Wärtsilä reports strong Q1 with high order intake By Investing.com



Wärtsilä Corporation (WRT1V.HE), a global leader in smart technologies and complete lifecycle solutions for the marine and energy markets, has reported a robust first quarter for 2024. The company achieved a double-digit comparable operating margin and a strong order intake, which increased by 11% with organic growth of 17%. Despite a 10% decrease in net sales to €1.3 billion, primarily due to timing in the equipment business, service sales grew by 13%. The comparable operating result soared by 50% to €132 million, translating to a 10% margin.

The Marine market is buoyant, with increased demand for new ships and a focus on CO2 emission reduction, while the Energy market faces uncertainty but sees opportunities in balancing and energy storage solutions. Wärtsilä’s order book has reached an all-time high of €7.3 billion, and the company’s operating cash flow has also hit a record €258 million in Q1, signaling a solid trajectory towards meeting its financial goals.

Key Takeaways

  • Wärtsilä’s order intake rose by 11%, with organic growth at 17%.
  • The Marine order intake increased by 23%.
  • The order book reached a record €7.3 billion.
  • Net sales fell by 10% due to timing in the equipment business.
  • Service sales increased by 13%.
  • Comparable operating result improved by 50% to €132 million.
  • Operating cash flow reached an all-time high of €258 million.
  • The company is on track to meet its financial targets.

Company Outlook

  • Wärtsilä expects demand in the Marine and Energy markets to remain positive over the next 12 months.
  • Sales are anticipated to gravitate towards the second half of the year, especially in the Energy sector.
  • The company aims for a 12% operating margin, although no specific timeline was provided for achieving this target.
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Bearish Highlights

  • Net sales decreased by 10% due to the periodization effect in the equipment business.
  • Energy Storage experienced low net sales due to project delivery timing.
  • Energy Services saw a slight reduction in megawatts under agreement in Q1.

Bullish Highlights

  • Marine and Energy segments both achieved around 11% EBIT.
  • Comparable operating results increased by 50%.
  • High customer renewal rates at 90%.

Misses

  • The company divested its pump business in Hamworthy, eliminating exposure to that segment.
  • The low sales in Energy Storage impacted operating leverage.

Q&A Highlights

  • CEO Hakan Agnevall clarified that low Q1 sales in Energy Storage are not indicative of future performance.
  • The demand environment for battery storage, power plants, and baseload for energy power plants is improving.
  • There are no significant order pushouts; delivery patterns are based on past order intake.
  • The company’s industrial system and supply chain are flexible and ready to scale up in a growth scenario.

Wärtsilä’s CEO Hakan Agnevall emphasized the company’s strong performance in the Marine business and the strategic focus on moving up the service value ladder. He also reassured stakeholders that the dip in Energy Storage sales was due to project delivery timing rather than delays, and that the company’s strategy in this area continues to yield positive results. With increased order intake and a record-high order book, Wärtsilä is well-prepared to handle increased volume, thanks to its major manufacturing hubs in Finland and through Chinese joint ventures. The strategic review of the storage segment is ongoing, with findings to be communicated upon completion.

Full transcript – None (WRTBF) Q1 2024:

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Operator: Good morning, everybody, and welcome to this news conference for Wärtsilä Q1 2024 Results. My name is Hanna-Maria Heikkinen, and I’m in charge of Investor Relations. [Technical difficulty] — and he will also go through the business performance. And after, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Please, Hakan.

