Good afternoon, ladies and gentlemen, and warm welcome to Wärtsilä Capital Market Day 2026. My name is Hanna-Maria Heikkinen, and I lead investor relations at Wärtsilä. It is a great pleasure to welcome you here at our head office in Helsinki, and equally to everyone joining us via the live webcast, wherever you are in the world. Thank you for investing your time with us. It has been three years since our last Capital Market Day, and a lot has happened. Since then, Wärtsilä has become a more focused and more profitable company. We have completed our portfolio divestments, announced the energy storage joint venture, and reached our financial targets we discussed in CMD 2023, and also the higher targets we set in April 2025. Last week, we announced the new midterm targets. Today, we are here to discuss the how part.
How we will accelerate the value creation and how we will reach the new financial targets. Let me briefly walk you through the afternoon. We have four interesting presentations. We will start with our President and CEO, Håkan Agnevall, followed by Anders Lindberg, President of Wärtsilä Energy. This will be followed by our first Q and A session and a short break. After the break, Roger Holm, President of Wärtsilä Marine, will continue, and after that, our CFO, Arjen Berends, will connect today's presentations to wider financial framework. We will close with a second Q and A session with all the presenters and Håkan's summary of the key messages. All presentation materials are now available on our investor relations webpage. With that, it is my great pleasure to hand over to our President and CEO, Håkan Agnevall. Håkan, the floor is yours.
Ladies and gentlemen, it is a pleasure to see you all here. We have a full house here today. Online, I think we have around 500 participants. A lot of interest in Wärtsilä these days, which we are, of course, very excited about. Warm welcome also from my side. I would like to start today's session just taking a step back and reflecting a little bit. First of all, I think we would all agree that the general economy is holding up in a surprisingly resilient way. In spite of geopolitical concerns, wars, tariffs, the economy continues to hold up. That is the backdrop of what we see in the two industries that we serve, in marine and energy.
Because we are seeing more things happening in these two industries the coming 10 years compared to the previous 30 or 40 years, and that makes us really excited. On the energy side, we will see an unprecedented growth of demand for electricity. Until 2030, just as one data point, the amount of new electrical demand for electrical energy will be equal to the current total demand of power in the U.S. today. We will add another U.S. to the global power system. Significant growth. Another trend is, if we look at the growth and what will generate the electricity to meet the demand, it will be predominantly renewables combined with gas. Yes, there are other sources, but if you look at the big things, it is a lot of renewables combined with gas going. On the marine side, the decarbonization transition is continuing.
Yes, IMO did not agree on a global carbon pricing mechanism, but last year, the marine industry paid more than EUR 5 billion in fees to the European ETS systems. We have also seen that the Chinese have introduced their emission, reducing carbon intensity with 15% until 2030. The world is clearly moving ahead on the regulatory side. We see that this will lead to even further focus on fuel efficiency and fuel flexibility. In Wärtsilä, we have a saying, "Green is not black or white." There are no single simple solutions. As Wärtsilä, we have some of the major solutions that will support our customers and help our industries to make the transition in a way that is both environmentally sustainable, but also financially viable.
We are well-positioned, and this is also why we see that our strategy, focused on shaping the decarbonization of marine and energy, will clearly accelerate value creation going forward. When we see the opportunities, we see the fundamental industry dynamics, we have now raised our ambitions. We have introduced our new midterm financial targets. As you have seen, that is based on the, you could say, a little bit different dynamics in our two industries. We have now introduced separate financial targets for marine and energy. On the marine side, we are looking to grow faster than the core market, our core segments, so we introduced the goals of mid-single-digit growth. We are on a journey to continue to improve our profitability, 14% operating margin as a target.
On the energy side, we will clearly take an advantage from the unprecedented growth opportunities, high-teens in growth, annual growth, and also continue to improve our profitability with a target of 18%. On the group level, you could say that the growth target and profitability target is just simple math, adding marine and energy together. On the group target, we have a new group target, net profit to free cash flow conversion above 90%, clearly reflecting the strong cash conversion that we have in our business. We keep our dividend target. At least 50% of EPS should be distributed as dividend. This is a mid-term financial target, and we already received questions about what is the mid-term, how long is it? We said that it is three to five years.
I will also like to underline for where we are now and how we see the future, our target is to get there sooner rather than later. How are we going to get there? We have, I would say, a fairly simple and straightforward way to achieve and reach our targets. First, we want to capture significant growth opportunities on the equipment side. Secondly, the installed fleet, which will grow quite a lot the coming years, we will transform that into a growing life cycle business over many years to come. Finally, we are going to continue what we have been doing the last 5+ years, and that is excel on execution and focus on execution. When it comes to the unprecedented growth opportunities, on the energy side, it is structural growth, we argue. It is about balancing power.
With increasing renewables, you need the balancing power, and it's data centers. On the Marine side, it's above market growth, clearly driven by our decarbonization, our excellence, leading position in decarbonization, and also the growth, continued growth of our core segments, which is growing faster than the overall Marine market. We have a long-term approach to our business. We want to build a customer base that is diversified, both geographically and industry-wise. We will not put all our eggs in one basket. We will diversify our customer base. We have customers that we have been with for decades. We want to continue to evolve our relationship with them. We have also new customers coming in, and we really appreciate the strategic relationship. When we evaluate the business opportunity, we look both on the equipment and the service combined.
On the lifecycle revenues, already today, more than 50% of our business is services. Yes, we are going to grow our installed base and generate service business well into the 2030s and beyond, but we also continue to move up our service value ladder. We continue to increase the share of our customer service spending by more and more agreements and performance-based agreements. On the execution side, it's about price discipline and price realization. As earlier communicated, we will more than double our operational capacity, and we will do it in tandem with a resilient supply chain. That gives us also opportunity to drive operational leverage, project execution excellence. We leverage continuous improvement in AI. I will talk more about that. We will continue to generate strong cash flows. Also, the focus clearly on organic growth.
We will be very disciplined about M&A, both on acquisitions and also very disciplined on capital allocation. This is it. Fantastic market opportunity. This is how we do it. But before we go further into details of how we are going to do it, let's also reflect a little bit, you know, what has happened since we had the last CMD in 2023. I would say that we have achieved a lot, and we are very proud of that. I mean, we have positioned Wärtsilä as an industry leader and achieved critical milestones that we set. We are clearly a technology and thought leader in our two industries. We are number one in the Marine high-value segments. We are number one in medium-speed engines for Energy. We have slimmed and focused Wärtsilä. I mean, we have divested in total 11 non-core business units.
Now also, lately, we have put our energy storage business in the JV, really focusing. We are on track of our three 2030 decarbonization targets. I would say on all metrics or KPI coming on safety, customer success, employer engagement. We are going in the right direction. One thing that we are really proud about, as an example, I mean, recently, for the second time, we were recognized as one as the world's best employers by the Forbes magazine. This is an external survey. It's one little testament, but we are moving in the right direction in these KPIs. Looking at our financial targets from before, we have achieved all of them, and sometimes we have overachieved them. Which brings us now to a situation where we have close to EUR 10 billion of order backlog, strong order backlog, and a return on capital employed of 94%.
We have a team that has executed. This team, the Wärtsilä team, is now taking on the new financial targets. The team is the same. It is a committed team, and we are going to execute. It is the same team, but it is also the same strategy. It is really the Wärtsilä Way and the different components around it. Our purpose, which is really about enabling sustainable societies through innovation in technology and services. Innovation and technology and service. Target position, we have now raised our targets. It is the same strategic priorities as before. Strong focus on execution, and looking, we are building everything on our cultures and customer success, passion, and performance. We have a solid base here to build. It is the same team, it is the same strategy. What is new then? The market is new.
I mean, we have unprecedented growth opportunities in energy, and it is a structural shift in our view. I mean, if you look at the think tanks of the world, they are upgrading their forecast on annual electric demand growth. Statistics show that until 2030, we will add another U.S. to the power system in terms of electricity demand. It is a broad set of drivers. It is about industry electrifying. It is about the demand for cooling and heating going up, which require electricity, transport electrifying. Of course, data centers we talk a lot about. I would really like to underline, it is a broad array of growth drivers. In addition, there is 200 GW of coal and turbine capacity that will be retired until 2030. That is on top of the growth, so to say.
The other view, our view is clearly that a lot of the, both the demand growth, the increase in demand growth, and the replacement will be provided by renewables, and renewables combined with gas. This is because this is the most sustainable and financially viable way to provide the electricity. The good thing is that as Wärtsilä, we are the number one in medium-speed engines for the energy sector, for balancing, for data centers. The good thing is also that our technology is very competitive for data centers. Turning to marine, our goal is to grow above the market equipment growth in marine, which is predicted by Clarksons to be 5% until 2030. It is really focused in two areas. It is the continued decarbonization journey, and we talked about it is clearly still in focus of the ship owners. Lifetime of a vessel, 25, 30 years.
During that time period, regulation will change, fuel cost will change. Rising fuel and compliance costs, that drives clearly focus on fuel efficiency. Fuel flexibility. The future fuel, that will not, in our view, one single fuel. There will be a number of different fuel, and there is uncertainty. Then there clearly, there is value for technology optionality. In both of these areas, fuel efficiency and fuel flexibility, we are technology leaders. We are the leaders in the industry. Decarb is one. The second driver is our continued growth of our core segments. The core segments, cruise, ferries, offshore. They, if you look on the Clarksons data, they are forecasted to grow faster than the average marine market. New build, a lot of opportunity both on energy and the marine side. Here comes, of course, the next.
Every equipment sale creates 20+ years of a great life cycle service business. I mean, already today, services is half of our business, or more than half. In the coming five years, we estimate to deliver engines representing 25% of the current installed base. So significant uptick. This is an important piece as well. The new fleets, they start to generate significant service business four to five years after the equipment order intake. Four to five years. Relate that to the midterm target. That is clearly at the end of the midterm target, or even after the midterm target period. That is something you need to consider. We have some interesting growth drivers in marine and energy. I mean, 70% of our expected fleet additions, they will be in alternative fuels. And currently, if you look at our portfolio, it's about 25%.
The share of alternative fuels in our installed portfolio will grow significantly. LNG is one of the major drivers. And the interesting thing for the alternative fuels, we have 30% higher share of the customer service spending than on the diesel, the conventional. With a similar logic, in energy, 80% of the fleet additions will have a service agreement compared to the average of the current installed base of 37%. That's a significant uptick. And we will continue to move up the service value ladder. And we talked about that. It's the same strategy as before. It's working for us. It will continue to work for us for the future. And it's about bringing customers from transactional to agreements, and then to performance-based agreements. And this is really working out. I think Marine and Roger will talk more about it as an example.
If you look at our agreement today, 40% of our agreements is a performance-based agreement. If you go back to 2023, I think we were at 28%. So the share of performance-based is growing. To sum it all up from a market perspective, strong opportunities in energy, driven by structural shift of energy demand, driven by increasing share of renewables needing for balancing. On the marine side, the decarb journey continues. It's a transition that will take decades, but it drives demand for fuel efficiency and fuel flexibility. And then for every engine we put in, it's generating a really good service business for a long time period. The demand side looks really, really strong. What gives us the opportunity to win? What gives us the right to win in the market? I think we are very well positioned.
On the marine side, we are the leader in medium-speed main engines in marine. We are technology leader clearly in the high-value vessel segments. We are leader in fuel efficiency, alternative fuels, LNG methane slip, hybrids, full electrics. We are pioneer in ammonia. Clearly a leader. On the energy side, we are also leader. We are leader in the base load and balancing power and energy. And just to make sure not to upset anybody, in the space of engines bigger than 5 MW. But it's not only traditional base load and balancing, we are also clearly the medium-speed engine leader on data centers. We have the best fuel efficiency, and we have clearly a technology that consumes very little water, which is a big topic in certain parts of the world.
The key thing here is also that the engine technology, the medium-speed engine technology, is a competitive technology in many, or how you say, all of the power system scenarios. Yes, now we talk a lot about off-grid power generation, but that will be hybrid when you generate both to the data center and to the grid, then you need the flexibility. When you bring in more renewables to the mix, you need balancing. We have a very competitive technology for all of those applications. On top of this, which is all related to equipment, services. I mean, 57% of net sales year to date is services, where we are clearly continuing our strategy of moving up the service value ladder. For instance, on the marine side, as far as we know, we are the only ones providing, for instance, performance-based agreements in the marine industry.
