Wärtsilä Oyj Abp (WRTBF) Q3 2023 Earnings Call Transcript

Wärtsilä Oyj Abp (OTCPK:WRTBF) Q3 2023 Earnings Conference Call October 31, 2023 4:00 AM ET

Company Participants

Hanna-Maria Heikkinen – Investor Relations

Hakan Agnevall – Chief Executive Officer

Arjen Berends – Chief Financial Officer

Conference Call Participants

Daniela Costa – Goldman Sachs

Max Yates – Morgan Stanley

Vivek Midha – Citi

Sven Weier – UBS

Sean McLoughlin – HSBC

Erkki Vesola – Inderes

Tomi Railo – DNB

Hanna-Maria Heikkinen

Hi, all, and welcome to this result briefing for Wärtsilä Q3 results. My name is Hanna-Maria Heikkinen, I am in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will go [through] (ph) the group highlights and business-specific performance. And after that, our CFO, Arjen Berends, will continue with recent financials. After the presentation, there is a possibility to ask questions. And we are also happy to discuss the strategic review we have announced today for our Energy Storage and Optimisation business. Time to start, Hakan.

Hakan Agnevall

Thank you, Hanna-Maria. Thank you and welcome, everybody, to our interim report. And if we start from the very beginning, I think we see a very positive trend for Wärtsilä; improved profitability, strong cash flow, and good development on the services. So, order intake is up by 11%, and we have a good support from services, we continue to see good progress in services, service order intake up with 15%, service net sales also increased by 15%. On the comparable operating results, we took quite a big step forward, we increased it by 53% to 8.6% now. And I think we are on a good path of improvement. And the improvement is supported by continued good development in services.

And now we could also announce, for the first time, that energy storage, our Energy Storage business is profitable. Cash flow has also been good, with good cash flow from the operating activities. Summary of the figures, and you see it here also, order intake up 11% in the quarter, close to €1.8 billion, and we still continue to see the growth of the services, 15%. Also, equipment continues to grow 7%. Net sales, you could say a little bit more flattish, €1.4 billion. But if you look at the organic growth, it’s up 7% actually, the sales. Services is strong, up 15% on sales. And on the equipment side, we’re actually down 10%. Book-to-bill, for the 10th consecutive quarter, we continue to have a book-to-bill above 1, so now it’s 1.23.

Operating result, it’s up quite a lot, and that is, of course, related to certain items affecting core ability that we had last year, now we don’t have them, so the operating result is up quite a lot. And if you look at the comparable operating results, it’s up to 8.6%, 53% up, which is of course very encouraging. Looking a little bit on the marine market sentiment, it remains positive in Wärtsilä’s key segments. What hampers the key segments a little bit, it’s low capacity, for instance for LNG carriers on shipyard. The available shipyard capacity is muted because there is so much work in the pipeline, and that has also led to a price increase.

But, in general, we see a positive development for the Wärtsilä key segment. The numbers of vessels orders in the period increased to 1,356, so it’s up from about 1,100 last year. And that is mostly driven by the changed mix of contracted vessels. And if we then look at the uptake of alternative fuel, it remain more limited this time, with 316 orders reported, representing about 23% of all contracted vessels. Demand for new cruise ship capacity, it remains limited. However, we do see a bit on the newbuild coming back now, which is positive also for Wärtsilä.

But the key focus still for our cruise customer is to focus on a very good business, with good rates of — good passenger rates, delivering the business, and step-by-step reduce the debt that they have on the balance sheet. But I will say when I talk to our cruise customers, they are very optimistic about the future. Then very important, in July IMO revised its strategy on greenhouse gas emissions. And the new framework that are in discussion puts further pressure rates opportunity for shipping companies to increase their investments to decarbonise their operations. So, the decarbonisation journey of the marine industry is very, very real.

It’s going to take years. And it’s going to be, not a stepwise journey, a gradual journey. But it’s clearly a journey where Wärtsilä can play a key role and support our customers, and also create shareholder value.

And if you look on the energy side, we see solid long-term opportunities in the energy market. And the energy transition outlook is actually improving in a bit fragile global economy. Our market shares in the natural gas and liquefied fuel power plants stayed rather stable, around 13%. Their overall market came down 22% to 10 gigawatt if you look at the last 12-month period, they are coming down. The market decreased from, I would say, relatively high level in 2022 was driven by Europe and Asia. Also, the volatility of the global natural gas prices shows how the market is sensitive to disruptions in supply and demand.