Hakan Agnevall: Thank you, Hanna-Maria, and a warm welcome. First, I’m going to go and get my clicker, I’ll be back. Sorry, I forgot that one. So, welcome to a really good quarter, summing up a really good quarter. And we have made progress, and we continue to make progress in a very good way, evolving in the decarbonization transformation of our two industries, positioning ourselves, and also improving our financial results. So, if we look at Q1, we came out with double-digit comparable operating margin and continued strong order intake. So, order intake is up 11%, organically it’s actually up 17%. And it’s especially supported by good development in the Marine order intake, up 23%. It leaves us with a order book at all-time high at €7.3 billion. And I think one of the highlights is that the comparable operating results increased by 50%, so we are now at 10% comparable operating margin and a continuous journey of improvement is evolving, so to say. Good progress in services also continued. And as you know, it’s a very important part of Wärtsilä business. So, we saw order intake increase by 7%, and the net sales increased by 13%. Cash flow, also very strong, which is a very strong signal considering that Q4 also was exceptionally strong. So, strong cash flow from operating activities, €258 million. And as a group, we are becoming a more focused and more profitable company. And we have now consolidated into two reporting segments, Marine and Energy. So, if we look at a little bit closer to the numbers, looking at the order intake, so €1.9 billion, up 11%, and if you look on the service side, €949 million, up 7%, and equipment, which equipment order intake continues to grow in a very good way in both of our businesses, so €975 million, up 15%. And that leaves us with a all-time high order backlog of €7.3 billion. Net sales is down 10%, so to €1.3 billion. And you can see net sales continue to grow on the services side, so €833 million. It’s really the equipment that is coming down. And I think the major message there; it’s a periodization effect between quarters. So, it’s not a trend shift, we have a positive outlook, but there is a bit of periodization, especially in our project-related business between the quarters, book-to-bill at 1.46, 12th consecutive quarter with book-to-bill higher than one. Operating result, up 38%, and the comparable operating results up 50%, €132 million, and 10% of net sales. So, outlook on our two markets, the Marine market, the sentiments turn positive for Wärtsilä’s key segments. In the first quarter, the appetite for new ships increased in general. The number of vessels ordered in Q1, 411, compared to 255 same period last year. Uptake on alternative fuels remain on a healthy level, 118 orders, 29% of all the vessels, 45% of capacity. And I think here, as of January 1, a major step in the decarbonization journey for the marine industry, certainly in Europe, where the marine industry is now included in the EU’s emission training system, which is adding cost and incentives for shipping company that operates in the EU or that do port calls in the EU to really focus on reducing CO2 emissions either by, of course, modernizing existing fleets and upgrading existing fleets, but also looking at strategies for new vessels going forward. Cruise segment increasingly very positive, a lot of cruising activities. And we also see that the high demand for cruise is now filtering through to the first new bill orders for large cruise ships, so to say. And all the big players, they are indicating orders to come. And so, it’s a distinct shift from, I would say, a four-year period of low rates. Clarkson also optimistic in our most recent update of the forecast, basically taking the overall level of orders for 2024 up 7%. Looking at Energy, we continue to solid mid-to-long-term market opportunities. In the first quarter though, uncertain market environment continued despite some relief. The increase of share of renewables is the primary driver behind the Wärtsilä’s balancing and energy storage solution demand. And, we do see a lot of activities and interest. Global prices continue to decline towards the pre-2021 levels. So, it’s made possible by increased renewable generation, warm winter season, and also muted demand growth. On the commodity pricing side, it has stabilized. Although the uncertain geopolitical environment presents price and availability risks, the positive thing is that we do see several signs that the energy transition continues to advance. And it’s another year of record high investments in deployment of clean technology last year. Looking at our numbers more in detail, so, organic order increase — order intake increased by 17%. Order intake grew 11%. Out of that, equipment order intake increased by 15%. Service order intake increased by 7%. All-time high on the order book as a result — and one important thing to highlight and note here is that the 2024 deliveries are tilted towards the second-half of the year, especially on the energy side. The rolling book-to-bill continues to trend up. Organic net sales decreased by 6%. So, net sales decreased by 10% and the equipment was the big driver. So, equipment net sales decreased by 33% whereas service sales continues the positive journey, increasing by 13%. And as I mentioned before, the equipment net sales decrease is mostly driven by periodization between quarters and project business. Profitability continues to improve. We are in a journey of continued improved financial performance. So, net sales decreased, but the comparable operating results increased by 50%. I mean clearly this is supported by more favorable mix between services and new build. We have about 63% of sales in Q1 was service related. So, that gives a positive impact on our profitability for Q1. The lower sales give lower operational average. So, that gives the other way. But we general, I think we are on a solid path to reach our financial targets. Technology and partnership, this is really what we are excited about in Wärtsilä. And it’s all focused around our strategy for decarbonization. So, a couple of examples from Q1, first of all, we are very happy and proud that we are a part and we are actually leading a €200 million collaboration in an ecosystem to develop autonomous power plants and also autonomous zero-emission power plants of balancing solutions going forward. So, this is a five-year collaboration program. It involves more than 200 Finnish companies, industrial organizations, research institutes, and universities. We call it WISE. And, it’s really to develop innovative clean energy concepts and autonomous zero -emission balancing solution by using data analytics and artificial intelligence. And, our goal as an outcome is to offer flexible autonomous power plants concepts by 2028. On the storage side, we continue to invest and continue to launch new products. At Wärtsilä, we have introduced Quantum2 to optimize the deployment of large scale energy storage facilities. So, it’s a fully integrated, high-capacity battery energy storage system optimized for global large scale deployment. And it enables our customers, product developers, to meet capacity requirements with improved transportation and deployment speed and unparalleled safety. As you know, we have the industry leading safety — thermal safety track record. It’s flexible to include modules from various manufacturers, allowing optimized configuration for each project and for different partners in the supply chain. If we then zoom in on our two businesses, so starting with Marine, good performance continue, order intake, net sales, comparable operating results all increased. Order intake up 23%, net sales up 6%, and if we look at the comparable operating result, we see good performance in services supporting the result. And but we do have an increase in R&D costs and higher depreciation and amortization. As we talked about, we are investing in new technologies on the marine side, new fuels, hybrid solution, carbon capture, et cetera. And we want to position ourselves as a technology leader in the industry, and I think we have a very strong position. If we look on the services side, we have good development in marine service agreements. Marine net sales to agreement installation continues to increase. And we took one example here, there are many of these, but this is really what the service business is about. So, it’s a life cycle agreement to support optimized low emission operations for two P&O Ferries. So, we signed the agreement with P&O, five-year agreement, two vessels, Pioneer and Liberte, designed to optimize and ensure minimal impact on operation. So, the scope includes parts, maintenance services, maintenance planning, operational support and also expert insight for predictive maintenance services. And this order was booked in the first quarter. Now, looking at Energy, comparable operating results increased. Equipment net sales decreased due to the periodization of deliveries between quarters as we talked about before. So, order intake up 4%, net sales down 30% quarter-on-quarter. If we look at the operating result, it was supported by the good performances in services and also improved profitability in our EPP business. Decreased sales, of course, we have lower operational leverage with the sales coming down. And also on the energy side, we are investing for the future being positioning ourselves as a technology leader. This, I think, it’s a great example of balancing and of the global trend that we are seeing in balancing, which is very strong, particularly in the U.S. So, one of our — you could say, repeat customers has placed another order. It is the Lower Colorado River Authority, LCRA, they provide wholesale power to the Texas power grid. And LCRA actually gave us an order in 2022 for 190 megawatts. And now they are returning, which we are very happy, to place an order for another 10 engines, the 50SG engines. So, it will basically double their output. And I think the statement here by senior leadership in LCRA, it’s I think it’s spot on with what we are doing in Wärtsilä on the balancing side and actually the message that we have been giving. So, quoting here, we really appreciate Wärtsilä’s track record in supplying efficient and reliable engines. The flexibility of the Wärtsilä engine is particularly important in providing the rapid ramp up of power needed for our new Pico plant, which will be called upon to quickly come online when other generation is not available to meet the power demand of a growing state. So, this is balancing power spot on. And this order was booked in the first quarter. If we look at Energy Storage, the comparable operating results continue to be positive. We had low net sales due also here due to periodization of project deliveries between the quarters. And the strategic review continues. Energy Services is at a good level. I mean, good agreement coverage, 29% of the installed base is under agreement. I mean you see a slight reduction of megawatts under agreement in Q1, but that is also affected by periodization, it’s not a general trend. We do see a positive development of our agreement business, also in Energy. And for us, one of the major metrics continues to be the customers’ renewal rate on the agreements, and they are 90%. So, a strong testimonial that we are creating value for our customers. To sum it up, looking at how the comparable operating results have improved, the bridge from Q1 last year, and you can see the contributors here, Marine, Energy portfolio business. And I think it’s worth to note that Marine and Energy, both are now about 11% EBIT, and the comparable operating result increased by 50%. Arjen, other key financials.