We are the lead. This is where we are today. We are not going to stop here. We are going to continue. How do we continue to evolve our competitiveness? We are going to continue to invest in technology, to be a technology leader. We set the target to invest 3%-4% of our net sales in R&D. You could say it is a little bit of a downtick from last period, so to say, where we were probably around 4%-5%. But on absolute term, it is rather stable, so to say. It is not only investing in new fuels. It is about investing in fuel efficiency and in operational efficiency, big operations in digital and AI as well. Then, we are expanding our capacity, and we are more than doubling our capacity until the beginning of 2029. All of this, as earlier communicated.
Now we are giving some further meat on the bone. We will have, going into 2029, 8 GW of capacity, and that is split 6 GW for STH, Vaasa, and 2 GW for our joint ventures. We are scaling up in our existing footprint with short paybacks. Of course, it is not only we are scaling up, we are working a lot with our supply chain, with partnerships, to ramp up and be able to meet the demand. Also, I really would like to underline, and for those of you going to Vaasa tomorrow, and do take the opportunity, we have possibilities for further capacity expansion. When you meet our people, and there was some of you saying, "I am going to see if you can expand," please do, and talk to our people about it. I really appreciate that you take the time.
It is a fantastic place to go. I hope you will enjoy it. It is not only the place, it is a lot of people. Thank you for taking the opportunity. We are investing in R&D, we are expanding our capacity, and then we continue what we have been doing for the last five, six years, execute, execute. It is about price realization and price discipline, operational leverage, continuous improvement, excel in project execution. I mean, you saw Q3, you saw Energy, 17.5% EBIT, and you saw the drivers there, and the third on the list was project execution excellence. We got questioned, "What do you mean by that?" It is basically delivering projects with a lower cost than budgeted. Anders and the team, they have done a fantastic job. We created a strong team, a machine, and we will continue to execute with project excellence.
Then we are going to continue to have a strong focus on converting our business to cash and be also very, very balanced on M&A. Basically, the focus is both on acquisitions. We are going to leverage digital and AI. Then you say, "Okay, everybody is saying this." I get a lot of questions, "Håkan, I mean, you are selling so much energy generation to the data centers, but can you really make use of all this? I mean, is it a hoax?" I would say it is not. I see, we see so much opportunities in leveraging AI in Wärtsilä. If we talk about that, I am going to talk about three areas. The first area is how we develop our customer solutions, and it is really where we focus our AI efforts is on services. The logic is very simple.
You extract a lot of data, you combine it with our knowledge, you use the digital tools and AI, and then you provide to the customer concrete value. Uptime, reliability, reduction of fuel consumption, reduction of emissions. This area, we are sticking out our neck. We want to be best in our industry. Today, concrete example, we have Expert Insight. It is about the control system, edge computing, cloud, and the digital structure, and the data architecture. We are evolving our capabilities within that framework. But already today, this business is generating significant revenues on the performance-based side. The next two, well, we start with this one, is more about our internal efficiency. Here, we want to leverage AI as a tool in our toolbox for continuous improvement, the lean journey. There are many tools in that toolbox. AI is one of the tools.
Here, I would say, I hope we will be a little bit ahead of everybody else, but of course, everybody is doing this. I think that the key thing to be successful here is to have a strong culture around continuous improvement. It is not about having the fanciest tool. Then the third avenue that we are seeing opportunities for AI in Wärtsilä, and this is a fairly new one, is how we can use AI to reconfigure processes for competitiveness. It is basically taking an end-to-end perspective on certain processes within Wärtsilä and take a kind of white paper approach. With AI, how we would design certain processes today. So not adapting AI to existing processes, start using AI as a starting point to define processes. The key thing here, the aim is to reduce lead times, improve responsiveness, and it is about efficiency, for sure.
We are building this on the platform of an AI foundation, which is about data architecture, which we have invested in setting up the governance for agents, et cetera, and having the right tooling. Is there opportunity for AI in a business like Wärtsilä? Absolutely. In some areas, we have started. In some areas, we are just early into it. AI is fine, fantastic tool, but even more important, I would say, and something that I am really proud about the last years, is to continue to evolve our performance culture. It is about focusing on the customer, having speed in the decision-making, and then work with continuous improvement. Acknowledging that we are successful by making our customer successful. It starts with the customer. We have clear leadership and delegated P&L.
We want to give people, leaders and people, the authority and responsibility to take decision, to be quick on taking the decisions, and take those close to where the customer value is created. To build that culture, you need to care for people. People need to feel secure and trust. I am really happy with the feedback that we are giving in our service of our employers, where we are way ahead the global benchmark. We have something here, and we want to continue to build upon. This is also the foundation for working with continuous improvement. If I sum it all up, the best is yet to come. I know this is a bold statement, but I say now, as I said before, we have a solid path to reach our financial targets. Once we reach them, we revise them, and we move forward.
The solid path is built on three very simple pillars: capturing unprecedented growth opportunities on the equipment side, growing the life cycle business that follows. Yes, there is a four to five year time lag, but it is going to come. It is accretive to Wärtsilä. Then continue our strong focus on execution. With the markets that I am seeing, with the team that we are having, with the strategy that we continue with, I see really strong opportunities to accelerate the value creation going forward. Thank you. Now, I am heading over the baton in the relay race to Anders. Anders and the team in energy, they have a fantastic journey ahead. Go for it, Anders.
Thank you. As you heard, the energy industry is experiencing a shift to significantly higher demand of electricity. I am confident that Wärtsilä is extremely well-positioned to capture this opportunity and to drive increased growth and improved profitability over the next years. This is true of the midterm, but also of the long term, because with the increased deliveries, we will also have a very positive impact on our life cycle growth. I will take you through the major drivers behind this structural growth opportunity: global growth in balancing, powering off-grid data centers, and growing in service business as the installed base expands. Simultaneously, we will also be scaling our technology competitiveness and driving excellence in execution. We have an unprecedented opportunity ahead of us and full focus from our team to capture it. We have three structural drivers supporting the upgraded energy targets.
The first one is to capture the unprecedented equipment growth, and this is to expand in balancing data centers. It is also to differentiate industry-leading efficiency, reliability, and also, not least, our track record as a life cycle partner. Then we will also scale up the industry-leading Wärtsilä 46TS platform. The second driver is to grow in life cycle revenues. That will happen over many years, where we will clearly benefit from the expanding installed base, but also increase the agreements and moving up the service value ladder. The third driver is the increased value through excellence in execution, where we will continue to deliver excellence in projects execution, and we will capture the operating leverage with the more deliveries that we have and drive continuous improvement. Then, of course, we will also leverage digitalization and AI, as Håkan mentioned.
As I said, we believe we will be able to achieve these targets sooner rather than later. When I last stood here at the Wärtsilä CMD three years ago, I had been about six months into the company and into the role at that time. At that time, Wärtsilä Energy had undergone a transformation with new organizational structure, new end-to-end processes, and a rebalanced risk appetite. I talked about Energy's good foundation and having a stronger risk-reward profile going forward. Today, I can look back and say that we have really delivered on our targets and now have a much stronger business going forward. I will highlight some of the examples here, the stronger risk management, which has resulted in an increased profitability of 3.4% since 2023.
Operational leverage from growth, where we have increased the order intake with 142%, the net sales with 39%, and only increased FTEs with 6%. We have also increased with new build orders. We have a record equipment order book, 331% up. We have a very strong growth in service with 39% in the order book up, and a book-to-bill of 1.2 in service. Very important going forward, we have agreement capture rates in the new build won deals of 80%, and that is very important for the service business going forward. To summarize, we set our focus areas, we execute well, and we raise the bar. As we will take the next step, we will continue to build on strong execution, supported by significant market tailwinds, which I will talk about now.
We see a structural shift to higher levels of growth, and we would believe that this will be sustained even further than 2030. There are two levers. The first is unprecedented electricity demand. We see more than 1,000 TWh annually as an increase, and this is the highest growth period in history. The second lever is the retirement of existing aging capacity. We have coal and turbines being retired until 2030 of 200 GW. Together, these levers shape an incredible opportunity for equipment and then service revenue growth for Wärtsilä. The new demand is not just data centers. We see here that we have electrification of industries, steel, cement, aluminum, chemical industries being electrified. This will be 36% of the increase.
Then we have cooling and heating, where we can see air conditioning and heat pumps being added, and this clearly correlates with the growing per capita income. That is about 13% of the increase. Then we have the uptake in electric vehicles that we will see, and we will see a doubling of this until the end of the decade, 12%. Then you have a lot of other things, for example, appliances, and then, of course, the data centers. If you look at the totality, data centers is 9%. Most of the electricity growth will be met through grid solutions, and of course, we know that the data center will be off-grid applications as well. But overall, this increase will be met by a mix of different technologies.
The increased growth in new electricity demand of more than 1,000 TWh per year on average will primarily be met by renewables. Renewables is clearly the cheapest form of electricity across most of the world today, and we see huge increases every year. This we see on the middle graph here, where IEA have projected what's happening going forward. We see that the wind and solar is what makes up the bulk of the growth. However, wind and solar, they are intermittent and varies with time, so they need to be balanced by gas, and that's why also gas grows a lot. The increased need for flexibility and balancing is now understood by markets, the global energy organizations, and by our customers.
This will mean a gradual shift from base load gas technologies to more flexible assets, and this is why technologies like Wärtsilä's medium-speed engines will have a significant edge over other technologies in the next decades. The growth in balancing is global and diversified, more than 60% outside U.S. in the last 12 months, and we have also included deals in Brazil and Australia as examples. The other big opportunity for Wärtsilä is the power of the off-grid data centers. Data center capacity is growing rapidly. There is a lot of variation in the forecasts, and one of the lines here, the line that you can see here, is actually coming from BloombergNEF. Then you can also see that the off-grid share of data center is increasing, and it's estimated to be between 25% and 42%, again, depending on which forecast you look at.
The off-grid portion is where Wärtsilä's main opportunity is, and it will see a good amount of growth in the coming years, with a projected 50% CAGR. Wärtsilä's power plants provide off-grid base load power to data centers today, but they are also a very attractive technology for all future grid scenarios. We will see hybrid setups that serves the data centers, but also can sell to the grid. Then we will see more and more renewables being mixed in, which means that we will move more and more to a balancing model to support the renewables in the grid. We have, from mid-2025, sold over 3 GW of power plants for U.S. data centers. We see an increasing opportunity in the U.S., but also globally. We have announced, as you can see on this slide, a number of partnerships.
In short, I would say that we are perfectly positioned for this market today and for how it's likely to develop over the coming decade. Now, I want to talk a bit about our technology and why we are so confident that we will be leading solution provider also when the market moves beyond lead times as the primary concern. Gas turbines are large and very well-established technology. They benefit to a certain extent from the incumbent advantage. However, when you look at all the attributes of the different gas turbine and engine technologies that exist, and look what matters to customers, you can see that engines come out on top. You have efficiency, ramp up to full load, unlimited starts, land use intensity, water usage, as examples. We are not the only ones to say this. Also, BloombergNEF recently came to a similar conclusion.
When they compared technologies to provide primary power for a 500 MW data center, they found that engines to have the most competitive levelized cost of electricity, all things considered. At the moment, lead times are very important to customers, but competitiveness, operational flexibility, and benefits like ultra-low water usage are increasingly driving decision-making. Here, engines have a strong position. To summarize, when the market moves beyond the lead times, we are strongly positioned on LCOE and crucial attributes, and this is why we are so confident in the long-term growth. There are also differences among the engine technologies, high speed versus medium speed. High-speed engines have smaller unit sizes, and this can give them a CapEx advantage in small projects and applications with very few running hours, like backup power. This is clearly for high speeds.
When you look at primary power for typical data center projects today, and here we have compared a 400 MW example, we can see that the footprint, the fuel efficiency, reliability makes the medium-speed engines the better choice. According to our analysis, high speed needs 42% larger footprint for a 400 MW plant, and Wärtsilä's solution needs only a fifth of the units and has up to 5% lower LCOE. According to our own recent study of data center power, which we call Unlock Power and Unleash Growth, medium-speed engines have the lowest total cost of ownership for off-grid gas-based generation. Here we show the comparison for U.S. data center, but we have also done the same comparisons for Australia and U.K., and it shows the same things with slightly different numbers. This study was published yesterday and consists of two white papers.
The first white paper is technical and commercial analysis of the options available for data centers, so focusing on one data center. The second white paper looks at the system level and how data centers can create tomorrow's power system flexibility. In other words, how off-grid power for data centers can solve the future grid bottlenecks and enable renewables in the system. You can access these two and come to our landing page and download both of these if you use this QR code. We have a stellar technology, and we are scaling up the next platform, the Wärtsilä 46TS, which will strengthen competitiveness even further going forward. What I showed on the last slides was based basically on our existing platform today. We continuously invest in R&D in Wärtsilä, and this is a great example how we can turn our know-how into the next generation performance for our customers.