The trend in the transition to renewable energy sources continues globally, and that is certainly a key driver in the development of battery energy storage and thermal balancing technologies. And yes, we have seen a bit of turbulence on offshore wind lately, but I think the onshore wind, which is clearly the dominating share of the wind industry, is moving ahead. The energy transition outlook in the midterms remains strong. So, order intake up by 11%. Equipment order intake increased by 7%. On the services side, order intake increased by 15%. And if we look at the organic order intake, it actually grew by 18%.

We have a strong order book. And the rolling book-to-bill continues to trend up. One thing that we would like to really point out is that the remaining order book for this year is lower than last year. Net sales increased by 1% which is fairly flat so to say. But, organic net sales grew by 7%. And, we can see that equipment net sales decreased by 10% whereas services continue to grow with 15%. Profitability continues to improve in a good way. So, whereas the net sales increased by 1%, the comparable operating result increased by 53% due to 8.6 comparable operating margin.

Now, some of our technology and partnership highlights. As you know, Wärtsilä is all about innovation and technology and services, so we are very proud that we have bee chosen for the world’s first methanol fuel hybrid RoRo vessels. So, Wärtsilä will supply an integrated hybrid propulsion system for two new hybrid RoRo vessels being built for the Swedish shipping company Stena RoRo. So, each vessel will be equipped with two Wärtsilä 32M multi-fuel engines capable of operating on methanol and also ready for ammonia with a notation. And the combination of new sustainable fuels and electrification, that is really in line with where Stena wants goes in the company sustainable operating targets.

And we are very proud that we have a strong relation with Stena RoRo. And as early as 2015, we converted the Stena Germanica to operate on methanol fuel, that was one of the industry first. We also continued, as we talked a lot about, to evolve our service business and moving up the service value ladder. I think here we have a longstanding agreement with our Brazilian customer here where we have renewed our operations and maintenance agreement.

And we talked about that before on our agreement slide. We have over 90% renewable rate both in energy and marine, which in my view really shows the value that we are providing to our customers. So, in the case we have signed a renewal of operating and maintenance agreement for Gera Amazonas. And the agreement covers the Ponta Negra Power Plant in Manaus. That is a plant that has been in place since 2006 when we commissioned the plant.

Now, we extend the agreement for another two years to ensure that Gera Amazonas can meet its power purchase obligation to Eletronorte. History here — I mean this plant was put in, built, and originally operated on heavy fuel oil. In 2013, it was converted to gas-diesel technology. And now, the plant basically operates 24/7 baseload, delivering 60 megawatts to the system.

Let’s look at the different businesses and how they are performing. So, if we start with marine power, we see a strong development in the order intake and profitability, and the good development in services continue. And, you can see order intake up with 33%, net sales to 26%, profitability improving. And, the major drivers we have good service performance. We also have good progress now in the voyage services turnaround.

We talked about that if we combined the two businesses that we earlier called voyage, they are still loss making. But, the losses are clearly significantly reducing. So, we are really on a good path and the right path on our turnaround plan. If we look at the negative side in marine power, it is that the margin improvement was partially diluted by lower share of services this quarter. We continue the good development of the marine power service agreements and we are on the net sales, we are clearly increasing, we are exceeding now the pre-COVID level on the sales to our installations.

And here is another example with a technical management agreement providing maintenance flexibility for China LNG shipping vessel. It’s a 15-year agreement. It’s a long-term commitment that will ensure the operational reliability and provide maintenance, planning flexibility to the Dapeng Princess, that’s the world’s largest shallow draft LNG carrier. And this vessel operates the three Wärtsilä 34DF dual fuel engines and the technical maintenance agreement includes constant data monitoring, maintenance support for the engines and the gas valve units. And we took this in as an order in July 2023, the 15-year agreement, long-term commitments, this is how we move up the service value line.

Now another really exciting example more than on the driveline side is our order with Incat Tasmania which has selected Wärtsilä for the world’s first zero mission lightweight Ro-Pax Ferry. So, we will power this biggest battery electric ship ever built so far. The vessel is a new ferry, the largest ever built of its type and it’s the world’s first zero mission lightweight catamaran. It’s built by Incat Tasmania and it’s been ordered by the longstanding South American customer, Buquebús.

