre-calculation margins on some of these projects. I guess, for us, the other side, it's a very different outcome if this business does 2% margins or goes back into loss making. I know you never like sort of commenting on margins, but I mean, are we talking about -- I mean, it sounds quite severe when you talk about it. So are we talking about this business going back loss-making when we think about the margins? Or are you just saying we might drop out temporarily out of our 3% to 5% guidance range, but we can keep it profitable. Just any way to kind of quantify the severity of those comments.

I would say and not to -- it's a very relevant question. I think it's very much related to how the U.S. market will evolve going forward and how that will go, I think nobody knows. So I think competition is growing. That's for sure. and how these dynamics will play out going forward? It's very unclear, I would say. I will leave it at that.

Next question comes from Akash Gupta.

I got a few as well. Maybe starting first with marine. So I think in the past down cycles, we have seen some cancellation mostly at Asian shipyards, more so at Chinese shipyard than other Korean and Japanese one. I mean, so far, we have seen significant decline in contracting activity, but maybe if you can talk about have we seen some cancellations already? And how do we think about risk of cancellation in this cycle and linking with this with MEPC 83 vote that is coming next month. Could that be a trigger for, let's say, a bit different behavior from your customers' customers?

So once again, I mean, I urge you -- first of all, I mean, everybody is talking about a big decline. Yes, 2024 was a peak year, absolutely. And the volumes this year are much lower but please look what Clarkson is forecasting. Okay, you can challenge if Clarkson are right or wrong, but I think they are the most reputable institute in trying to predict the future in this industry. Their estimates for the coming 3 years are above the average 10-year demand. So I don't recognize this that there is a crisis, so to say. Yes, volumes have come down from 2024. So that's the general comment. And then I would encourage you also please look, maybe you have done that already, but please look at this slide in our quarterly report. If you look at Wärtsilä's core segments, Clarkson is very optimistic about that, clearly about the 10-year average and when it comes to cancellation related to that, so no, we have not had any cancellations rather the opposite, we have new orders coming in.

Thank you. And then I have a couple of questions on energy side. The first one is more technical. I think you have said that you're operating in market for up to 400 to 500 megawatts. I mean you can stack these engines and probably you can go even higher. So why can't you go even higher and, let's say, have a set up that could be 700, 800-megawatt and would be more suitable for some of the hyperscaler customers' requirement? What are the technology challenges there? Or is it something else?

No. So I mean it's very practical. I mean, there is no technical limit. You can build gigawatts of engine power plants. The thing is that there will be quite a few engines, and it would take quite a lot of space. So those are the constraints. It's always a balanced decision, how much space you want to allocate. And then the other thing if you intend to run a combined cycle, I mean, use the heat that you generate. Are you going to use this for district heating or for something else. That also lends into the equation, so to say. So -- but I would say, for practical purposes, it's similar. Why don't you build 1 gigawatt with high-speed engines. You can do it, but it's going to be a hell of a lot of engines and you're going to fill a lot of space with engines. And of course, they need to be maintained, et cetera, et cetera. So that is very practical.

And then maybe a follow-up to that. I mean, is there anything that stops this combined cycle technology in terms of like capturing the heat and having a steam engine to -- steam turbine to fire up with engines because, I guess, let's say, if you have 400, 500 megawatts set up, there will be a lot of heat. Can it be done theoretically? And are you looking at it to further improve maybe attractiveness of your offering?

And we are doing -- I mean, this is not -- I mean, to put a steam turbine after the engines, you can do that. We're doing it in Mexico in certain installation. It's about how much value if you can use it, how you use it. So it's part of the equation. But normally, if you're looking at the 1 gigawatt installation, the -- it's a better equation, energy equation for the CCGTs then it would be for engines with the steam turbine, so to say. But up to -- but 400 megawatts we are certainly competitive. Not in all occasions, for all applications, but in many applications, we have a very interesting alternative.