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Arjen Berends: Thank you. Give me the clicker. All right, other key financials. If we look at all these, let’s say, other key financial parameters or KPIs, however we want to call them, actually we can clearly see that it is, on all lines, improving compared to the same quarter last year. Actually, it’s also improving compared to Q4 last year, except for solvency and basic earnings per share. Solvency typically goes down in the first quarter as the AGM decision about dividend is accounted for in equity. And if you look at the basic earnings per share, it’s actually only €0.02 down from Q4, which is actually for Q1 a very good level. Our operating cash flow, €258 million, actually it’s an all-time high Q1 record for Wärtsilä. We have never had such a high cash flow in Q1. And clearly supported by customer payments, downpayments very much, I would say, related to the good order intake that Hakan was reflecting upon earlier. Actually, order intake in Q1 was higher than Q4, which is really a good trend. But also, other milestone payments from customers, but also clearly happens to the — or supports the cash flow is on our continuous improvement on transactional services, because the transition, let’s say, from order to cash on transactional services is a lot shorter, and that can have quit significant impact, even on single quarters. Looking at this graph or this slide actually, in the left-hand graph, let’s say, cash flow from operating activities actually going really strong. Actually it generates that we are in a net cash position today, very much supported by improved profitability, but also a continued negative working capital. I would still say that negative working capital is exceptional, and it relates very much to project execution milestones in our order backlog, and that can vary a lot quarter-on-quarter. But Q1, extremely good, and the trend is clearly positive. Back to you, Hakan, on the prospects.