We have significantly increased power output. We have world-leading efficiency. We have excellent performance in hot climates, and these hot climates exist in Texas, Australia, and other places, and also with high altitudes. We have rapid response to fluctuations in the power system, and we can already operate on a number of different fuels today, both liquid and gas. Also when we get more renewables into the system, we can also provide the support and stability with our synchronous condenser application. Moving now from technology competitiveness to the here and now, meaning our lead times and our order book. We have a strong order book that gives us a very good visibility for the next few years, also including the visibility of the attractive service revenues beyond the midterm, which I will talk more about shortly.
As you can see from our equipment order book on the graph here, our lead times are lengthening. We have a lot also in 2027, 2028, and 2029. If you come with new customers that comes to us today, we will be talking about 2030. What is not fully visible on the graph is that this is not it. We have committed and reserved capacity for 2028 and even more for 2029 that is not yet in our order book. It is signed orders that may be waiting on down payment or NTP, but it is also capacity held for active customer negotiations or where customers quoted to their customers. We estimate our deliveries from now until the end of 2030 will be approximately 13 GW.
6 GW is already in the order book, which leaves 7 GW that both is non-committed in 2030, but also that are committed in 2028 and 2029. The new gigawatts that we will deliver will come with a significantly higher service agreement coverage, where you can see 80% is what we have going forward compared to our existing installed base that have 37%. This significant addition in new deliveries coming with a high agreement coverage is one of our key levers for the long-term growth in services. Growth that will, for the main part, come after the period or the midterm targets period. I said the new deliveries with high service agreement coverage is one of the key levers for long-term service growth. Every equipment sale creates robust life cycle for over 20 years.
A second lever is what we expect with the new deliveries be higher on the service value ladder and have a higher share of the customer service spend. Together, these two levers mean that we expect more than 50% higher life cycle revenue per kilowatt for the new gigawatts to be delivered compared to the current average of our operating installed base. This combined shift in increased agreement capture with the higher on the service value ladder will boost our life cycle service business for years to come, and the main positive impact is expected after the midterm growth and profitability targets.
If we dive a little bit deeper into this second lever, the increased share of service spend, or as we call it, the Wärtsilä service value ladder, we offer a range of services and agreement types to our customers to meet their varying needs for services, support, and guarantees. What we see with the customers higher on the ladder is that we create increased value for them, and we also receive very positive customer feedback in general. We see that on the higher levels of the staircase, we also have higher net promoter scores from our customers. Moving up with the service value ladder is also a positive driver for our business with three to five times the share of customer spend.
We also see that we have good progress with agreement coverage, which has increased to 37% today, and 50% of the increase is coming from the highest level on this staircase, the outcome-based agreements. Also a testament, I think, to our customer satisfaction is also our renewal rate, which is higher than 90%. Håkan talked about how we use AI to develop our customer solutions and support the growth of our service business. In Energy, we leverage AI and digital capabilities by predicting the maintenance needs by looking at the plant data and combining that with our expert know-how and AI to make predictive maintenance and avoid downtime. We can also help our customer, and especially the customers that are in balancing service, to operate in a way that they can catch the most valuable hours, because the prices on the different hours vary a lot.
If we can make sure that they can actually be up and running when they can get most money for an hour, we can plan the maintenance when the costs are much lower on the customer side. A great example of such an agreement we have with Âmbar Energia in Brazil, where our financial terms are linked to the plant performance. That's what we do on these performance-based agreements. We are in an excellent position to drive both growth and profitability. If we look at some of the highlights here on the growth side, if I start with that on the equipment side, we have already an order book that is 331% higher than we had in 2023. A lot of growth and a very good visibility from the existing order book.
On the service side, we have increased after 37% agreements, and as I said, going forward with the 80%, so clearly there will be growth. On profitability, we have increased the profitability with 3.4% already, and we have also seen that on the working capital, and this is without the advances, we have improved that with EUR 150 million at the same time as our net sales have increased EUR 600 million. This is also testament to good project execution. If we also look going forward, we also announced in Q2 that we have increased our order book margin with 500 basis point, and the development continued to be positive.
To wrap up, I will return to our three structural drivers for growth and profitability, capture unprecedented equipment growth, grow life cycle revenues, which will be going on for many years, and also increase the value for excellence in execution. Wärtsilä Energy is in a very strong position to deliver on our upgraded midterm targets. I have highlighted throughout this presentation that we believe in further value creation beyond the midterm, driven by strong market position, technology competitiveness, and a significant long-term service growth. Thank you.
Thank you, Anders, and thank you, Håkan. We start our first Q and A session. We will start with the questions from live audience here in Salmisaari. If you have a question, please raise your hand, and please wait until you get the microphone. When you get the microphone, please start by saying your name and organization. I kindly ask you to start with one question and leave the follow-up questions to the second round. The people following us via webcast, you can send your questions via the chat, I will raise them here. Let's start with the first question. Maybe Daniela.
Thank you. Can I actually ask one clarification through one of the numbers before my real question? I did not understand when you divided the 13 GW into six, which are already in the order book, seven, which are outside. You said some are committed, some are not committed. I thought you did not take reservation slots, I was not quite sure what you meant by that.
We have 13 - 6 , it is seven that remains, so to say, that is not in the order book that we have capacity for up until the end of 2030. I said that in 2030, most of this capacity is free, meaning that if a new customer comes, we will direct them to 2030. What is not in the order book and what is not free is what we still have not booked in 2028 and 2029. We have not slot reservations, but sometimes we have signed a contract, and we have not received the down payment or the NTP.
Notice to proceed.
It is not in our order book, but it is committed. Or we have a customer that are waiting to sign their PPA, so they have agreed with us that they have these slots, and we have, so to say, waiting for them to be able to commit to us. It is not a slot reservation, but it is a commitment. Or we might be negotiating the contract, and that can sometimes take 30-60 days for that, so
Yeah, very clear.
Yeah.
Got it. Very clear. My question was regarding you had the comparison between high speed and medium speed, and we have heard some of the high-speed players saying they are going to go back to medium speed. Some had it years ago, some don't. Can you talk a little bit, like technologically, what are the barriers to entry for them? They already have the data center customer relationships, I guess. And I guess the same goes if you wanted to go to high speed, what would prevent you from going in, if you can talk about that?
Yeah. I talked about the gas turbines being the natural choice and the incumbents, so to say. But also the high speeds, you are absolutely right. If you look at the data center segment, the high speeds, they have been doing business for years with data centers because they have always done the backup, so to say, when they were grid connected and smaller. What happens now is, of course, that the data centers are much bigger and need primary power because it is off-grid, and that is where we have an advantage with the medium-speed technology. And that might be, of course, why some of the high speeds also then take up the medium-speed technology, because there is an advantage in efficiency, in maintenance, you saw also on the number of units, the area that you need for installing your primary power. So there are upsides on that.
And fully agree. And don't forget, we talked about that before. I mean, we were not, as Wärtsilä, in the data center business two and a half years ago, because the data center business was completely different. I mean, if you built in a data center in those days, you were looking for 20, 30, 40, 50 MW. In the U.S., you signed a PPA with the utility, so you were hooking up to the grid. Then you bought some high-speed engines from Caterpillar or Cummins as a backup if the grid failed. And our engines are too expensive. I mean, they do the best when they operate a lot. So that is why we were not in the business.
So what has changed is the size of the data centers are growing with AI, and now it is much more difficult to contract and sign a PPA for 500 MW. So now you need thermal generation with high uptime, high reliability, often off-grid, and this is why the market is moving into our sweet spot. And we know that some of the high speeds, they are moving up, revitalizing their old platforms. I mean, right now, and I said to you in the audience here, in the pre-talk, you can sell any technology. The market is so hot, you can provide any technology, because the core decision parameter for customers right now is delivery time. But many of these technologies that kind of revitalizing, they are a little bit old. They are not stellar in fuel consumption, et cetera, et cetera.
And that is why our message is, right now, any technology, because of the strong demand, you can sell it. But when it balance out, it will be going back to the good old parameters of fuel efficiency, water consumption, da, da. And in those parameters, we have the leading technology. Also, you should recognize, if you look at the W50, W46, they are at the 20, 23 MW. Some of these revitalized platforms, they are 10 MW. So the size is much, much smaller, so to say.
Yeah.
Hi.
Uma, please.
Yeah. Hi, it's Uma from Bank of America. Thank you very much for taking my question. I have a question regarding the 80% capture rate that you communicated. I was just wondering, how should we think about the transition from the 37%- 80%? What drives that, and what are the margin opportunities associated with that? Yeah, some insight there would be great. Thank you.
The 80% we have defined on having a service agreement before the COD. That is the definition of the-
Start of operation.
start of operation, yes. That's how the 80% is. Yes, it is considerably higher than what we have had in the past, and therefore, we will be able to increase our service business. This has to do a little bit about two things, I think. One is clearly that the type of customer signing this today. If you say data centers or IPPs, so independent power producers, they don't have a big organization and tradition to run these things, so they want to maximize the reliability and availability of the plant. That is their goal, to the lowest possible cost, and they don't have an organization themselves to do that. There it's a great opportunity for us to do this signature.
Then the other thing is that, what I mentioned to you, that in 2023, we had a new organization in Energy where we said that let's now focus not only on selling new build, and then we have another part of the organization far away that is doing some service. So we said, "Let's now look at the end-to-end." Energy is there to serve the customer end-to-end. So we are working closely between the service and the new build. So we work with that from the beginning when we start the discussions with the customers, and therefore, we are also able to sell much more service agreements early than we were in the past when we came in and knocking on the door long after the plant had started up. So I think it's also due to that change of how we work with the customer.
Building on, I said, Anders and the team, they've done a fantastic job. I mean, we have had a complete market breakthrough on services in the U.S. And as you know, we are putting in now a lot of new capacity. So that's why we are so excited. And on your question on margins, et cetera, it will be accretive to them. Absolutely, it's clear.
Akash, please.
Yes. Hi, Håkan and Anders. Thanks for your time. It's Akash from JPMorgan. My question is more on long-term demand, because when we hear from you and your competitors, everyone is kind of sold out by 2030, and now discussions is going in more in 2030s. And here, I mean, one fact is that you are going to deliver 13 GW by 2030, and when we look at each of these large gas turbine makers, they have more annual capacity than what you're going to deliver over the next four and a half years. So the question I have is more like, when we look at these slides on economics, and I think when somebody's planning six year in advance, probably they can focus more on economics then.
When it comes to, let's say, if we have to think about your market share between 2030 and 2035, do you think there is a big potential for Wärtsilä to gain market share based on the economics, based on the lower water usage, and all the things that we have heard today. Or is there anything that is keeping you on hold. If you expect to gain market share, then when should we expect to hear the next announcement on capacity increase. Thank you.
No. I think, as I have explained also in the presentation, that we are very well positioned when the market will not only be about lead time because of the attributes and also because of the life cycle cost. Today, I think that the life cycle cost is not the primary driver for the decision. It's since the value of being late with the whole data center is so much higher. Today, it's clearly on delivery time.
But I think that when this change, and we can discuss when this will change, and I don't know the answer to that, but I think that there will be a change going forward since capacity is added to the market all times by us and by our competitors as well. There will become a balance in some point in time, and then I think that we are in a very good position to defend our market share or even increase our market share, which then will, of course, require more capacity if we increase our market share.
It, yeah. I mean, adding, I think this is also why we are so excited is this is a fantastic opportunity because more and more customers that are normally very used to gas turbines, they try the engine. Maybe we have failed in the past to, it's the same message, but maybe we haven't been able to get through. But now when people try the technology and they see that fuel efficiency, flexibility is real, they like the new candy, and they come back. We see that because we have repetitive orders with customers that clearly acknowledge the benefits. Now, coming back to what I perceive to be the core of your question, which is very relevant, if you're so confident on the long-term expansion, why don't you build even more capacity.
And our view on capacity building has been, we take this step-by-step approach, and you clearly saw in my slides, we have opportunities to further expansion, but we take it step by step. As I said before, I know you will be going to Vaasa, ask your people there what they say, so to say. We have opportunities. As we will get confident and we get the supply chain in place, et cetera, that's certainly opportunities going forward.