The Wärtsilä full scope, it includes our own energy management system, the power conversion system, the DC charging system, and also 40 megawatt power battery modules, the DC hub, the eight electric motors, eight Wärtsilä water jets, and a pro-touch propulsion control systems. So, you can see it’s a fairly all-in-cap, own-compassing scope. And this order was also booked in July.

So, moving to marine systems, we see that the equipment order intake increased, however the net sales is down, order increased with 55%, net sales down, Scrubbers is one part, the exhaust side is one part of that equation. If we look at the comparable operating result, it’s down. We have good service performance, but the lower equipment sales is affecting the operating income. Energy, the comparable operating results increased and we see also here a good development on the services side. Order intake down 16%. We still see this a little bit as a prioritization between Q3 and Q4. As you know, this is a project, many parts of it is a project related business. And I think we also communicated before that for energy power plant that the second-half of the year would be stronger than the first-half of the year.

We still hold to that. But for Q3, the order intake is down with 16%. Net sales is also down 12%. If we look on the profitability side, we do see a positive trend there, supported by the good service performance and also improved profitability of the storage business. But the lower sales volumes are affecting our profitability in Q3. On the energy storage, comparable operating result is now positive. We are there. And the profitability is improving. Now, you also saw earlier this morning that we announced that we are initiating a strategic review of our energy storage and optimization business.

So, basically, the Wärtsilä Board of Directors have initiated a strategic review to consider options that would support the continued growth of our storage business in a way that benefits our customer, employees and our shareholders. And throughout this process, all potential alternatives will be considered, including different ownership options. And that involves all alternatives from keeping the business, to partial divestments, to full divestments, and other possible strategic alternatives. Also very important to highlight, we will continue to develop and invest in our battery storage business, as we have done also going forward to continue to build the business for the future. We have not set the timetable for the completion of the strategic review, as we want to thoroughly assess all the strategic options.

Now, if we switch to energy service business, we do see continued good development in the service agreement side also here. And here, once again, asset performance agreement to support the U.S. utilities efforts towards net zero carbon emission. Ten-year guaranteed asset performance agreement signed with OPPD in Omaha. The agreement covers the 150-megawatt standing Bear Lake Station located in Omaha, and it’s set for commence it’s commercial services in 2024. And when we activate, the plant will provide dispatchable balancing power as part of the utilities Power with Purpose project. And that’s an initiative designed to add 400 to 600 megawatts of utility-scale solar generation, and then 600 megawatts of balancing natural gas generation. And this order was booked in Q3.

Now, to sum it all together, you see the waterfall here, how the different businesses have contributed to our improved profitability. The biggest improvements are coming from marine power and energy. And as we see, the comparable operating results is increasing by 53%.

Now, Arjen, please join me.

Arjen Berends

Thank you, Hakan. I’m very happy to present here the other key financials. In fact, if you look at it, it’s all better than previous year at the same time. And it’s also better than, let’s say, Q2 and state, so, really good quarter in many ways.

First of all, cash flow, €213 million, operating cash flow in this quarter compared to €100 million the same quarter last year; €432 million year-to-date, which is a really good level, considering also that it is about 92% of EBITA.

Working capital, clearly one of the big contributors to a good cash flow, besides also improved profitability compared to Q2 and state. Let’s say we improved quite significantly on the working capital as well from 105 to 43.

Net interest bearing debt also going down from 477 last quarter to now 356, of course, supported by a very good cash flow in the quarter. And that, of course, also supported, let’s say, the gearing ratio, which went from 0.24 to 0.17 in the quarter.

Solvency also clearly improving, 33.4% at the end of last quarter, now to 35.2%, and basic earnings per share also significantly better than, let’s say, previous year. Good to remember or to remind, actually, that the minus 0.16 that we see year-to-date last year includes the €200 million write-off related to the Russia exit, as well as at that point of time, €75 million related to the Trieste manufacturing closure.

While at the same time, the 0.28 year-to-date basic earnings per share that we have in this year includes a €45 million write-off that we did on portfolio business, or impairment, actually, that we did on portfolio business in Q2. So, all-in-all, I would say looking at where we are today compared to, let’s say, previous year, all significant improvements on all financial parameters; really happy with this.