And lastly, a follow-up on your earlier comment. I think you mentioned your customers are selling, I think, electricity to hyperscalers. So just to double check, you have not been approached by hyperscalers directly, it's basically the customers that are building infrastructure for hyperscalers?

Correct. I mean we are not doing business directly with hyperscaler so far, I would say, at least.

The next question comes from Vivek Midha.

Thank you very much, everyone. Good afternoon. I hope you can hear me well. I have a few more sort of follow-ups on some of the questions earlier. The first was on the capacity commentary. You mentioned the expansion of Wärtsilä sustainable technology hub. And based on your release, the comment was that the completion is expected into 2028. But I was wondering if you could maybe just give a little bit more color about the phasing of that? Should we expect that there's some incremental capacity coming from that expansion bleeding in, in '26 and '27 before the eventual completion? How should we think about that?

No, I would say that when it comes to testing capacity, maybe there is something earlier. When it comes to manufacturing contribution, it's probably in '28. But please also note the comment that I made that, yes, we have -- we are sold out, you could say, second half of 2027 for certain of our engine offering. But for others, we still have 12 months delivery time. And please don't ask me to elaborate on which engine, I don't want to give that to competition.

Understood. And just following up on that, I guess, it's a tricky one to answer, but I mean testing sounds like it is one of the key bottlenecks. I mean, is there any way you can quantify for us just how much of a bottleneck testing is at the moment, that testing capacity bit.

I don't have an even a proper KPI for it, sorry.

Fair enough. Then there's another question around -- I have a couple for you around service because clearly, you had a strong up cycle now on the order intake in energy. And so -- and particularly now with, for example, data center that feeds into your baseload service fleet. When can that start to feed into the service revenue growth? When does that -- what's kind of the lead time between deliveries and when that becomes relevant for your service business?

So basically, we take an order, I'm talking very generically now, there is a lot of it, but just to give you -- because I think I understand the logic behind your question. So we take an order, let's say, it takes 12 to 18 months to build it. These days, we -- not for all, but many times, we signed some type of service agreements, sometimes even operation and maintenance agreement very early. So this service agreement starts to kick in very closely to when we start operating the plant. And then we have a kind of an internal accounting guideline, and Arjen has been talking about this in the past, so it's nothing new. If we sign a 10-year service agreement, we only book -- the first booking is for the first 2 years. So we don't book -- I mean, let's say, we deliver after 12 months, let's assume that the service agreement starts immediately when we start to operate -- and the customer starts to operating the engine. Let's say that we have signed a 10-year maintenance agreement, where we will book when we start operating is only 2 out of the 10 years.

And my last question is just sort of summary thoughts around how you're thinking about service growth going forward because you've highlighted the book-to-bill, maybe the Q2 order intake was not quite so strong, but a lot of that was retrofits. But over the last few years, you've seen some very strong service growth and as we go forward, do you expect that to be sustained? Is it likely to go close to maybe your group target? How should we think about normalized service growth going forward?

No. I mean I think we sent very strong signals. I mean our service order intake continues to be well above book-to-bill and we also made this breakdown of the 4 disciplines within services because we clearly acknowledge that the retrofit is cyclical. And I know in the past, maybe still, it caused you some concerns among the analysts. But I think we've been very consistent with our message. Services continues to grow, it will continue to grow. It's a major driver of both our growth and profitability. And even more importantly, it's a major driver of our customer happiness and satisfaction.

Next question comes from Tom Skogman.

October 1, Europe is moving to 15-minute pricing market in power. So I mean, what will happen and what regions are included in this? And I guess, can you draw some similarities for what has happened in certain states in the U.S. from this?