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Hakan Agnevall: Thank you, Arjen. So, coming to the prospects, I think we have a fairly positive outlook, so we expect that the demand environment for the next 12 months on the Marine side and the Energy side to be better than of the comparison period. So, the positive journey continues. All right.

Hanna-Maria Heikkinen: Thank you, Haken, and thank you, Arjen. Maybe Arjen, you can join here for the Q&A. So, we will continue the Q&A now, but I would like every analyst first ask one question. So, one question per analyst first, and then please save the follow-ups until every analyst has had the possibility to ask one question. Thank you. Handing over to the operator.

Operator: Our first question comes from Sean McLoughlin. You can unmute your microphone and ask your question.

Sean McLoughlin: Good morning. Can you hear me?

Hakan Agnevall: Morning. We can hear you. Welcome.

Sean McLoughlin: Thank you. So, my one question, just trying to understand a little bit your comments around prioritizing projects. Just what is going on here? I mean, are you — is there any sense that you’re capacity-constrained? Are there potentially supply chain limits on your ability to deliver or what else is causing this, let’s say, you’re having to decide which projects move forward and which take longer? And I guess are there any, also, risks that we see, maybe project delays?

Hakan Agnevall: So, just to clarify, the word is periodizing, not prioritizing, periodizing. So, what does that mean? It means that when we deliver projects, we invoice our customers and we do revenue recognitions for some of the projects and based on invoicing. For some of our projects, we use the percentage of completion to recognize sales. So, we have a bit of mix of that. But what happens is that if an invoice slips a week from one quarter to the other, or you have a certain milestone and a delivery scheme that can slip for two weeks, then you can have quite a lot of impact on our quarterly sales. So, this is not about lack of resources or supply chain constraints or capabilities. It is about — what sometimes happens in project-related business, that you have milestone slipping from one quarter to the other. And that’s why we are confident this is not trend shift or anything, this is more of a quarterly phenomenon, so to say. And yes.

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Arjen Berends: And in addition to that, I think it also links to, let’s say, our order intake pattern of the past. Let’s say, if you look at order intake in particular at some projects, storage and in engine power plants, for example, it has been more in, let’s say, the second-half of last year when we took the order intake as we have also earlier commented. And typically, that is then also delivered, let’s say, not in the first-half of this year, but typically, let’s say, the second-half of last year, and beyond. What we also see as the trend is that the time between, let’s say, booking the order and delivery, so sales recognition you could say in the Marine side is slowly increasing because of, let’s say, yard capacities being full. So, where we used to say about — it’s 12 to 18 months between that, it’s now more to, let’s say, 18-24 months. So, that’s also a clear change in what happened in the market actually.

Hakan Agnevall: And also to make —

Arjen Berends: And it relates to periodization; sorry.

Hakan Agnevall: Yes. And also to make a final comment on sales recognition for this year, we clearly also make the statement that if you look on sales in general over the year, we will see a gravity towards the second-half of the year, especially on the Energy side, both in storage and power plant.

Arjen Berends: Correct.

Sean McLoughlin: Thank you. I’ll get back in line.

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Operator: The next question comes from Vivek Midha from Citi. Please go ahead.

Vivek Midha: Thank you very much, everyone, and good morning. My question is on margin and [indiscernible] for the year. You notice there are unusually high service share of sale, and you commented that the segment is likely to come off in the second-half. But how should we think about the phasing of the margin over the quarters this year? And if I may, when you comment about the solid part to your financial target, is there any more color you could give at this stage as to when you hope to achieve that part of that margin target on a full-year basis? Thank you.

Hakan Agnevall: So, I mean, we have a 12-month — sorry, 12% operating margin target. We have said, over a few years, we are not more specific than that. We emphasize our journey of continuous improvement of our profit margin. And I think Q1 is certainly a testimonial to that journey. Then also on — we do underline that first quarter, the sales mix, services versus new build, it was favorable from a margin perspective, because with 63% services sales in comparison to new build, of course that supports a positive margin mix. And we also say that when we look at the sales recognition for the full-year, especially then we talk new build will be more — gravitate more to the second-half than the first-half. I don’t know if you want to comment something?

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Arjen Berends: No, I think you did. That covers it quite well, I would say, yes.

Vivek Midha: Thank you. Thank you very much.

Operator: The next question comes from Sven Weier from UBS. Please go ahead.

Sven Weier: Yes, good morning, and thanks for taking my question. It’s regarding the Marine order intake. And specifically, my question is on offshore, where I think you were more bullish on the offshore segment for 2024, but we haven’t seen that coming through in Q1 order intake yet. I was just wondering is that a timing issue? And also specifically, I was wondering in the merchant segment share of Marine order intake, the 30%, how big the tanker exposure is in that? Thank you very much.