Cash flow continues to trend upwards, and that’s, of course, what we want to see. Also looking at working capital to net sales ratio, we are now on a 12-month rolling level, just below 1%. While it’s a long-term average, if you compare 2015 to now, it’s just below 9%, so we are at a very good level.

Nevertheless, we will, of course, continue to work with our working capital and try to improve it further by collection of receivables, getting better payment terms with customers and suppliers, inventory reductions, et cetera, so really going well forward.

With these words, I give it back to you, Hakan, on the prospects.

Hakan Agnevall

Yes. So, if we look at our prospects, first if we start on the marine side, we expect the demand environment for the next 12 months to be similar to that of the comparison period, similar. And on the energy side, we expect the demand environment for the next 12 months to be better than that of the comparison period, so better. The marine, similar; energy, better.

Okay, I think that wraps up the presentation for today.

Hanna-Maria Heikkinen

Thank you, Hakan. Thank you, Arjen. Now, we’re happy to take questions.

Question-and-Answer Session

Operator

Yes. And please keep your microphone muted while not talking. Thank you. First up is Daniela Costa from Goldman Sachs.

Hakan Agnevall

Hello, Daniela, we can’t hear you. Welcome.

Daniela Costa

Hi. Can you hear me now?

Hakan Agnevall

Now we hear you, Daniela. Welcome.

Daniela Costa

Perfect. Thank you. Sorry for the little difficulty. I have two questions here. First one, wanted to explore on the strategic rationale for the storage, why doing the strategic review now. I guess not obvious from us from the outside that there is a massive disconnect between your valuation and the valuation of some of your main storage pure play peers. Also, you have articulated that one of your differentiating points, in the past, was having this integrated balanced power and storage. So, can you talk through some of the benefits of potential different ownership structures and really the timing, why now? So, that’s my main question. And I had a second question. It sounds like your portfolio company is actually doing a bit better than expected. Can you articulate what’s the vision for that segment going forward? I think in the past have interpreted that as maybe being more of a non-core segment. Just any update there would be useful. Thank you very much.

Hakan Agnevall

So, if I take storage, maybe, Arjen, you take portfolio.

Arjen Berends

Yes.

Hakan Agnevall

So, if you look at storage, and why now, and what’s the logic. I think we found the timing good. I mean we have grown this business now and successfully to €1 billion, give or take. And we now brought it to profitability. And I think this is a good time, together with the Board, to take a step back and look at how do we want to support the continued growth, because clearly this is an industry that is growing, we are growing. And we need to find the best way to fuel that growth. And that’s why we want to do the strategic review to look at different ownership alternatives. And the conclusion could be that we keep the storage business, but it could also be that we partially divest, fully divest, et cetera. So the timing, we kind of reached the milestone €1 billion, now profitable. Okay, how do we continue to support the growth? So, that’s the rationale.

So, portfolio?

Arjen Berends

To your question, Daniela, on portfolio business, of course, let’s say this is, as we have also communicated earlier, let’s say, non-core, let’s say it’s not strategic, let’s say critical for us to keep. And therefore, we have also, earlier decided many business units to put in portfolio business. Or the plan remains to divest. The performance is, of course, let’s say, we are very happy with the performance. Let’s say good profitability always makes it easier. Also to divest this business, it’s a temporary thing. We will not reverse our earlier decision. So, the divestment roadmap continues.

Daniela Costa

Okay, thank you very much.

Operator

Next up is Max Yates from Morgan Stanley.

Max Yates

Thank you. Just — hi, can you hear me?

Hakan Agnevall

Yes. Hello, Max. Welcome.

Max Yates

Yes, hi. Good morning. And just my first question was on the marine orders. And obviously there were some pretty good equipment orders in there, particularly in the marine systems business. So, I just wanted to understand, we’re thinking about run rates of order intake. Were there any kind of abnormally large one-off orders that maybe we should strip out in the business? How should we think about some of those growth rates and the momentum going forward? Thank you.

Hakan Agnevall

If I start the marine power, maybe you can comment marine systems order intake. So marine power, I would say that strong equipment order intake, as I said, the core or some of the core segments of Wärtsilä is delivering in Q3, including cruise. So, that is a driver. And I would say that we see continued positive development in our core segments from a demand side.