Maybe I'll add one more thing. Because one thing is, of course, about the competitiveness and the technical attributes. But I think that what also customers do discover, and I heard that directly from one of our customers that are using several technologies, they said, "You're quite rare. You deliver on time. That's quite unique," he said, without us even asking about that. That is coming back to what Håkan mentioned in his opening, is about execution. Besides the technical, I also think on the execution side, we want to be known for the ones that you can depend on and that delivers on time. I think we are that in the business. The more customers that experience that, or experience when it is not like that from others, the stronger we will be.
Please.
Yeah, Sebastian Kuenne from RBC. I have one clarification question and then a proper question. On your chart 14, you show the increased lifecycle revenue per engine. I'm not sure. It says here it's based on the higher capture rate and also more spend per engine. But if I exclude this higher capture rate going from 37% to 80%, I would get a much larger number than 50% growth. Is the spending per engine then going down? I'm not quite-
No. First of all, this can be per kilowatt, per engine, or per plant. It doesn't matter what is the base, so to say. It can be all three of them. In all those cases, it will be 50% more with the new than it was historically.
It includes the jump of the capture rate as well?
It includes the capture rate going from 37% to 80%, and it also includes the service ladder as well.
Okay. I will have to make some calculations there. My second question, and the proper question, is the service income or service potential you get from the energy side, how does it compare to a standard marine engine? Because the, I would say, the wear and tear on the marine engine is much higher, need more preventive maintenance. So, how should we understand this service development on energy compared to marine? Thank you.
In the very simplistic, I mean, we have two applications on the energy side. We have base load and balancing. Base load, 24/7, 8,000 hours in a year. That's very similar to marine. I mean, marine vessels are not at sea all the time. So, I would say in terms of running hours and therefore spare parts and service is very comparable. On balancing, where there is no formal definition for balancing, but we say loosely defined 3,00- 5,000 hours.
Of course, the running hours are less, and there are less spare parts because of that. And this is also why, in the previous period, because there were concerns, and maybe there are still concerns, if you have a lot of balancing power, will your service business go down? No, because we move up the service value ladder, where we increase our share of the customer service spending. Power plants that run 24/7, it does not matter if they are at sea or on land, they run continuously.
The other thing, of course, with the energy application is that we have the engine, but then we have a lot of critical modules around the engine that we also deliver. There is much more than just the engine to service for us. We can also service all the equipment around, the fuel equipment, the cooling equipment, and all the other modules that we deliver around, which is also a fundamental part of our delivery.
Also this argument, because for those of you who has followed us for a while, I think a couple of years back, we have the service kind of fora where many of you were calling in, and because there was a lot of balancing, less hours, what will it do to your service business? But we could also show that if you look at the average operating hours in the installed fleet in Energy, it was still going up. But how can that be if you are balancing and it is increasing? Now it is going to be a lot of data centers, so the pendulum has swung back. But what happened though, and that is still very relevant, the coming back, and like this, customer install running, okay, initially we are going to run it for 3,000, 4,000, 5,000 hours.
They started to run, and I know this in Germany, for instance, very concrete example. They saw, "Wow, this plant is the most energy efficient in our whole fleet of gas turbines and other things." "Yeah, we thought it should be run like balancing." "No, no. We run it as base load. We make a lot of money." That is why customers that have installed on balancing power plants, sometimes they see the good candy and they run them even more.
Not only that they run them more, they are also actually able to catch the price spikes. If you go to Texas, for example, you have a lot of variability on the prices. If you can catch the price spikes, meaning you can start up very quickly and shut down when it is over, so to say, you can catch that. I was together with our team in the U.S. here a couple of weeks ago when we met the customer, and the guy had just been on one of the customer's gas turbine plants, and he had just changed over some months ago. He said, "With these engines, we can really catch the most priced minutes, so to say. By that, we can make much more revenue, and therefore we run much more hours than we had predicted." They are valuable.
Just to that was a little bit, that is the balancing narrative still there. Of course, now when we look forward, data centers, it is high uptime, high reliability, 24/7. That is why we say it is a significant service business, the data center business. In data centers, we are also moving up the service value ladder, i.e., we have high content of the service budget of the customer.
Thank you, Håkan. Now let us take a couple of questions from the chat. Question regarding Energy's midterm margin target. Why does Energy's midterm margin target stop at 18% despite capacity more than doubling, strong demand, and higher service attachment? What limits further operating leverage?
We have set our target together with the overall group, and to a midterm target. When we reach that target, we will have to revise it. I think it better to have a realistic target that you see in the nearer future, so to say, than having a long-term target, which is more uncertain. We will do that, and we will upgrade, just as we did with last time we set targets.
I think that for those of you who knows us, I mean, the last six years, we set target, the initial target, I do not know, for those of you who remember, we were at 5%, 6%, and we said 12%, and then some people said, "Oh, can you make it?" But we said, "We are convinced we can make it. We have a solid path," same language, and we made it, and we upgraded. Solid path, we made it. Now we set targets again, solid path, we will make it, and we also say sooner rather than later.
Then another question.
The team is the same, and the strategy is the same.
Thank you, Håkan. Another question from the chat. What do you see as a company's biggest challenge for maintaining growth and being able to answer to the demand?
The biggest challenge is the risks.
Biggest challenge for maintaining growth and being able to answer to the demand.
I think that, of course, having made two announcements this year on increased capacity, we now also, of course, need to make sure not only that our own capacity in Vaasa, which some of you will visit, but also the whole supply chain is there. As I said, we cannot fail on delivering to our customers and having delays. We take great pride in the way we execute. I think that a lot of effort goes into that. Also, another area that we should not forget is that once we get up and running this, or have them installed and up and running in the U.S., we will also need a lot more people. We also have launched a project internally, which we call the Giga Next project, where we actually have recruitment, development, and training of people, and a lot of people.
We will double the amount of people here in the next years in the U.S. for servicing our equipment as well. That is also a challenge, of course, because we are not the only company. We even have customers that say, "We have difficulty to get people. Can you do the service for us?" But we will take that challenge, and we have already started hiring people and have had the first two cohorts of development and training of these people as well. I would say this is the important thing.
I will build upon that because everybody is, of course, trying to recruit people, especially in the U.S. We have a very structured approach. This is where I will also highlight this in the culture. I think the retention rate, if we ask our people, "How long do you want to stay and plan to stay in that?" It is long. We are way over the kind of benchmark, global benchmark. I think Sanna and Risto, you are here, I mean, the head of North America and the U.S., you can talk, and they are right in the middle of this.
If I take a different perspective on the question, I would say we have a lot in our own hands. We have the right products, we have the right team, we are building, we are expanding. We should be humble in the sense that expanding a supply chain and building up, it has certain risks, but I think we have a strong team on the executional side. What are the market risks? I would say that, as we try to convey, our view is that the fundamentals are solid and they are structural.
The general economy, and that we can all have a view. I mean, if, let us not hope for this, that there is significant damage to energy infrastructure in the Middle East or something, or we get inflation rates that really bites, of course, that will affect the interest rate, et cetera. I mean, if you ask, what are the major risks around this story around that? That is the major risk. Our own execution, we feel very confident. That is why we reiterate, we are on a solid path to reach our financial targets.
Let us continue with the questions from Salmisaari, please, on the first row.
Hello. Thank you for the presentation. My name is Olga Marjasova. I am from Evli Fund Management. My question is regarding your midterm target of high-teens growth for the Energy business. Can you provide some kind of color? What are these end markets which you expect to grow? Is it like data centers mainly? Is it like industry? Just to get some understanding as a current picture.
Yeah.
Thank you.
The overall electrification is growing, as we have shown a lot. From that, we get the balancing applications. That is one that will grow with 25% CAGR, so clearly higher than the high-teens. We have the data centers off-grid, which we have seen in the forecast that will grow with 15% CAGR, depending a little bit on which forecast you use, but that is what we see. You can say that the combination of those will be the high-teens that we will grow with.
There is a little bit of abnormal base load as well, which is not growing as fast.
Yeah.
If you mix it all up, because I know some of you will make the calculations, then it adds up to this high-teens.
But the two big ones is the balancing and the data center, and then we have a little bit of base load, which doesn't grow that much.
Antti Kansanen, SEB. I had a follow-up question on a potential capacity increases or the curtailments today. If you would like to expand your delivery capacity, how much is it due to Vaasa, and how much is it for your suppliers? Maybe more in detail, how do you work with your suppliers to incentivize them to grow the capacity? How much you invest yourself? How much is based on your kind of suppliers' willingness to expand? Do you need to provide some type of guarantees for them?
When we need to expand, we both need to expand our own in Vaasa and our supply chain as well. It is both, of course, proportional. We also, as I mentioned, have the other modules in Energy around the engine that we also need to expand, which we are making a lot of them in India, in Khopoli, today. It is our own factory down there as well. Talking about the supply chain, we have worked with our suppliers a long time. I think it is a lot about trust, working together, a partnership. We, of course, the first thing we do is to tell them about how we see the market and how we see our capacity developing and invite them to be part of that expansion, which is, of course, interesting for them as well. That is normally how we do it.
If I complement. Part of the investments is clearly in Vaasa. Part of the investments is with our suppliers. We do not have one model. Each supplier is different. The public example, and that we announced December last year, is our strategic cooperation with our engine, the big engine block provider, Siempelkamp, where we announced strategic collaboration for several years to expand the capacity. Siempelkamp we made public because there was a mutual will. Those type of agreements we are formulating with other suppliers as well. We just do not make them public. There are some of them, the suppliers financing themselves, some we are helping co-financing. There are several different models. I would say, and I give a lot of credit to our supply chain team, because we have been early out there working with our core supply chain.
We have been stocking electric circuits. We all know that is a big topic. Also remember, during COVID and when we came out of COVID, we had a very robust supply chain. I think our supply chain team has continued to work on that. It is not easy, but we are doing a structured work. It is really, as Anders was saying, building on the long-term relationship that we have with many of our core suppliers. Anders, you wanted to say something?
I would just say that the normal is that the suppliers invest in their business and we invest in our business. It is in some specific cases where we would help suppliers to invest.
What do you think is the lead time in the sense that if you wanted to decide on further capacity expansion now, what would be taking the longest time? Is it the suppliers or is it the square footage in Vaasa?
I think it's not a big difference. There are suppliers that have longer time and shorter time, and we have our own time. I don't think it's both ourself and the suppliers, so to say. I don't see a big difference on that.
There was a question on the back.
Thank you. Hi, it's Nabil with Deutsche. Just sticking with the topic of capacity expansion, I think you partly addressed this in the previous question, but I realize, Håkan, you want to take things step by step, but just wondering what would be the trigger that you would need to see for, I guess, the next step? Is it just a matter of waiting for the supply chain to ramp up, or would you also need to see a further step up in demand in terms of visibility, in terms of the orders and commitments that you've got? If you can also talk about if you assumed any further capacity expansion in your financial targets, that'd be great.
Yeah. Anders, please.
I think I can answer generally that we, of course, see a very strong demand. As I also mentioned to somebody asking me, I mean, all our customers, we see continued strong demand. I know you can read in the papers about AI and not AI and what's happening and should we stop development of AI, et cetera. But I can just say what we see from our customers is continued very strong demand. We don't see the hesitation. On the contrary, we see very strong signals from the market. The other thing is, as you already mentioned yourself, is of course how much of the capacity do we have available.
When we see that capacity starts to go down, that's also a clear signal that we need more capacity. I think that that's from the demand and capacity side. Then, of course, we also need to work with our own STH and our facility also in Khopoli in India, as well as with our suppliers to make sure that we can execute. That is also work we need to do. It's not just to say, "Yeah, demand looks good. Capacity is running out. Let's take the decision."
We also, well in advance of that decision, start working with our suppliers and our own teams up in Vaasa to make sure that we actually can deliver on such a plan as well, because that's key. When we go out and say that we have taken this decision, our customers will ask for these slots, and then we need to be able to commit. When we commit, we will deliver. It's quite a lot of work in front of taking such a decision, not just looking at two KPIs and say, "Go."
We have a strong view on the market, what we are getting formulated there, how far out are you relevant, depending on when you can deliver. I mean, the demand is there, but if your delivery times are stretching too far out, it starts to be too long. But underlying demand, timing of that, and then it is ramping up our supply chain. I think these are the two components. Because, as Anders highlighted, we want to be in our DNA of executing to also our customer and others, under-promise and over-deliver.
We have time for one last question before the break. I think there was a question on the back earlier. Oh, then on the first line.