Hakan Agnevall: I would say that we still have an optimistic outlook for offshore this year so to say. And we are still optimistic about the segment. Then tanker impact, I would say it’s limited. I would say.

Sven Weier: Yes.

Hakan Agnevall: Because I mean it’s mostly two-stroke engines. And we do deliver some auxiliaries, but maybe not so much into that specific segment.

Sven Weier: Because I remember when you did the Hamworthy acquisition years ago that they had some I think pump exposure, also to tankers. But, that seems to be relatively small, right?

Hakan Agnevall: No, the pump business in Hamworthy, we divested a couple of years back. So, we don’t have exposure anymore.

Sven Weier: Yes, that’s what I thought.

Hakan Agnevall: What we see though in gas solution, I mean the business unit that we have put in portfolio, it has — there is a lot of activities on transport. As you know gas solution is delivering transport systems for different type of gas carriers. And, there is a quite a lot of activities in that particular segment. But as I said, this is nowadays in portfolio.

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Sven Weier: And also, [indiscernible] actually on that segment?

Hakan Agnevall: Yes.

Sven Weier: Yes, very clear. Thank you.

Operator: The next question comes from Max Yates from Morgan Stanley. Please go ahead.

Max Yates: Thank you. Could I just ask on the marine service business? when I look at your order intake in marine services, it looks like sort of what? It is up 16%. Organically, it’s probably up in the 20s. How much of this is sort of underlying activity? And, how of this is kind of multi-period bookings? I am just trying to get sort of real sense of kind of what the underlying market is doing and maybe what the sort of uplift from your kind of your own [indiscernible] if you can give a context of that, whether that sort of service level it’s kind of €568 million in marine is sustainable?

Hakan Agnevall: So, two sides of the equation, so to say, I mean first, there is, of course, a high level of activities in general in the fleet, so to say. And I would say I mean with the geopolitical challenges in the Middle East and also the droughts around Panama, and therefore, the impact on the Panama Canal, that makes people take longer routes. And that has a contribution to the service business. So, the high level of activity in considering the very current stage, ships are actually going longer which has a positive impact so to say. But, that’s only one piece of the equation. The second piece of the equation — and I would say it is more important piece of the equation, is our strategy around moving up the service value ladder. And we really see that strategy playing out, I mean bringing new customers into agreements and brining customers that already in agreements to more advanced agreements et cetera, et cetera. So, both are benefiting. But I would say our strategy is really delivering so to say.

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Max Yates: Okay, that was helpful. Thank you.

Operator: The next question comes from Sebastian Kuenne from RBC. Please go ahead.

Sebastian Kuenne: Thank you for taking my question. I have a question on energy storage and the impact that these project delays or later deliveries have on the margin. Energy storage dropped or deliveries dropped by 80% year on year, so first of all I would assume that the margin increase you have an energy, the 500 bps is really driven by thermal and services. And that the storage business is basically absorbing a lot of the SG&A costs into later quarters. I would like to understand that dynamic. And, what the normal margin would have been in energy if you had delivered normal storage volumes? I hope that makes sense. Thank you very much.

Hakan Agnevall: No, so basically — and I’ll let Arjen also comment. I mean you could say that — sales in storage is very low this quarter. So, you could say the quarter is — the main contributor is the EPP, the power plant, and the service business. I think that’s one thing to reflect upon. And as to clarify with prioritization, it doesn’t mean necessarily that we have delays in projects. That’s not the major driver. It’s just that we have a project business and milestones and payments. They are planned in a certain way and they are not — unfortunately they are not planned for our quarterly reporting. So, it’s not that things are slipping and sliding. It’s just that the businesses — projects in the businesses have a certain cadence and it leads to sales recognition in certain times. And as I said, if the time is not the last week of the quarter, but maybe two weeks into the new quarter, of course, you will see this as a decline in sales in Q1. So, just underlining that, there is no major delays. It just happens that a kind of project cycles, and we do have in storage, we do have quite some big projects. So, planning of distinct milestone can have this impact on our sales recognition. But I’ll give over to you.

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Arjen Berends: Yes, I think it’s you said many things already. Let’s say one thing to add, you’re absolutely right, Sebastian, that’s of course with a low sales in storage, the operating leverage is clearly, let’s say impacted. We will not open up, let’s say, what it exactly is, but it’s a clear effect. And we believe that, let’s say, over time looking more on a full-year perspective, this will get back in line basically.

Sebastian Kuenne: But does that mean, if the low margin business, which is currently still storage, if that comes back in Q2, Q3, it could lead then to lower margins, right, because you add back all the SG&A costs in these projects into your books?

Arjen Berends: No, SG&A costs are already, let’s say, hitting, let’s say, storage as of today, basically, because you cannot put it on the balance sheet. That’s not working capital or work in process.