Arjen Berends

Looking at marine systems, of course, for marine systems I would say it’s better to look at a bit more long-term trend and not, let’s say, standalone quarters. They can be very big orders, in particular in the gas solution business within marine systems. While on the other businesses, like shaft line solutions and exhaust treatment, they are typically smaller in size. So, you have these incident or bigger ones every now and then, it can, of course, make a big difference in one quarter. So, I would recommend to look more at a rolling 12-month than any specific single quarter. I think that makes more sense.

Max Yates

And just secondly, just on the energy storage announcement. And I think I completely understand your comments of taking a look at what’s the best path forward. Just in terms of how integrated that business is in your organization, would it cost substantial money to disentangle this? Do you have a shared service network at this point? How should we think through how integrated that business is, and any cross — I guess people involved in both organization? If you could comment there that would be helpful? Thank you.

Hakan Agnevall

There are certain synergies, clearly, especially on, you could say, on the admin side, on everything there. There is also a bit of synergies on the sales force side. So, if whatever — as we talked about, there are many options. But if we pursue that option, we will need to see how the structure would look like. Clearly what we doing today is that we are tracking the profitability separately, Arjen.

Arjen Berends

Correct, yes.

Hakan Agnevall

So, that I think we have a good understanding of the cost structure, and that is valuable input for the review when we consider all different options.

Arjen Berends

And then just to add on that, as we also commented before, there is a lot of cross-utilization of people as well depending on [lot] (ph), let’s say, in the different parts of energy, being at [EPP] (ph) or storage. So, on the sourcing side, on the logistic side, but also in the group functions like shared service centers. Of course, they are also supporting storage. I wouldn’t say it’s super complicated. It’s not super integrated there.

Hakan Agnevall

And then, of course, we have the GEMS platform that we use in both parts of the business. So, there are synergies, and that’s why we need to look at all different options.

Max Yates

Fantastic. Thank you very much.

Operator

Next up is Vivek Midha from Citi, please.

Vivek Midha

Hi, everyone. Thank you. Can you hear me?

Hakan Agnevall

Yes. Welcome.

Vivek Midha

Perfect. Thank you very much. I have one question on the energy business, it’s relating to the thermal power plants business. It sounds like you’re still looking for an improvement in demand in the fourth quarter. But could you maybe expand on that, what gives you the confidence that that’s going to improve in the fourth quarter? Thank you.

Hakan Agnevall

Well, I think we look on our pipeline of potential projects, and that gives us some positivism, so to say. Also, going in, if you look at our guidance for next year, we do see certain power auctions coming in South America, et cetera. So, we are looking into our pipeline.

Vivek Midha

Understood. Thank you.

Operator

Next up is Sven Weier from UBS, please.

Sven Weier

Yes, good morning from my side. I hope you can hear me.

Hakan Agnevall

Yes, good morning, Sven. Welcome.

Sven Weier

So first up, also on energy storage, just coming back to the motivation for the strategic review, was just wondering did you also have an increasing amount of expression of interest in the business lately? Is that maybe also behind the motivation or would you only expect that to happen once you start a clear process down?

Hakan Agnevall

I think this is clearly driven inside-out you may say. It’s more our strategic perspective, working together with the Board. It’s not — and what I would call an opportunistic approach, so to say. So, it’s clearly coming from taking a step back, looking at how do we best fuel the continued growth, and looking at different models.

Sven Weier

And when you say partial ownership, you mean IPO as an option?

Hakan Agnevall

We don’t rule out any option at this stage.

Sven Weier

Okay. Second point was just regarding the phase out of the legacy contracts for the last time, in Q3. Was just wondering which business unit has been the residual impact of that phasing out?

Hakan Agnevall

Well, I think we talked about that before. It has been in energy. It has been on marine system so to say. So —

Hakan Agnevall

Mostly, not only.

Arjen Berends

Yes.

Sven Weier

Same in Q3?

Arjen Berends

Yes.

Hakan Agnevall

Yes.

Sven Weier

Right. Okay. Thank you.

Operator

Next up is Sean McLoughlin from HSBC, please.

Hakan Agnevall

Sorry, Sean, we can’t hear you.

Sean McLoughlin

Can you hear me now?

Arjen Berends

Yes.

Hakan Agnevall

Yes, Sean.

Sean McLoughlin

Perfect. Thank you. Just I wanted to comeback maybe to Vivek’s question little bit about what is driving improved outlook in energy. Is it across all segments? Is it specifically driven by storage over thermal? Is it more the services side within thermal, i.e., more customers willing to take on long-term service agreements, just any moving parts within that guidance improvement?