Thank you very much. Will Mackie from Kepler Cheuvreux. I have a question about how you have experienced demand and how you are seeing it in the market related to your order book and how you expect it to deliver. Firstly, can we level set and provide a bit more color on how your order backlog breaks down between the customer types that we have discussed today? Then thank you for the detail about the 500 basis point expansion in the backlog margin, but you have talked about another 7 GW that is in signature in the near future, well, medium term. How would you expect pricing or that backlog margin to develop as we go over the next couple of years? Thank you.
I think we will not continue to give updates on our backlog development. We made it in Q2 as an exception that we have increased it with 500 basis point, and I think I said already when I presented that the development continues to be good. That is what we can say.
The future will also be a mix of data centers, balancing power, base load power. It is a mix. As we talked about, we are building a diversified customer base within Energy, but also between Energy and Marine. We are in the business for long run, and we know that certain geographies can be stronger than they are weaker. So diversification and long-term growth and analyzing both the new build equipment and the overall life cycle. I mean, when Anders analyzes business opportunity, he looks at the holistic business.
Thank you, Håkan. Thank you, Anders. Thank you for all of the excellent questions this far. Please remember that we will have a second Q and A session with all of the presenters later this afternoon, and we are open for any questions then. Before going to the break, I would like to introduce some of Wärtsilä's leading experts who are here with us today, and these will be available during the break, so please take the opportunity to meet them, ask questions, and continue the discussion. We have grouped them by area of focus. Starting with our Marine Service team. Matteo Natali, Vice President for Strategy in Marine. Andrea Morgante, Vice President Performance Services Marine. Stefan Wiik, Vice President for Parts and Field Service in Marine. Together they can speak of how we support our Marine customers from strategy to performance services, parts, and field service.
Next, our Energy Services team. Markus Ljungkvist, Vice President Energy Services, and Sanna Silander, Business Director North America Energy. Markus and Sanna are the right people to talk about our service offering for Energy customers, including data center customers. Finally, the experts who can discuss the engine as the winning technology for power generation. Malin Östman, Vice President Strategy and Business Development in Energy. Risto Paldanius, Vice President Americas Energy. Erik Jungner, Director Technology Energy. Malin can share the insights of our strategy and business development in Energy.
Risto has a deep knowledge of America's market, and I also want to highlight that Risto had good relations and knowledge about our data center customers. Erik can take you through the technology perspective. For online followers, we have prepared short videos from the same experts. Now we will take a short 30-minute break. Please be back at your seats at 4:00 P.M. Finnish time. We will turn to the seas with Roger Holm, who is leading Wärtsilä Marine. Thank you.
Welcome back from the break, and now we are going into the exciting world of Marine. I meet frequently ship owners from different segments, and for a ship owner today, the next one vessel lifetime, meaning 25+ years, is increasingly about optimizing your financial performance. As a ship owner, you are on a journey where regulations is to some extent unclear and uncertain, but you know that either wrong decision or no decision at all will be costly for you. My message to our customer is that partner up with Wärtsilä, and we are going to help you to maximize your profitability during that journey. Today, I am going to give you proof points on why we are unique in our market position and why we are the best one to help our customers to optimize their profitability.
Our upgraded targets are based on three structural drivers. Number one, capture above market equipment growth. We see a positive outlook in our core high value segments. We see a decarbonization-driven demand for efficiency and fuel flexibility that plays to our technology strength. Number two, to grow lifecycle revenues over many years. We see a growing installed base with increasing technology complexity. We see expansion of service agreements moving up the service value ladder and more towards outcome-based agreements. We see retrofits accelerating towards the end of the decade. Number three, to increase value through excellence in execution. We see an operating leverage through increased volumes, both in Marine but also in combination with Energy.
We are continuously looking at our internal operations to see that how we can improve, and we see an increasing part coming from both digitalization and AI, where we can get more value through. In the end, of course, also through disciplined price management. This is then leading to our upgraded Marine targets with a mid-single digit annual organic net sales growth and a 14% operating result post IFRS 18 that Arjen will come back to later on as well. But before going into the future, let's look a bit at the history, and we have had the same strategy for years, and the strategy has played out very well for us. If we look at milestones achieved since last CMD in 2023, we are number one in four-stroke medium speed engines. We have sold more than 400 methanol engines.
The first ammonia engine has been delivered, and we have clearly the lowest methane slip in the industry, being a key value for LNG-powered vessels. We are number one in hybrid and full electric vessels, and also first hybrid electric concept is contracted. We have the first full-scale carbon capture installed early last year, capturing up to 70% of carbon on board a vessel, and we have the first Gate Rudder system delivered. The only target that we set back then where we have not been grown as fast as we expected is on the decarbonization-driven retrofits. We have been growing, but not as much as we expected due to still lack of global regulations. This has delivered profitable growth, net sales with a 10% CAGR, an order book that is up 53 percentage points, and an agreement coverage that is up 4 percentage points. Outcome-based with 12 percentage points.
What we are really proud of, more than 90% renewals on our agreements. On profitability, 3.1 percentage points up. The past, strategy-wise, we have a lot of proof points, and we see that the same strategy continues and will play well into the future as well. That's about the history. Let's then move into the future. Rising fuel and compliance costs increase the value of fuel efficiency, and IMO net zero targets by or around 2050 still remains. What we are lacking is the emission cost connected to that target. Having said that, this is still leading to fragmented regulation. We have EU regulations in place, a concrete example where we have seen $5.6 billion cost for shipping for 2025 emissions. We have also seen early this year China putting a target that lowering CO2 intensity in shipping between 25% and 30% with 15%.
I was in China two weeks ago. We see clearly more and more focus on green fuel production in China. We see parts of the ecosystem coming together in a way that I'm very certain that this 15% in China will happen. Most probably we will see it even more during this time period. There are clear indications that this is moving in a more decarb direction. This transition will accelerate during this one vessel lifetime. As fuel costs increase, the value of efficiency is increasing, and you can see an example here in the middle of the slide where over that vessel lifetime, the cost of fuel and emissions will increase significantly. This is playing directly into our strength from a technology and value creation point of view. The fuel uncertainty increase the value of technology optionality.
Today, we see that LNG is accounting for around 30% of the gross tonnage of the shipyard's order book, and it's increasingly seen as a longer term option in the maritime world due to lack of availability of green methanol and green ammonia. We have the market leading LNG main engines with 85% market share and the industry lowest verified methane slip. What does this mean then in practice? If you take a large vessel operating in EU waters, this methane slip benefit can be in the millions of annual savings for the customer. So it's both an emission benefit as well as a financial benefit with reduced emissions. Fuel flexibility is a key element to provide to our customers. Ship owners are looking for this fuel flexibility, and we hold the leading position in all the alternative fuels.
As a ship owner, you have more or less three pathways or a combination of these to move towards net zero. You can burn less fuel, you can clean up emissions, or you can use alternative energy sources. If you burn less fuel, it's about vessel efficiency where we are the leader in fuel efficiency. It's operational efficiency where we are the leader in voyage and energy optimization. When you move to cleaning up emissions, it's about carbon capture where we are a pioneer, and I talked about the example already operating where you can capture up to 70% of the carbon. Or when you move to alternative energy sources, it's about sustainable fuels where we are the leader in LNG, methanol, and ammonia. Or you move to electrification where we're also the leader in hybrid or full electric installations.
What makes us unique in the market is that we are the only one that can look at this full spectrum together with the customers, both for your existing fleet and for your new build. It's not just about the technology solution, it's also about the timing. When do you need to do the necessary investments to optimize your financial investments versus your financial performance? The fuel transition is further strengthening our competitive position. In our core market, four-stroke medium speed main engines, we have a market share of 45%. When we talk about alternative fuels, including LNG, we have an 85% market share. If we look at then the auxiliary engines where we have clearly more players, it's a more commoditized market, we have a 10% market share, but also there, our market share is the double if we look at the alternative fuels.
This shows the technology strength, but it also shows the value of the R&D investments that we have made in the past. This is clearly where it's paying off. We see a positive outlook in our core market segments. If we look at the four-stroke medium speed main engines, we have in the past seen an 8% CAGR while we have been growing 10% CAGR at the same time period. For the future, that same estimate is about 5% CAGR, and we hold a strong position in the key segments where we have relevance for this. So number one in cruise, number one in ferries, and number one in offshore. This is an excellent starting point for our new build business. Then it's not only about new build.
For every new build sale, we are creating about the same amount of service income during the lifetime of the vessel, which is then our time period of up to 30 or some cases even longer than 30 years. If you look at the graph here, you see that from order intake until the service operations start to generate service income, it's about five years in average. Then you see a curve that is going a bit bumpy up. This is connected to where we see bigger overhauls during the journey of the vessel, then ending up in about the same value for the service business as we see for the new build. For Marine today, we are even over 60% of our sales is connected to services. The growth of our install base and the shift towards alternative fuels is expanding our long-term service opportunity.
Our install base today is around 60 GW, and around 25% of that is alternative fuels. If we then look at estimated deliveries until 2030, we are estimating 17 GW, about half of that coming from our joint ventures. Out of that 17 GW, 6 GW are in the order book today. If we compare that a bit with history, if I would look at the same picture in 2022, this 17 GW would be about half for same time period going forward. Also interesting when you look at the future deliveries, we estimate 70% to be on alternative fuels. When you look at the share of customer service spend, it's usually about 30% higher on alternative fuels than diesel installations. So you have two benefits out of this one page.
One is that we have a clearly accelerating install base coming in, which is then giving service business when we are five-plus years ahead. On top of that, the mix is changing. We see more installation moving towards alternative fuels, which is good for our service business. The service growth is, as said, driven by the install base expansion, but also the agreement growth and outcome-based models. We have seen agreement coverage of the install base growing from 33% to 37%, but at the same time, we are moving up the service value ladder. So 28% share of the agreements are outcome-based to now 40% as we are today. These outcomes are then clearly providing more value to our customers, based on what we can help them with. Again, the 90% agreement renewal rate. This is a lot about the value we can create.
We can sell the agreement once, but when the customer is renewing it, that's the true verification for the value they have seen of the agreement we have had with our customers. On the retrofit side, we can divide the retrofit opportunity in energy saving, fuel conversions, and carbon capture. Today, a lot of what we see on the retrofit side is on the energy saving side, also a bit connected to the higher fuel prices as we see it today. Going forward and coming towards the end of the decade, we estimate we will start to see more on the fuel conversions, but also on the carbon capture uptake come from retrofits. Håkan talked about AI and the opportunities AI is bringing in. I wanted to bring in two concrete examples here how we use AI.
If I start from the customer angle and AI-enhanced customer value, we used AI-powered diagnostics. What we do is we combine real-time data with AI-powered analytics and expert know-how to detect anomalies and improve asset performance. In this example, we have a clear case where we have for a customer saved EUR 3.5 million in saved in fuel spares, labor cost, since 2025 across a fleet of 14 container ships. A clear proof point for our agreements where we use our internal know-how together with data and AI capabilities. If we look at AI-enhanced productivity, agentic parts quotation, we are already using today and we are scaling it more. What this does is it automates quotation processing for spare parts.
It's shortening response times, so giving better customer service, but through faster response time, it's also improving hit rates, and it's then increasing productivity internally as well. Our target is that during first half of 2027, more than 30% of our parts quotations would be touchless. These are two concrete examples of what we can do using AI to optimize the customer value and then drive efficiency improvements. Looking at growth, it's starting from the positive outlook in our core segments. It's about being well-positioned in the decarbonization journey, where customers already today demand fuel flexibility. They want to see efficiency and this plays to our technology strength. On the service side, we see a continuously growing install base and expansion of service agreements, thanks to the value we can bring and also more to the technology complexity.
Retrofits coming in towards the end of the decade with further opportunities. On the profitability side, it is to look at operational leverage, continuous improvement, and more and more digitalization and AI, and then pricing optimization based on the value that we provide. Three examples on execution excellence. We have improved the engine production lead time with 33%, which is clearly providing more value and capacity through the factories. Service net sales through online portals has increased with 52%, and excluding advances, we have more than EUR 100 million decrease in working capital, while net sales is still up with more than EUR 700 million. This shows the efficiency on the operation also in impacting the capital usage. To summarize, decarbonization leadership really drives profitable growth in equipment and services. We see our position to be perfect on this journey.
Yes, we have less clarity on the global regulations, but the fragmentation is there. We see local regulations coming in. All ship owners today think about, "What do I need to do during the one vessel lifetime?" And we are perfectly positioned on that journey. That is driving the lifecycle revenues, it is growing our install base, and we are growing with our outcome-based agreement and climbing the service value ladder. We are increasing value through excellence in execution. This makes us very confident in reaching the upgraded Marine targets. Thank you. With that, I will hand over to Arjen, our CFO.