Hakan Agnevall: So you could say that you might recognize that if you look at the 12 month rolling as we presented for the EBIT of Energy Storage. It continues to be positive. And that is still absorbing the S&As. So, it’s not like we are reallocating the S&A.

Arjen Berends: Exactly.

Hakan Agnevall: So I think that also show the underlying strength of the project execution in storage. I think we have a very solid project portfolio, and we have good profitability development of that portfolio. So, storage keeps on carrying its own S&A by earnings.

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Sebastian Kuenne: Okay. Thank you so much.

Operator: The next question comes from Vlad Sergievskii from Barclays. Please go ahead.

Vlad Sergievskii: Good morning. Thank you very much for the opportunity. I was just trying to understand the 75% drop in storage sales. I assume significant part of sales recognized here as cost-to-cost method and therefore shouldn’t be impacted by delivery milestones or invoice. While if indeed the revenue is recognized on delivery, then I would expect inventories to go up if you have been building those projects, and I don’t really see that happening. So, if you can help me to understand the drop, that would be very much appreciated. Thank you.

Hakan Agnevall: I’m not sure if I fully understand your question, but I think you referred to, let’s say, the percentage of completion application, which is of course, what we apply in storage largely. But I think the answer to your question because you at least what I understood through the line is that you think that it should be more, let’s say granular coming over the over time. That depends very much on, let’s say, when are we buying, for example, the batteries in the storage project. And as you can see from our order intake last year, let’s say, the majority of the order intake was actually in the second-half of the year, which means that, let’s say, okay, we buy the batteries later. So, that also brings the — let’s say, the percentage of completion to a later moment. You cannot buy the batteries earlier because then, let’s say would you get the batteries too early? They will deplete. So, they will not deliver the performance as you have promised to your customers. So, related to my earlier comment that, okay, the order intake last year was rather late in the year, then you could basically say, okay, it tilts more to the second-half of this year when it comes to the deliveries and even on the percentage of completion. Hopefully, that answers your question, if I got it right what you meant.

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Vlad Sergievskii: It does. Thank you very much.

Operator: The next question comes from Chitrita Sinha from J.P. Morgan. Please go ahead.

Chitrita Sinha: Good morning. Thank you for taking my question. So, in your income statement, your revenues are down about 10%, but your expenses are down by about 14%. So, I would imagine lower equipment sales would imply lower production costs. But could you please comment on SG&A in the quarter and whether it was up or down versus last year? And could you also tell us, like, how what level of inflation you saw in your cost base versus revenues in the Q1? Thank you.

Hakan Agnevall: I would say that the cost inflation, of course has impacted us. Let’s say, we are clearly seeing, in particular, on salary inflation, let’s say, clear impact in this year. And I think we are not the only one. I think many companies face the same. Material cost inflation, I would say or in the services, I would say that has been stabilizing pretty much, so there is not too much from there. It’s also good to know that, let’s say, okay, when you think about, let’s say, orders being down and cost being down on a — let’s say, just quarterly basis. I think it’s a bit or on a standalone quarter, bit wrong to compare like that because let’s say you’re still producing for all the quarters to come. You need the resources to sell in the market. We are clearly, let’s say, ramping up, let’s say, resources on the service side in order to facilitate our service growth. So, it’s not, let’s say an exactly 1:1. So, if your sales goes down, your cost goes down, that doesn’t work on a quarterly basis. Of course, if the long-term trend is that, let’s say, sales is going down, we need to take, let’s say, more radical measures. But actually, at the moment, we are in certain particular points, in particular on the service side, more ramping up than ramping down.

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Chitrita Sinha: Thank you.

Operator: The next question comes from John Kim from Deutsche Bank. Please go ahead.

John Kim: Hi, good morning. If we could stay in the Energy segment and talk a bit about the sequencing of revenues perhaps through the year. I’ve heard you clearly that the division is likely to get weighted. But given the impact of periodization on your accounting, do you expect Q2 to be up sequentially without getting into great details or put slightly differently is the storage revenue sort of the new normal in in the short-term?

Hakan Agnevall: No. Storage sales is not let’s say, that’s not the new normal. Let’s say €62 million, let’s say sales for Q1 is not a normal. Let’s say you can look at the order book and also the order intake of the past. I think that substantiates, let’s say a clear improvement from Q1 levels to the next quarters. But as I said, let’s say, the delivery volumes are tilted to the second-half. So, I would say, I will not guide you exactly, but second quarter will be better, but the most is tilted to the second-half of the year.

John Kim: Okay. So, just to be clear, you’re not seeing order push outs of any real magnitude?