Hakan Agnevall

I think we actually see in all those dimensions, positive signs that triggers this outlook. So, it’s about new building in power plants. It’s about new building storage. It’s about service. So, you could say it’s a broad array of drivers. And if I come back, for instance, on the power plant side, we see certain options coming in South America et cetera, et cetera. So, there are — yes, we see market demand evolving in a positive way.

Sean McLoughlin

And on the thermal side, you specified Latin, I mean is that’s been region specific or is that a let’s say regionally broad better outlook?

Arjen Berends

It’s a broad outlook. I just gave that as an example to make it — it’s not only in South America. We also see in certain countries in Asia.

Hakan Agnevall

Asia.

Sean McLoughlin

Thank you.

Hanna-Maria Heikkinen

Thank you. Do we have any further questions? We still have some time. So, in the case you have a question, we are here for you.

Operator

Next up, Erkki Vesola from Inderes, please.

Erkki Vesola

Hi, good morning, guys and girls. Anyway, coming to the — regarding the legacy projects, how much of a drag that you see in Q3? And, how big an improvement should we expect in Q4 regarding the omittance of this?

Arjen Berends

So, we don’t — sorry, it’s a good question. But, we don’t give guidance for the profit margin. It’s the story that we have communicated in the past when we went into this year, we had about €1.2 billion in order backlog left of orders that has been heavily affected by the accelerating cost inflammation. We have now worked that out through this year until now. So, those projects have also had an impact on Q3. But, we are not guiding on the margin impact.

Erkki Vesola

Okay, thanks. And basically, still coming to the storage revenue, why did you have to come public with this, starting this revenue? I mean you could have just carried this out internally? Is it just you are kind of flagging that we are out here and we are looking for partners et cetera? What was the reason behind it?

Arjen Berends

I think being a listed company, we need to follow the regulations, of course, of NASDAQ. And, this is a sizeable decision even to enter the strategic review. So, the Board made a decision. And, we immediately go out and release the news, that we need to do in the line being a listed company.

Hakan Agnevall

Size and potential magnitude, yes.

Erkki Vesola

So, I would say you are kind of more forced to do that, not just that you wanted to come public with this?

Arjen Berends

No, it’s part of being listed. And then, you if you make sizeable decisions that could have a significant impact, you need to immediately disclose it. And, that’s what we have done.

Erkki Vesola

Fair enough. Thank you.

Operator

Next up is Tomi Railo from DNB, please.

Tomi Railo

Hello.

Hakan Agnevall

We can’t hear you.

Tomi Railo

No, okay. Sorry about the short delay there. Yes, a couple of questions. So, firstly, maybe on the energy outlook as well, to what extent is it a true environment improvement what you see, or is it just a reflection of that let’s say weakness or delays in the market activity, customer signing delays in the previous quarters?

Hakan Agnevall

Well, if you look at the development during the second-half of the year, it’s a bit of periodization between the quarters. But when we do the outlook, I think we are looking at two things that is a little bit hard to delineate that there are up and demand for power, and then there is the decarbonization journey. And both of those are coming together. So, that gives us confidence when we see, as I said before, in our pipeline going forward.

Tomi Railo

Okay. And secondly, if you could maybe explain a little bit about the service profitability development, very strong order sales, as we have seen in the previous quarters. Have you been able to improve the service profitability as well?

Hakan Agnevall

Well, I think we are gradually doing that. I mean, there is, of course, a volume effect. I think the key thing here in fueling our growth — of course we have high utilization of the equipment that our customers are using, but this strategy of moving up the service value ladder, we clearly see that that is fueling the growth. I mean, we showed some examples here with the maintenance agreements, 10, 15 years agreements, and they are profitable. We are creating value for the customers. As I said, 90% renewal rate of this type of agreement. So, it shows also customer things that we are creating value. And that is one of the major growth leaders. And we are growing profitable.

Tomi Railo

Thank you very much.

Operator

Next up is Max Yates from Morgan Stanley, please.