Hello. As my colleagues Håkan, Anders, and Roger have explained, we are on a solid path towards new, realistic, mid-term financial targets and sustainable value creation. This is not a new journey. This is a continuation of a journey actually that started years ago. We committed, we delivered, and we commit again. At Wärtsilä, we set realistic targets that we are confident to achieve. Then we commit to them, we deliver upon them, and then we set new targets. Of course, as my colleagues have also referred to, we want to achieve them sooner rather than later. With these new targets, we continue our growth journey, just explained by Roger and Anders, with a clear acceleration in Energy. We expect profitability to improve for years to come, with the next target in reach being 14% operating result for Marine, 18% for Energy, and 16% for the group.
Let me come back on the details later on in this presentation. As said, we committed and we delivered. All the targets that you see on this slide have been delivered within two years after they were defined. I will not run you through this slide, as I am sure you have seen it. We have shown it in earlier occasions as well. What I do want to highlight is that while we were delivering on these targets, we simultaneously executed targeted actions to improve the resilience and quality of our earnings for the future. A few of these actions I would like to highlight. First of all, the growth of the installed base covered by agreements. It moved from 2023 around 30%, okay, the exact numbers you saw earlier, 31% in Energy and 33% in Marine, to 37% today in both businesses.
Clearly a proof point of moving up the service value ladder. Second point I want to highlight is the EPC share in the Energy order book that goes down, or went down, from 30% in 2023 to 10% today. For reference, in 2022, it was 60%. Clearly lowering the risk in our order book. Third point I want to highlight, investments in the future. We consciously decided to increase the R&D spend. Historically, for those that have followed us for a long time, we are typically, let's say, 3% of net sales is R&D spend. The most recent years, it was more 4%-5%. It was a conscious choice to be able to be the front runner, the technology leader. We also invested in capacity expansions. You saw the announcement earlier this year, as well as service infrastructure. Fourth point, tight working capital management.
If you look at our working capital balance end of Q3, it was EUR -1.6 billion. EUR 2 billion of that is advances received. It is money borrowed from customers. If you exclude that, you get to EUR 400 million positive working capital. On that level, also like my colleagues explained, we have done great work. Over the past three years, we have reduced that by EUR 300 million, while at the same time, the sales went up with EUR 1.3 billion.
Finally, what I want to highlight is our divestments of the portfolio business. So, 11 business units divested since 2019, as well as the establishment of the energy storage joint venture recently named Valo. Delivering targets comes through focused effort, yesterday, today, and tomorrow. If we now shift from backward-looking more to, let's say, forward-looking. We earlier had a combined set of targets for Marine and Energy together.
We now introduce separate financial targets for Marine and Energy, as both have distinct market dynamics. Before going to the numbers, let me spend a few words on IFRS 18. IFRS 18 will be effective 1st of January 2027. It will introduce a mandatory standard structure for the income statement with new subcategories and subtotals. That, in practice, means that the operating result of tomorrow, so post-IFRS 18, has a different content than the operating result today. There are two main differences for Wärtsilä, which are main differences that are relevant. First of all, joint venture results. Joint venture results are part of operating result today, but they will not be part of operating result tomorrow. I mean, then post-IFRS 18, because they will be in a new category on the income statement called result from investing activities.
This is, of course, mostly relevant to Marine, as Marine owns the joint ventures in China, which is a single-line consolidation today in our income statement, as they only produce marine engines. The second point that is of difference is the cost of hedging, the forward points. That is today part of financial items on the income statement and will in the future be part of the operating result, majority in cost of goods sold. So IFRS 18 will significantly change our income statement and the content of operating result. If we then look at the numbers, first of all, Marine. Since 2023, Marine realized an annual organic growth of 10%, while at the same time improving the operating result from 9.9% to 13.0%, so 3.1% up, you could say, average percentage per year over that horizon.
The IFRS impact, estimated impact for Marine, if we take the last 12 months ending Q3, is estimated to be around 0.7 percentage points. It is good to note here that the targets that we set for the future, they are IFRS 18 compliant. Would IFRS 18 not be implemented, for sure our targets would be higher. Also, comment to make here is that, let's say, the official restatements of the IFRS 18 impact on the 2027 full year will be published in March 2027. If we look at Energy in the same way, over the past year, let's say since 2023, I mean, so past three years, you could say, annual organic growth of 16%. While the percentage, let's say operating result percentage, moved from 12.3 to 15.9, 3.6 percentage points up.
Estimated impact in Energy of the IFRS 18, mainly coming, I would say, from the hedging cost in this case, is 0.6 percentage points. If we look at the group targets for, let's say, growth and profitability on this page, the left side of this page, it is basically the sum of the two graphs that you saw on the previous page. In addition, we introduced a new target for the group, being free cash flow conversion to be at least 90% of net profit, to emphasize our focus on cash generation and capital management. The group level target for shareholder distribution did not change. So at least 50% of EPS will be paid out as dividend. For reference, over the last 10 years, we had about 70% of DPS, or sorry, 70% of EPS paid out as dividend. Even in the year of loss, we paid dividend.
Let's go next a little bit deeper into growth and profitability and what drives it. If we start with growth, the key drivers of growth actually have been well presented by Roger and Anders, but I still would like to highlight a couple of points. First of all, technology leadership. Technology leadership and being able to differentiate in our offering compared to the competition is critical to increase our competitiveness and to secure growth for the future, mid-term and long-term. We want to be the technology leader. We want to be the go-to party. By what Roger and Anders have shown, we are the go-to party and the technology leader in many fields. But you have to invest in R&D to maintain that position.
Good reference point is what Anders was showing on the W46TS, clearly an engine that stands out in the market, but also, let's say, what Roger was showing on the market shares for alternative fuels. Clearly, we have a benefit there. Another point I want to highlight here is that equipment sales today is the service sales tomorrow. We have good growth opportunities for services short and mid-term, but we have even a significant and more bigger opportunity, I would say, beyond the mid-term, beyond 2030 and beyond, because of all the capacity expansion volumes that are coming to the installed base ready for service. Service growth is extremely important for Wärtsilä, because typically on service, you make the highest margins. I don't think that's a secret.
In the coming years, though, let's say, because the equipment sales grows much faster than the service sales, the overall mix will have a dilutive effect on the overall operating result percentage. If we next look at improved profitability targets and what are the drivers for that. Marine targets 14% result through technology leadership and service growth. Key drivers for the improved profitability are operating leverage, supported by continuous improvement in AI, as well as, let's say, price realization, mainly on the equipment side. While service keeps growing, the mix impact is negative. Equipment grows faster than services. That is today the case, but there is a significant opportunity beyond the midterm, as Roger Holm was actually explaining earlier as well. The pluses and minuses on this slide indicate the relative impact of the change driver versus the Marine operating result percentage.
For clarity, operations in this graph mean the cost on the income statement, not being SG&A that benefit from higher volumes. If we next look at Energy, supported by structural revenue growth, Energy targets 18% operating result. The key profitability drivers for Energy are also, let's say, price realization, mostly on the equipment side again, and operating leverage supported by continuous improvement in AI. Similar actually to Marine, also the mix here is, let's say, a negative impact. In particular for Energy, as you can see also from the number of minuses here, it's significantly, exponentially, let's say, growing faster than services, which has a diluting effect on the overall total percentage for Energy. But again, similar to Marine, while, let's say, it's dilutive today, the mix, beyond 2030, there is a significant opportunity, as well explained by Anders Lindberg. So what is our starting position?
We have a very solid base to start from. Our order book is all-time high at EUR 9.9 billion. Like Håkan said, I think we will cross the EUR 10 billion. Yes, I am pretty sure about that very soon. Of which 2.8 billion of that order book is services, and it's getting longer in time. Our order book is well diversified, let's say, across businesses, across segments, across applications, across geographies. Inflation risk in the order book is well mitigated through indexes as well as contractual terms. To be noted, let's say, the service order book for agreements, we typically book 24 months in as order intake, and then we roll it after that. The total agreement order book that is not, let's say, in the order book shown, meaning basically the part that is beyond 24 months, is EUR 2 billion at the end of Q3 2026.
This provides us additional long-term visibility. The strong order book for both businesses supports the installed base expansion and provides also a very significant service revenue potential beyond the midterm horizon. Order books for both businesses are getting longer, in particular longer for Energy. As Anders explained, what is not registered in the order book is signed order spending down payment or notice to proceed, or let's say, quotations that are valid quotations that are outstanding. We have capacity reservations for that as long as the quotation validity is open. Going forward, we will provide more statistics on order book. We will provide one more extra year of clean data before aggregating the total. So in the future, we will provide you with order book for the current year, the current year plus one, the current year plus two, before we aggregate the rest.
And doing this in combination with unchanged quarterly guidance, which I will come back on the next page, will provide better transparency and visibility in future growth and profitability development. Then on the guidance, from January 2027, we will change our quarterly guidance from demand outlook to net sales outlook. The new guidance will be guiding, let's say, the next or giving the expectation for the next 12 months compared to the actual of the last 12 months. Quarterly comments on market environment will not disappear. Don't worry about that. But the demand guidance will. One could ask, "Okay, why do you give only net sales guidance and not operating results or other financial parameters?" Until now, we have only provided demand guidance. Net sales guidance in combination with a deeper insight on the order book is the next step.
Net sales also better connects to the growth target, the external financial growth target that we have. And it is the first line on the income statement, the starting point for many of your modeling. It provides investors with a more accurate view of the short-term sales expectations, and we believe this is a clear improvement. Is this the last step in guidance changes? Let's see. But this is what we go for now. Our capital allocation principle targets to balance investments in growth with attractive shareholder returns. Our first priority is to secure growth, invest in the execution of our order book, invest in the capacity expansions to deliver on the commitments that we have made, because we have already sold the extra capacity to a large extent. Invest in R&D and to secure long-term technology leadership through that.
Secondly, we are firm on our commitment to distribute at least 50% of EPS out to shareholders as dividend, with optionality for additional shareholder returns. Typically, the board decides on shareholder returns and the distribution methodology once a year when the financial numbers are available of that financial year. And for example, last year, the board decided to provide an extraordinary dividend of 50% of EPS. So last year we paid 50% regular and 50% extraordinary, in total 100% of EPS. Finally, we will focus on synergistic bolt-on acquisitions to support our strategy and the realization of our financial targets.
So if I conclude from my side, we committed and we delivered. The journey of improved profitability continues. Disciplined capital management and capital allocation will be maintained. Our targets are realistic and achievable, and we aim to achieve them sooner rather than later. Finally, we are very committed to achieve them, and you have seen what committed resilience can do, all towards sustainable value creation. Thank you from my side. And I invite my colleagues back on stage.
Thank you, Roger, and thank you, Arjen. We are now moving to the second Q and A session, and the same rules apply. We will start with the questions from Salmisaari. Please raise your hand, wait until the microphone comes, and then state your name and organization. Also the people following us via webcast, please continue to send the questions via chat. First question, Daniela.
Thank you. I just wanted to actually ask on the Marine margins again. I guess I take the IFRS points, but it still looks like you have lower margins than several peers in the value chain, not just engines. I know the mixes are different, OE and services. Can you talk a little bit about the evolution on OE and on service? I guess there is some pure play service players out there with more like high-teens margins. Is your service comparable to that, and is the OE that is diluting it, and what is the trajectory that we should expect there?
I think first of all, it is very difficult to compare players because we all play to some extent in a different mix of segments, and the mix of segments is playing into one part here. Then you have the other mix, which is, as you mentioned, new build and services. From our side, we have seen a good development on the new build coming from the synergies that we get from higher volumes. We are continuous to develop the new build margins. Then, of course, the big value comes in when we kick in with more installed base supporting the service and climbing the service value ladder. If I look at where we are compared to competition, I think we are well positioned in that total basket.
As we talked about before, I mean, it is a common theme in Marine and Energy. We install new fleet. It is going to be a lot of new fleet going on, but it takes four to five years until the service business really picks up. That is the very end, I would say, of our midterm period, and most of it will come beyond the midterm period.
Then there's a question on the last row.
Thank you. It's Panu Laitinmäki from Danske Bank. I actually have two questions. First one continuing on the Marine margin topic. I was going to ask, is the expected acceleration in retrofits a headwind for the margin improvement in Marine Services?
No, I would not call it a headwind. What we have said is that we have seen lower growth compared to what we thought in CMD 2023 due to the lack of regulation. But we see going forward with either more fragmented regulations or IMO kicking in that it's actually rather a growth opportunity for us, but more coming towards the end of the decade. So I see that as a positive opportunity, but it, to some extent, is more a long term than short term.