Hakan Agnevall: No, let’s say, it’s just related very much to what I earlier explained, let’s say, the order intake patterns of the past that make that the delivery patterns of this year are what they are. There is no delays from our side, there is no delays on customer request either.

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John Kim: Okay. Thank you.

Operator: The next question comes from Panu Laitinmäki from Danske Bank. Please go ahead.

Panu Laitinmäki: Thank you. I have a question on the energy market outlook. I mean, storage orders were down and you mentioned some slower decision making in the commentary, but the energy outlook is unchanged and you expect improvement. So, could you talk about what do you see in the market? And you previously commented that you expect improvement in all the three energy categories: service, storage and power plants. So, is still the case?

Hakan Agnevall: Yes. So, if we start there, and you saw our guidance, I mean, we expect the demand environment to be better. And if we look at the balancing side and if we start on battery storage, there is a lot of activities out there, I mean, countries like U.S., Australia, U.K., et cetera. So, a lot of market activities. And it’s really — it is this narrative about more renewals, challenges with stability of the power system and the need for balancing power. That is so that’s a clear driver for storage, but it’s also a clear driver for our power plants. And if you look at the LCRA, the Lower Colorado River Authority, I mean, there are many of these type of dialogs that we have ongoing in the U.S. right now. So, a lot of activities. Then if we look at baseload for energy power plants, there are quite a lot of activities both in Southeast Asia and in South America, so to say. So, that is the kind of underpinning logic. If you look on our services side, we continue also on the energy side service value ladder, moving in the right direction. Yes, you can say that Q-on-Q, it is a bit flat. But coming back, that is also periodization. So, we see continued positive development.

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Panu Laitinmäki: Okay. So, no change in the statements basically?

Hakan Agnevall: Correct.

Panu Laitinmäki: Okay, thank you.

Operator: The next question comes from Mikael Doepel from Nordea. Please go ahead.

Mikael Doepel: Thank you. Just give me — briefly back to the aftermarket business where, I guess you had some of the double-digit organic growth in the quarter year-over-year for the order intake, which is obviously a very strong number and a continuation of what we’ve seen in the past couple quarters. Within that, I can see that marine seem to be very, very strong. Energy seem to be a bit more muted this year-over-year level. So, I was just wondering, is this the level of growth fair to assume going forward as well? And with the energy, are things kind of slowing down there? If you could give some more color on this, that would be great. Thank you.

Hakan Agnevall: So, I didn’t hear in the beginning, were you focusing on service business or new business? Just can you just stop the first one? You’re talking about service?

Mikael Doepel: Yes. I’m talking about service now.

Hakan Agnevall: Yes. Okay, good. I didn’t hear you. No, I think we see a positive development clearly going forward. And it’s these two pieces of the equation that I talked about. Strong underlying operations of the assets, and yes, when we look in the market, I think there is still the underlying operations will continue to be strong, certainly in our core segments. And then, the other piece of equation, which is, of course, moving up the service value ladder, and there is so much activities I talked about, service agreements, we continue to see a positive trend. We can also talk about the retrofit business. I mean, now with Marine industry joining Europe’s ETS, strong focus for ship owners to develop their CII, their Carbon Intensity Index strategy, how to drive down the CO2 emissions. Yes, they start maybe with slow steaming, but then it comes to retrofits of maybe bringing hybrid system, bringing methane slip down, doing drastic de-rating of two-stroke engines. In all of these retrofit businesses, we are very much active. So, it is a positive outlook. On the energy side, it’s you could say the strategy is the same moving up the service value ladder, looking at agreements, and we do see a continued positive development.

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Mikael Doepel: Got it, thanks.

Operator: The next question comes from Tomi Railo from DNB. Please go ahead.

Tomi Railo: Good morning, Hakan, Arjen and Hanna. It’s Tomi from DNB. Question on Marine Equipment. Would you be able to share how much or say comment, how much engines represent of Marine Equipment orders and how much alternative fuels represent out of engine orders in the first quarter?

Hakan Agnevall: I think in the first quarter, I think but it was more a market trend. I think it was 45% alternative fuel generated orders, okay. I don’t have exactly in my head now how that translates to our order intake. But I wouldn’t expect it to deviate a lot. It might actually be a little bit more on our side.

Arjen Berends: We see I mean, so far, we haven’t made public the share of the incoming orders. Maybe this is something we should consider. But so far, we are not making this public. But I can clearly say that if you talk about methanol, we have a solid order backlog for methanol engines. Methanol enabled engines, because as we talked about, it’s a lot about dual fuel or even multi-fuel capability. So, we still see a lot of demand for the LNG, also for the heavy fuel type of engines. But it’s really focused on dual or multi-fuel capability. If we talk about ammonia, we commercially launched our ammonia engine by Q4 last year. And we are still negotiating the first order. So, that is a very early stage. But I would say methanol is really catching up volume wise. But let’s see if we are prepared going forward to be more transparent about the volumes.