Max Yates

Thank you. I just had a quick follow-up question on the services order intake. I mean, I guess if I look at your sort of 12-month rolling service order intake, it is nearly up 40% versus 2 years ago. I guess, we have seen in some other industries, we are now starting to see kind of orders normalized. We have seen some early ordering kind of supply chains have made customers do strange things with their ordering behavior. So, to what extent do you see any of that in your own business? And do you think we could then go through a period of more stable order intake as customers sort of focus on the deliveries? Or do you just see a sort of fantastic runway ahead, lots of opportunities on maintenance contracts? And do you think this is kind of customers are behaving in a normal way? Any color on that would be helpful. Thank you.

Arjen Berends

No, I think we see a mixed portfolio, so to say. If we look at the different segments, I see clearly that the merchant side is starting to stabilize a bit. Offshore has been growing a lot, very steep. Cruise is also going up. So, it’s a mixed bag. Certain segments are clearly kind of leveling off, might be going down. Other segments are growing.

Hakan Agnevall

Yes, just to add, I think if you make a comparison to 2 years ago, of course, one factor that is clearly not continuing going forward is the effect of, let’s say, moving out of COVID. So, I think that exceptional, let’s say, growth rate is definitely, let’s say, 21. Still being deep into COVID and cruise rate running, let’s say ferries are coming back to life again. I think has clearly had an impact. But I would say we have a strong belief in the growth of the service also on a continuous basis going forward.

Arjen Berends

What we do see, sorry, to — I mean, the decarbonization journey, retrofit, you remember that we talked about in our previous year and the previous year, we see a €2.5 billion retrofit market potential of our own equipment over five to 10 years. So, the retrofit system [technical difficulty] —

Max Yates

And maybe just to follow up, I mean, if I go back sort of two or three years ago, one of the kind of negative cases on your stock was the potential risk in energy services of more flexible power in your baseload, less running hours, and that would negatively impact energy services. We don’t seem to be seeing any of that. Is that a case of kind of some of these retrofits and kind of bigger service contracts are offsetting kind of lower consumables for some of your customers? Or are we just not really seeing that happen at all in any parts of your installed base? Is that happening in pockets? But there’s obviously offset. How, help us through that.

Hakan Agnevall

So, basically, you could say that we are growing our installed fleet of megawatts on the energy side, and we do see that the total, if you aggregate all the number of service hours is stable. Although our share of balancing, which has lower running hours is increasing. So, we grow the installed base, the total number of hours is stable, and then I would say on top of that, and we talked about that before, moving up the service value ladder, we clearly see that, that is supporting the growth. Moving up the service value ladder, we clearly see that that is supporting the growth, moving customers into agreement.

Max Yates

Thank you very much.

Hanna-Maria Heikkinen

Thank you. Do we have any further questions?

Operator

Next up, Vivek Midha from Citi, please.

Vivek Midha

Thanks very much for the follow-up. A quick follow-up on Max’s question, the service order intake has been growing quite a bit over the last few years. I appreciate it if you can’t disclose this, but could you give us any indication as to where those prices are in service compared to say two years ago or pre-COVID levels so that we can work out X price, where is your service activity versus previous levels? Thank you.

Hakan Agnevall

I won’t go into the X percent, you might be looking for sorry for that, but I mean clearly we have worked with price realization and we have had to do that in the wake of inflation so to say. As you know, there has been a rather steep inflation and I think on the services side, we have been able to work quite a lot with price realization. I don’t know, Arjen, if you would like to add.

Arjen Berends

No, it’s exactly as you say. We will not open up on this one. It’s very competitive, sensitive as well, of course, but what we can clearly see is that the whole industry has done the same. So, we are not an outlier in this respect.

Vivek Midha

Thank you.

Hanna-Maria Heikkinen

Thank you for great questions. And thank you, Hakan. Thank you, Arjen. I would like to remind you about our Capital Markets Day, which will take place on November 9. So, please register on our Web site and join us following it. Thank you.

Arjen Berends

Thank you.

Hakan Agnevall

Thank you. All right, so we shortened it. Normally we have —

Arjen Berends

There were no questions.

Hanna-Maria Heikkinen

There were no questions.

Hakan Agnevall

[Indiscernible]

Arjen Berends

Or they are buying shares now.

Hanna-Maria Heikkinen

Yes. Not everybody.

Arjen Berends

I’m not sure what the share price did now so far.

Hanna-Maria Heikkinen

20%.

Arjen Berends

Minus?

Hanna-Maria Heikkinen

Plus.

Arjen Berends

Oh, plus. I was about to be surprised actually.

Hanna-Maria Heikkinen

Yes.