Thanks. Secondly, on capital allocation. Could you consider share buybacks as a kind of additional distribution? On the selective M&A comment, is this like a standard comment that you kind of keep it open if you find anything, or are you kind of seriously looking for M&A, and in which segments are you kind of looking for M&A?
On the capital allocation, like I said, basically the optionality is open. Let's say yes, that can be, but it is a decision by the board, and the board will decide upon that once the financial numbers of 2026 are available to them. They look at, let's say, both the distribution and the distribution methodology. Then on the M&A, I am not sure, Håkan, do you want to comment or?
No, I mean, it is clearly, it is the same narrative and journey that we have had the last couple of years. I mean, we divested clearly more than we acquired. The acquisitions that we will consider are bolt-on acquisitions, and they are normally smaller. Yes, before anybody asked, Wärtsilä two-stroke business, obviously Bain Capital has now taken it on. Will the two-stroke come out in the market ever? We do not know. We are saying to everybody, if and when it comes, we will certainly be interested, but it is hanging there, so to say. Focus on bolt-on, I would say, continuously also going forward.
Then Uma, please.
Thank you. It is Uma from Bank of America. Just follow up on the capital allocation question. Is there any reason, any pros and cons for buybacks versus special dividends? I guess, historically, you have gone for the special dividend, but would we be able to get some insight on your thinking there?
No, let's say there is not, let's say, any written document. Let's say the consideration is every time unique. Let's say they might have a different view, let's say, next year than, let's say, what they had last year. I would not say there is a written playbook.
No. I think it's every year there is in-depth discussion by the board before taking the decision. The board clearly considers all the tools in the toolbox.
Yes.
Thank you very much. Just one more for me, please. I guess in one of the slides, you have the mix effects on Energy as one of the most negative. Would you be able to somewhat quantify that? What's your assumption there, and how will that change once you have started to deliver the service agreement?
Once you have changed the service agreement, then it will be different, of course. When that, let's say, new capacity comes to the market, let's say 2030 and beyond, let's say then the service will jack up again, for sure. Definitely, let's say what Anders was showing on the 80% life cycle coverage on attachment rate, basically, to the new build contracting, that will clearly go up. How the mix exactly will be at that point of time, that's difficult to say, because there are many factors that, let's say, play a role into this one. But I would expect service to clearly, let's say, go up beyond that horizon.
Sebastian.
Sebastian Kuenne, RBC. One follow-up question on pricing. I mean, we have this very tight and dynamic market for data center energy. You have one main production hub in Vaasa that produces both types of engines or for both end markets. How do you allocate capacity, and how do you see spillover of pricing coming from data center, where people are more willing to pay higher prices, onto marine or onto your conventional utility customers?
I can maybe start with the first part of the question, how is the spillover from data center to utility customers in energy? We see a clear spillover. The market price has increased for both utility customers and also IPPs, based on what's happening in the data center and the demand and supply. We see a similar thing going on in these other markets in energy.
In marine, I would say it's to some extent, but it depends on the engine type a bit. It's not similar across the market, and also difference between main engines and auxiliary engines.
I would say, as we mentioned before, we have a long-term strategy to our customer base, because these are relationship over decades. We want to be in marine, we want to be in energy. We have customer relations with certain customers that we have had for decades. We want to keep them, we want to evolve them. At the end of the day, it's about optimizing the total life cycle, which is, of course, the new equipment and the service contract. I think, so we're not going to put all our eggs in one basket, clearly, because we don't think long term that is the best way to create shareholder value and to serve our customers. How do you deal with this situation with your existing customers? Because it is a very fluid situation, and it's a very hot market.
And I think what we are underlining there in our dialogue with our core customers is, you need to have a very close and upfront dialogue on timing of projects. That is a dynamic dialogue, both from a customer perspective, but also from our perspective, because our pipe is filling up, so to say. We do not work with slot reservation fees and all that, but we do make tenders and we lock capacity during the tender times, but those are normally shorter times. We talked about that. So, it is a dynamic situation, and at the end of the day, we want to serve our customers. To be able to do that, very much upfront dialogue and close dialogue, because it is dynamic, our capacity and the customer's demand.
Akash, please.
Yes, hi. Akash from JPMorgan. I have two as well, and I will ask one at a time. My first one is on energy bridge, margin bridge that you have shown, Arjen, in your slide. And I was a bit surprised how many minuses you had on the mix, because I think we are at a time when pricing for new equipment in energy space is quite unprecedented. One of your peers mentioned not that long ago that average price realization this year is going to be 50% higher than last year. And still we have these four minuses. So again, is this just because you are too conservative, or what is stopping you from pricing a bit higher than what you are doing now? That is the first one.
Let us say it is a very plain calculation, actually. Let us say if you grow your new build business and you grow your service business slower, that impact is mixed, and that is reflected in the minuses. Yes, we increase our prices. Let us say we have better price realization, but that is on the other line, price realization, in particular for equipment sales.
I would say we have good price realization.
Yes. I know it is a concern or a continuous question. We continue to have good price realization on new equipment.
Yeah. Sorry, got confused by the presentation of it. Then the second one I have is more on the way how you recognize your orders in service, because I think a theoretical question is that as you move along more towards the life cycle contracts, and again, backlog is a reflection of a performance obligation that you have at a given point, does it make sense for Wärtsilä to recognize the entire life of obligations than just couple of years? Because I think that will also make your backlog quite comparable to your peers. Any thoughts on changing that practice, given now you are focusing more and more on these life cycle agreements?
Yeah. No, it is a good question. Let us say we today take, let us say, 24 months order intake in, basically, and then we roll it, as I explained.
Should you talk a little bit about the background, why we do this?
Yeah, yeah. I was about to say. Why we do that is basically because there is a lot of indexes, lot of, let's say, also unknown outcome, let's say guaranteed asset performance agreements. Will you realize the uptime? Fuel benefit savings that we share, let's say, how much will it be? So it's full of indexes, and that's also why we say, okay, on the 24-month horizon, we have a very good, or I would say quite close to very good
Right
accuracy of, let's say, what it will be. But if you take an agreement that is 12 years out, that's very difficult to say. It would also, let's say, change many of the parameters quite oddly, I would say. Take book-to-bill ratio. Let's say you take the order intake in like that, but the sales generation will be over 12 years if you have a 12 years agreement through percentage of completion. I'm not sure. I hear what you say, and I think it's good to, let's say, look at competitors and what they do. I will certainly, based on your comment, have a look at that. But for now, I would probably say that, okay, we keep it for now. But again, I will look at it, what you said, and see what competitors do.
I think for those of you who has followed the industry for a while, that has also been sometimes a trigger for bigger valuation swings when you book so far in advance with some of the industry players. Not Wärtsilä, but with some others.
Then I will take a couple of questions from the chat. What do you see as the biggest risk to achieving the midterm targets, particularly the 18% Energy margin? What is the biggest risk to achieving these targets?
I think we talked about earlier the challenges. It is, of course, to make sure that we have the resources for the business that we are building up now in the U.S. It is also the supply chain and making sure that we can deliver on time, and we have done so far, and we want to continue to do that. Otherwise, if you look at other risks, it is, of course, global risks. I think, Håkan, you alluded to the economy. Tariffs. I mean, how many times have we revised tariffs in the last 12 months?
A lot.
And probably continue to do so. I think these are things that we have less of course, of a control over, and therefore, I think those risks are, yeah, worse in a way because the other thing with the supply chain and our own capacity and our own resource build-up, we have control over. Tariffs, we really do not have control over, or other geopolitical things, war in Middle East, et cetera, and economy in general.
I agree with Anders, but I think the general signaling that we are trying to convey, we are rather confident on meeting these financial targets.
Absolutely.
Rather sooner than later. Can I ask a question? There were good questions here also on the powers, and we wanted to clarify because I think we caused a little bit of confusion. Together, we caused a little bit of confusion when it comes to the scaling up of your service business.
You asked the question in the first round to me, and I thought about the answer when I got the next question, what you really meant, and I think I understood it now. So you are asking about the 50% increase, why it is only 50% increase when the agreements go from 37% to 80%. But the thing is that if we do not have an agreement, that also gives us an income. So it is not zero. I think in your calculation, you put in a zero when we do not have an agreement, but that is not true. We have an income also for parts that we deliver to customers when we do not have an agreement as well, and that is why it is only 50%.
Only 50%. It is pretty good.
No, but with your calculation, you would double it and more thereof. But it is because it's not zero if we don't have an agreement. You can say that if we have an agreement today, we maybe have a double what we have if we don't have an agreement today. If we then go forward, we will have now 80% agreements.
Thank you, Anders. I think that was a good clarification. I hoped it helped. Continuing with the questions from the chat. Where do you expect the net working capital ratio to sales ratio to trend from the Q3 2026 level over the midterm growth period?
What we said, I think it will stay negative. I think that's what we said. I'm not going to comment on will it be, let's say, - 5% or - 3% or - 2%. There are many, many, many dependencies. One being, okay, how much advances do we get in? Is it the same size or will it, let's say, be different over time? I think nobody can say. But I'm pretty confident, or actually very confident, that it will stay negative over the midterm horizon.
Thank you. Then question regarding Energy. Regarding your order book in Energy, could you give us the split between data center and balancing? Some question for your pipeline, orders not yet in the book. What is the share of data centers versus balancing?
I think we can say that the data centers is about 50% of our order intake and order backlog today. It is about half, and the other half that is not data centers is a lot of it is in balancing.
Thank you. Then maybe Antti Kansanen.
Thank you. I wanted to follow up on the previous question on the equipment margin impact and the negative mix. Could you maybe comment on how much increase in your fixed costs will come after the two capacity expansions that you have announced? Then on a longer term, how kind of dependent your Energy margins or, let us say, margins overall on the operating rates at Vaasa?
Let us say the operating leverage was a single line. Actually, there were two lines. Let us say the need for increasing a lot of extra, let us say, people or resources actually is very low. That is the answer to the first question. Now I forgot the second question.
No, I am just thinking that how sensitive is, how flexible is your cost base after the expansions regarding kind of capacity utilization rates on Vaasa factory, whether they are 100% like they are now or 75% like they were a year prior?
I think we are pretty flexible in our cost base. Of course, let's say there are certain fixed costs. Let's say if you now expand your capacity, there are certain fixed costs that you cannot suddenly get rid of. But there are also, let's say, others that are pretty flexible. So it varies a bit, let's say, what kind of category of cost that you are talking about. But what we have always said is that, let's say, we will adjust our cost base when and if necessary, and that stands also for the future.
Okay. If you would add kind of the pricing impact to the growth on Energy equipment, is it still negative for your contribution margin or margin expansion?
No, let's say if you have a higher utilization, that is positive, clearly. Let's say a high utilized factory is much more efficient, and that you see in absorption rates and whatever. So that is positive.
Let's take first from the back.
Yeah, the hands in the back.
The following ones. Unfortunately, I cannot see all of the faces.
Yeah.
It looks like Tom Skogman now.
Yes. Good afternoon. It's Tom Skogman from DNB Carnegie. So, two questions. I've covered Wärtsilä for many years, and you had a similar boom in Marine ahead of the financial crisis you have in kind of Energy now. Back then, the argument was always that you had very good agreements, that your customers cannot walk out of it, but we know what happened. Have you learned anything about writing these agreements and who is really the counterpart in these agreements? I think you said that it's all going to hyperscalers, but I think there are some companies in between, et cetera. Could you open a bit this box?
Okay. So, you start.
Yes. Today, the majority of our order book is not with the hyperscalers, the end customers. We sell to the ones building the power supply for data centers. So we have customers that supply the whole power supply with batteries and switchgear and other things, including our engine, medium engine, medium-speed engines. So those are our customers, and with them, we have firm agreements, so we don't do slot reservation agreements in general. So, we have firm agreements with them where we do get down payments and milestone payments, so we all the time is protected against our spend and also commitment all the time. So I would say that we have good contracts and safe contracts, so to say, in that sense.
If I can-
Then maybe one more thing before. Then we also, of course, do know if worst come to worst, and we haven't had any cancellations, so I just want to say that. But even if it would have, we are well protected financially for our commitments, but we would also be able to resell the engines as well because they are pretty standard, our engines, so we have a good chance of if we can resell this then to other customers as well.
To, let's say, reference to your marine decline, I remember it, or all remembers it as the long-timer here on stage. Actually, we didn't lose any money at that time because our contractual agreements were solid.