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Tomi Railo: Thank you. We have our calculations, but happy to confirm later if you can. Second question would be on energy and the level of EPC orders, or maybe not EPC rather your own kind of product orders in the first quarter. In the Capital Markets Day you mentioned that more than 80% of the backlog is equipment orders. What is the situation during the first quarter?

Hakan Agnevall: So, I would say, the trend continues. I mean clearly the focus on equipment relative to EPC continues, not a major shift, but I think also when we look at this and then we discuss this, just looking at one quarter you will have a lot of swing, so I don’t think we should talk about the percentage for every quarter, because it’s going to swing a lot.

Arjen Berends: I would say 80% has not been diluted.

Hakan Agnevall: No, exactly, I think the trend is very clear and continues.

Tomi Railo: And would you say that this has kind of played a clear role in the profitability in the first quarter? I know one quarter is one quarter, but —

Hakan Agnevall: Yes, no. So, I mean, you recognized in the bridge there that we said that the profitability of EPP is increasing and the shift to more equipment certainly is contributing to that. It is.

Tomi Railo: Thank you very much.

Operator: The next question comes from Sven Weier from UBS. Please go ahead.

Sven Weier: Yes, thanks. And the follow-up question from my side is a slightly bigger picture question on the marine business. Because as we all know, in the last 15 years, we had a bit of a structural down cycle, of course, which has led to the lower shipyard numbers. And I guess you guys have also reduced your capacities. I was just wondering how you go about capacity planning, let’s say with a view to the maybe next up cycle that is driven by decarbonization. Are you still extremely reluctant to add a lot of capacity here? Is that kind of limiting your ability to accept orders, because we talk a lot about yacht constraints, but I’m more curious about your constraints that you have on the capacity side potentially.

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Hakan Agnevall: Yes. First, a general remark, I think it turned in 2020, 2021. So, we actually see that shipyard capacity is a little bit coming back. But you’re right in the sense that was a big downturn before that. So, if we look at our capacity, no, we are not a bottleneck. I mean, as you know, we have now stopped the manufacturing of engines in Trieste, in Italy. So, we have our two major manufacturing hubs, you can say in Vaasa, in Finland, but we also have our Chinese JVs, we will not be a bottleneck. I mean, we have significant capacity to scale up, if needed, so to say, because we have the built-in flexibility in Vaasa and in China. So, we would take that as a very positive challenge if the volume suddenly would go up very drastically, so to say. And I think the long-term trend, we do see a positive development and we are ready for it.

Sven Weier: Does that also mean you don’t have to really invest a lot of CapEx to get there? It’s more about managing the shift, managing people, numbers, and the factories?

Hakan Agnevall: Yes, no, I mean, as you know, we invested about €250 million in STH in Warsaw and so we can grow within that facility. If it really would grow we can build a little bit more, but I think the overall CapEx level will not drastically increase so to say. I think we have an industrial system including our supply chain that is flexible and also capable to scale in a growth scenario.

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Sven Weier: Okay. Thank you Hakan.

Operator: The next question comes from Vlad Sergievskii from Barclays. Please go ahead.

Vlad Sergievskii: Yes, thank you very much for taking my follow up and hopefully the line is all right. I would like to ask about your progress on the strategic review of storage. I mean, it has been ongoing for about six months now. Would you be able to give us some idea why is it taking such an extended period of time and maybe some preliminary conclusions that you have come up to after six months of work? Thank you very much.

Hakan Agnevall: So, good question. I think when we set out the strategic review, we said that we’re not going to communicate a specific deadline because we want to take the time that is needed and that’s the same approach that we have today. So, we haven’t said and we will not set a deadline. I mean, time is running clearly, but we also working through the review. And I think it’s premature for us to go out and say where we are, so to say. So, I’m sorry, but you will have to wait for that when we are ready with the analysis.

Vlad Sergievskii: No problem. Thank you very much for sharing that.

Operator: Seems like that there are no more questions on the queue, but we still have a couple of minutes left. So, in the case you have a question, now we have good time to answer.

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Vlad Sergievskii: No questions.

Operator: Thank you. Thank you, Hakan. Thank you, Arjen. Thank you for all of the good questions. I would like to remind you that we are hosting a Marine Theme Call together with the President of Marine Roger Holm and together with Arjen Berends, our CFO. It will take place on May 7. And then, we are also hosting a site visit to our Sustainable Technology Hub in Vaasa, which will take place on May 30. So, hope to see many of you there. Thank you.

Hakan Agnevall: Thank you for today.

Arjen Berends: Thank you.

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