So I don't know exactly which regions are involved, but I can clearly say that the more granular, I mean, in the shorter time for this resolution, the more value will be realized in balancing power. We will put even further focus on balancing power. And this is good for Wärtsilä. So from that perspective, this will support Wärtsilä's business going forward. Now just to put in references, and because you alluded to the U.S., I mean people have moved from a couple of hours to 1 hour, in Japan, there is no 1 hour. And we that change from a couple of hours to 1 hour, that is clearly putting the focus on the balancing power. And now in Europe is moving to 15 minutes, it will create additional focus. I would also say it's still early to say. But I mean we remember the Spanish incident, power outage earlier this year. I think there are still ongoing root causes and there are different hypothesis but it's clearly so, I think that there is more and more stakeholders realizing that. Renewables are great, but we need more balancing power. And in balancing power, yes, and also to strengthen the grid. Green is not black or white. There is no single simple solution. But moving to 15 minutes, it will support us maybe next quarter, no, and maybe not next year, but in 5 years, it will definitely support Wärtsilä basically.

Will it trigger closure of some certain form of power generation?

I would say, I mean, coming back to the narrative and Tom, you've been following us for long. So normally, you chase us. When is the big revolution coming? And if we say that it's coming but it's more linear. Yes. I mean it is a story. When need for balancing goes up with more renewables, you put the balancing in, then you will start to phase out the big -- often coal-fired power plants. And this will happen.

All right. Then moving over to data centers. To my understanding, the power demand goes up and down extremely quickly, even more quickly than your engines can ramp up and ramp down. So how is this technologically done basically? And what is your responsibility here? Are the batteries in between? Or -- and who is responsible for no failures basically there.

So basically, this is where the system developers -- our customers, they are the develop the power systems for the hyperscalers. We talked about these 3 stage, you could say, business system, OEMs, the data power center developers and the hyperscalers. So they design these power plants for -- to reach the appropriate reliability, and the reliability requirement from the hyperscalers is very, very high. And how do they do that design, well, they introduce redundancy in the engines or gas turbines, but as I said, you lead less redundancy from a modernized engine power plant. You can add some batteries also if you need it. We are not into that. We deliver the engines. Of course, we have -- there is a certain reliability requirement on each engine from our side, and we need to meet that but the step change from that level up to a level where the hyperscaler wants to have. This is one of the major tasks and engineering -- and also risk management competencies of these power developers for the hyperscalers.

Okay. Now in 4 minutes, so 1 more question from you, please. But it needs to be the last.

Yes. The final question then is when I just look at marine equipment and the different kind of segment. And I can just notice that the merchant segment has been clearly larger the last 3 years than before that. Of course, they have had a good order cycle. I mean, but is there something beyond this that you sell more products to the merchant segment than to other segments. But you have increased that compared to history?

I mean you could say there is a little but -- we sold more auxiliary engines, especially with the introduction of methanol. We talked about that before that for the new fuels, we have a higher market share in main engines, but also in auxiliaries. So that has fed in a little bit. But I would also say, cruise has been very muted for a number of years. And now it's starting to come back. And of course, if you look on the percentage, this means that percentage-wise merchant has been strong. But yes, as I said, I'm optimistic about cruise going forward.

And we have 2 minutes. [ Nicholas ], then you can raise 1 question, but only one.

Just one on the -- I'm not sure if you looked at this Cat agreement with Hunt Energy, I think it was like a gigawatt over some undetermined period of time. But maybe you can talk through why, I guess, why they went with Cat as opposed to you? Maybe did you compete in this? And would you be interested in signing a similar type of agreement with someone else or where you agree to provide X amount over a few years?

I must say, I pull a blank on the Cat agreement -- I guess, Caterpillar, I guess, I don't know. So I can't comment on that. But I can comment on, are we in our business thinking, do we want to sign up agreements for power for long time forward. We are little bit hesitating on that. I mean if you want to sign, then you will have to pay the full amount and there are very few customers willing to do so. And then to charge like a 10% or 20% reservation fee, it normally doesn't work very well. So that's why our general approach is that if you're willing to place a firm order, 100%, then we book you in, but to pay 10% for, that's a reservation, no.

I'm afraid that we need to close the call now. So thank you, Hakan, thank you for all of the great questions. Pre-silent call will be on September 30. I hope you can enjoy September before that. Thank you.

Thank you very much. Thank you for today.