Yeah, you didn't lose money, but you didn't book any kind of extra profits, and now you take investments, you know.
Actually, we did.
Some minor, perhaps, but I mean, you thought that it would maybe like you could keep all the advance payments, but I think you had to give a lot of advance payments back that time, that were stretching.
Not in my memory.
Further out. Okay. But moving then from.
To your point, sorry, I really appreciate your perspective, Tom, because as you said, you have been following us for a long time. So, I would say, on the new build side, contractually, we have a very strong situation. I am not concerned about this. This is also, we talked about slot cost reservations and charging for the slots. This is something we are not so very keen on. So, we feel rather confident. Please also note, when we talked about the capacity expansion, that we say that we invest, and these are the communicated investments. So there is an alignment with the midterm financial targets and the communicated investments. I got some questions on that, but I can confirm that. The payback time for the investments is rather short. So, that is also a little bit to de-risk.
And then, how we also de-risk is, of course, we are expanding in Vaasa because expanding in the existing footprint, and most of our competitors do the same, carries a lower risk because you will have more flexibility. So, short payback time of the investment, and then expanding in existing facilities. I think these are some of the major kind of risk mitigation actions that we are taking.
Moving then from fear to greed, the other side of it, the great opportunity, and Wärtsilä has spent decades consolidating these markets and has great market positions today. But now you see that, especially your Korean competitors investing very, very aggressively, which means that you kind of risk losing your dominant market position unless you come up with a third and a fourth kind of expansion. Could you talk philosophically a bit about, are you prepared to take risks just to keep your market share? Because I guess that's very important longer term.
So, I think we look at, if we expand, we do it because if it's good business. It's not because we are posturing. I don't think that's a major driver. I think it's true, HiMSEN is expanding. Anders can talk more about it, but their engine is fairly new to the energy space. They have had it for a while, but it's not a huge installed base. If you look at W50, we are already well ahead in fuel efficiency, and now we come with W46, which we are ramping up in energy. We take a step even further. Then performance-based service agreements, growing our service network. So, HiMSEN is clearly a competitor, but I think where we are now, we will keep on moving. I think we see our major competitors more on the gas turbine side.
And that's why we are so passionate to explain about why our technology is very competitive. But there, we are gaining traction. But of course, it's a technology shift, and we need to be even better at showing and convincing our customers that this technology is a competitive technology going forward. But I'm optimistic because we talked about it before, once the customers try the new candy, they come back.
Thank you. Will Mackie from Kepler. A quick clarification to build on the net working capital question and your target of a 90% cash conversion. How should we, looking in the midterm, three to five years, there is the potential for a change in the book-to-bill ratios, the prepayments, and you are growing your service, which can often be more capital-intensive. To what extent should we think that your 90% is an underlying, or could the prepayments reverse and create a period of underperformance in cash conversion?
No, we are pretty confident with this cash conversion rate, even on an annual basis. Of course, the longer you go out in time, the closer it is, the better your transparency is. It depends a bit also on the order intake. Is the advance, is the order intake continuing, et cetera, et cetera? So, is then the down payment, for example, on the same level as we have it today, or is it at the lower level when all the capacity comes to the market, also the capacity of the competitors? Things might change in the market. That transparency, that means basically beyond the midterm, because the capacity of all the competitors comes also in 2030, that I am not so sure about. But on the short term, I am not concerned at all. 90% we will make.
Okay.
Also on the long term, we need to keep a strong balance sheet.
Correct.
Because the advances, you can see them. This is, we have borrowed.
It is borrowed money from the customers.
It is borrowed money from the customers. To hand them out to shareholders, I think we need to have a right balance here.
Correct.
Maybe stick with that, the EUR 2.2 billion, I think it is, on your balance sheet at the moment. How do you think about what element of that you could distribute in capital allocation, through M&A or buybacks or dividend, and what you need to maintain as a balance because it is customer money?
This is a discussion we have on the board, and I will refer to the board discussion. I talked about this at the end of the year when we compile our financials, and the board has this discussion. This is where we make those type of decisions.
Sure.
I don't want to preclude that board discussion.
But you have no ambition to be a bank.
Clearly
Excess cash eventually will go to the shareholders.
Yeah.
Hi, it's Akash from JPMorgan. I have a couple of follow-ups. The first one is on M&A. I think, Håkan, you mentioned you may be interested in two-stroke business of one of your competitor if that comes to block. But I'm also curious, I mean, if I look at longer-term history on M&A, we haven't had that much success. Again, it's not your call, but from your predecessor, but number of businesses that has been acquired has been sold subsequently. And if you look at what was common in all of those, you were going out of your core engine area into some other segments, which didn't work out for whatever reason.
The question I have is that, like, you still have a quite large supplier base, and one could argue that maybe going after some of those suppliers, particularly those that may not have that much of financial strength, would make sense also to increase your value add and improve medium-term margins. Just wondering, like, when we look at M&A pipeline, do you see some of these suppliers could come and you would be picking them up, or that is not currently you seeing your-
I mean, it would certainly be in the scope of what I have described as bolt-on or acquisitions. I mean, we talked about critical competence, but you could expand that to critical supply. I think we are continuously looking at that. I mean, we all know, I mean, vertical integration in a buoyant market, it feels good. But we know when the market goes down, you are sitting with more fixed cost. So, it is a balance. But I would say it is on our radar screen, so it is one of the tools in the toolbox.
My second follow-up is on your capacity comment earlier. I think you mentioned you have 8 GW capacity by 2030 or 2029.
29.
Six in STH and two with joint ventures. I want to understand a bit about joint venture because we know about STH and you are expanding capacity by 65% there. But can you talk about, like, where is this 2 GW today and where it will, I mean, it will go to 2 GW by 2029? And then secondly, because it is part of joint venture, so can you recognize that in your revenues or does it goes through profit lines? So when we have to forecast your revenues, we have to only look at 6 GW and not eight.
Roger, I'll let you handle.
Yeah. First of all, most of it is not in our order intake or sales of the JV production, so that's outside of our top line. Then on your second question, we have also expanded the joint ventures with quite a lot of capacity. We said that it's up to two now, and it has gone from about 1 GW up to 2 GW, and we start to be there already on the 2 GW capacity on the joint ventures.
Thank you. Andreas Koski from BNP Paribas. Maybe a question for Roger and Anders about the service ladders that you showed. Why is the potential revenue multiplier materially different? In Energy, it was 3-5x, and in Marine, it was 2-3x. Do you have the same profitability at the top of the service ladder as at the bottom of the service ladder?
If I start, first of all, you need to remember there is a difference between the whole power plant and the vessel as a scope. So that's the starting difference. Usually, we can go look into the power train, so it might be the engine, the propulsion that is generating then the service benefits. Then it depends a lot on what you are promising to the customer when you start to get to outcome-based.
When you start from transactional, and then you might promise uptime, you might promise fuel consumption, or even going into emission optimization. All of that is then dependent on that. I think the main driver starts from amount of running hours, how is the vessel or power plant operating, like Håkan mentioned before, then the commitment from the customer that how much are the customer committing to, then moving into the outcome-based, then the scope expansion in Energy with the larger power plant.
One of the key differences also that in Energy, we run full power plants. We do not do that in Marine.
Profitability varies. I would not say that I mean, of course, if you get the bigger share, the absolute numbers go up. But the percentages, of course, we have a high profitability on parts which are our own IP parts, like all businesses. So it is not necessarily on the percentage of margin. While if you do an O&M, for example, of course, the operations part, meaning the manpower, of course, you do not have so high profitability on that part in margin. So it varies depending on what parts it is. So you cannot say it is always higher in percentage, but it is higher in absolute value, of course, since the volume is higher.
I would say, I mean, in general, we have said, because we got this question in the past, I mean, moving up the service value ladder is margin accretive. So we just were clear on that now.
Then one more question from the chat. The 3 billion equipment deliveries for 2027, does that determine the highest possible equipment revenue in 2027, or can you still take non-engine equipment orders for delivery in 2027? I assume you cannot take any more engine orders for 2027.
Is there more propulsion than there is less, I guess?
Yeah. And we need to remember that it is not only engines in the order book either.
No.
I mean, we do propulsion, we do shaft line solutions, hybrid installations, et cetera. So, on the new build side, it is clear that we are more selling on the Marine side into 2028 and to some extent to 2029 already. Then service is, of course, totally different. Service is transactional, goes on a much shorter basis.
On energy, we always need an engine for selling new builds. For us, we are limited on the 2027. But of course, on the service side, we can sell more.
Thank you. Then we have time for one final question, if there are any.
I have a question.
He has one.
Well, I was Because I know you have been asking this before, and now we have a capital market session. Now we have some time to explain if there are follow-up questions, and that is the famous questions on average sales price, Anders.
Yes.
It is.
We have prepared a slide on that.
Yeah.
Because we knew that question was going to come. Do you need this or? No, I think the slide is here. Let me first say that actually, the sales price in euro per kilowatt is not a very good indication of what the margin is. The reason for that, the factors that influence margin are so many. We have the, what is the size of the project, number of engines? What type of project is it? Is it an EPC project? Is it an extended EQ where we deliver more equipment, or is it an EQ? The scope, have we included switchgear, medium voltage, low voltage switchgear? Are SCRs, meaning emission, to take care about emissions, cleaning those, are those included?
The delivery term, are we delivering FCA or are we delivering like we do in the U.S., DDP, which means that we deliver duty paid to all the ways, so to say. What is the specific project costs like? Is the transportation long and difficult or is it just to the harbor in Vaasa? What is the labor at site? Is this in U.S. or is this in Kazakhstan? It is a big difference in cost of the local labor, because we do quite a lot of things local as well. All these things vary and contribute to what the price is, but does not necessarily influence the margin. Therefore, we have taken two examples that you can see here.
To the left, you have project one and project two, where the euro per kilowatt is actually 80% higher in project two, but the margin is actually 4 percentage point lower. Then you have on the right side where the euro kilowatt price is exactly the same on project three and four, but one has a margin that is 12 percentage point higher than the other. These are real projects. Now, I get this question a lot, especially from you, Arjen, and I have said this is not a good indicator.
Because you are.
It would be a good indicator if we had a standard delivery, always the same engine and engine only, and it was always delivered with the same delivery terms. Then it would be a really good indicator. I have tried now to list all the things, and there are more than this. These are the main things on the right side that makes this not a very good basis for what the margin is.
Thank you, Anders. It looks like that we have at least one follow-up question now.
Yeah, I have a follow-up on this. Would it then not make sense to say, okay, for a standardized engine of 10 MW without any service contract attached, this would be a typical price in this quarter? That we get an indication of what the prices are doing.
It becomes very I think we would spend a lot of time explaining then all the caveats to that, because then you I mean, the natural question. Let's say we did that, and then we will describe, this is evolving up and down, and starting to explain the delta for a theoretical number. It will open up a lot of discussion. I understand and I sense your wish and frustration around this. As we said before, if you are going to focus on this one, it will lead you wrong on wrong assumptions. I think you should What we are trying to provide is information on price realization, information on how our financial targets are developing. I think you should focus on that one.
Another final question comes from Akash.
Thank you, Håkan. I mean, I completely appreciate that point, and I think that debate will going to remain. The question is that what can Wärtsilä do to help analysts and investors? Maybe on that point, do you think it makes sense for Wärtsilä to maybe give some more additional color on contribution margin on last four quarters versus previous year? Because I think in the end, what matters is your contribution margin rather than these ASPs.
I mean, we said now in our guidance that we start to guide on the top line. This is a basis for modeling, and we are trying to provide more color there. I mean, to the credit of the collective, I mean, I think you are very good at analyzing, and we let you run. I know the sense, the more we can provide, the better it is. Now, the next step is from guiding on demand side to guiding on sales, net sales, and also showing further granularity on the order backlog. That is the first step we take.
Thank you for all of the great questions and engaging discussions. Then handing over back to Håkan to summarize the key messages of today.
Okay. Thank you. Yes. So, a full day. Thank you for a lot of good questions. To sum up, we really feel that the best is yet to come. It is a bold statement, but we have a solid path to reach our targets. We have the right team in place. We have consistency in the strategy side, and the market situation looks very favorable. There are several long-term drivers for it. This is also why we are investing in expansion.
We are clearly not investing for short term. We are investing for long term. We have the opportunity to expand even further if and when we take the decisions. So, to sum it all up, and let us continue the discussion, I think we have some really exciting times ahead of us. I want to thank you for your continued challenging us and hopefully supporting us going forward, because we have a real opportunity to accelerate the value creation. Thank you for today.