Wartsila Corp B Shs

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, and he will also go through the business performance. After that, our CFO, Arjen Behrens, will continue with the key financials. After the presentation, there is a possibility to ask questions. Please, Håkan.

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. 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 order book at all time high at 7.3 billion euro. 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 the continuous journey of improvement is evolving, so to say. Good progress in services also continued. As you know, it's a very important part of the Wärtsilä business. Service order intake increased 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 to 158 million euro. 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 euro up 11%. And if you look on the service side, 949 million up 7%. And the equipment, which equipment order intake continues to grow in a very good way in both of our businesses. So 975 million euro up 15%. And that leaves us with an all-time high order backlog of 7.3 billion euro. Net sales is down 10%, so to 1.3 billion euro. 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, 12 consecutive quarter with book to bill higher than one. Operating result up 38% and the comparable operating results up 50% to 132 million euro and 10% of net sales. Outlook on our two markets, the marine market, the sentiments turned 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 remained on a healthy level, 118 orders. 29% of all the vessels, 45% of capacity. And I think here, as of 1st of Jan, 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 trading system, which is adding costs and incentives for shipping companies that operate 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 built 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 their most recent update of the forecast, basically taking the overall level of orders for 2024 up 7%. Looking at energy, we continue to see 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 natural gas 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, I mean, the uncertain geopolitical environment, it presents price and availability risks. The positive thing is that we do see several signs that the energy transition continues to advance. And, I mean, it's another year of record high investments in deployment of clean technology last year or so. Looking at our numbers more in detail, so organic 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 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 prioritization between quarters in project business. Profitability continues to improve. We are on 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 a more favorable mix between services and new build. We have about 63% of our sales in Q1 was service related. So that gives a positive impact on our profitability for Q1. The lower sales give lower operational leverage. So that goes the other way. But in general, I think we are on a solid path to reach our financial targets. Technology and partnerships, this is really what we are excited about in Wärtsilä. And it's all focused around our strategy for decarbonisation. So a couple of examples from Q1. First of all, we are very happy and proud that we are part and we are actually leading a 200 million euro collaboration in an ecosystem to develop autonomous power plants and also autonomous zero-emission power plants for 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 a Quantum 2 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, project 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, 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 performances in services supporting the result. 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, etc. 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 lifecycle 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 Liberté, designed to optimize and ensure minimal impact on operation. So the scope includes parts, maintenance services, maintenance planning, operational support, and also VAT 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 ordering take 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 US. So one of our, you could say, repeat customers has placed another order. 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 50 SG engines. So it will basically double their output. And I think the statement here by senior leadership in LCRA, 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. 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 customer's 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 above 11% EBIT. And the comparable operating results increased by 50%. Iron, other key financials.

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 we look at the basic earnings per share, it's actually only two cents 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 Wetzel. We have never had such a high cash flow in Q1. Clearly supported by customer payments, down payments very much, I would say, related to the good order intake that Håkan was reflecting upon earlier. Actually, our order intake in Q1 was higher than Q4, which is really a good trend. But also other milestone payments from customers. What also clearly happens to the or supports the cash flow is 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 quite significant impact even on single quarters. Looking at this graph, or this slide actually, 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 continuous negative working capital. I would still say that negative working capital is exceptional, and it relates very much to, let's say, project execution milestones in our order backlog. And that can vary a lot, let's say, quarter on quarter. But Q1, extremely good, and the trend is clearly positive. Back to you, Håkon, on the prospects.

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.

Thank you, Håkan, 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, you know, please save the follow-ups until every analyst has had the possibility to ask one question. Thank you. Handing over to the operator.

Our first question comes from Sean McLaughlin. You can unmute your microphone and ask your question.

Good morning. Can you hear me?

Good morning. We can hear you. Welcome.

Thank you. 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 your capacity constrained? Are there potentially supply chain limits on your ability to deliver or what else is is causing this? Let's say you're having to decide which projects move forward and which which take longer. And I guess are there any also risks that we see maybe project delays?

So just to clarify, the word is periodicizing, not prioritizing. Periodicizing. 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 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 in 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 milestones slipping from one quarter to the other. And that's why we are confident this is not a trend shift or anything. This is more of a quarterly phenomenon, so to say.

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 the order intake in particular, let's say on projects, storage and 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 a 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 clear change in what happened in the market, actually. And it relates to periodization, sorry.

Yeah, 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. Correct.

Thank you. I'll get back in line.

The next question comes from Vivek Mehta from Citi. Please go ahead.

Thank you very much, everyone, and good morning. My question is on margins and seasonality for the year. You noted the unusually high service share of sales and you commented that equipment is likely to be off in the second half. So how should we think about the phrasing of the margins over the quarters this year And if I may, when you comment about a solid party or financial target, is there any more color you can give at this stage as to when you hope to achieve that 12% margin target, the four-year basis? Thank you.

So we have a 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 we do underline that first quarter, the sales mix, services versus new build, it was favorable from a margin perspective because with 63% service sales in comparison to new build, of course that supports a positive margin mix. And we also say that, you know, when we look at the sales recognition for the full year, especially, I mean, then we talk new build, we'll be more, gravitate more to the second half than the first half. I don't know if you want to comment.

No, I think that covers it quite well, I would say, yeah.

Okay, thank you very much.

The next question comes from Sven Weyer from UBS. Please go ahead.

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 to 30%, how big the tanker exposure is in that. Thank you very much.

I would say that we still have an optimistic outlook for offshore this year, so to say. So we are still optimistic about the segment. Then tank or impact, I would say it's limited, I would say. Because, I mean, it's mostly two-stroke engines, and we do deliver some auxiliaries, but maybe not so much into that specific segment.

Because I remember when you did the handwork, the acquisition years ago, that they had some, I think, pump exposure also to tankers, but that seems to be relatively small, right?

The pump business in Hemweather we divested a couple of years back, so we don't have the exposure anymore. What we see though in gas solution, the business unit that we have put in portfolio, 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 quite a lot of activities in that particular segment. But as I said, this is nowadays in portfolio.

And also on ammonia, actually, on that segment.

Very clear. Thank you.

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

Thank you. Could I just ask on the marine service business? When I look at your your order intake in marine services, it looks like sort of what it is up 16 percent organically. It's probably up in the 20s. How much of this is sort of underlying activity and how much of this is kind of multi-period bookings? I'm just trying to get a sort of real sense of kind of what the underlying market is doing and maybe what the sort of uplift from your own businesses. If you can give a bit of context of that, whether that sort of service level of $568 million in marine is sustainable.

So, I mean, there's 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, you know, the geopolitical challenges in the Middle East and also the droughts around Panama and, therefore, the impact on the Panama Canal, that makes people, you know, take longer routes. And that has, you know... a contribution to the service business. So there's a high level of activity, and 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 this 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 bringing customers that are 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.

Okay, that's helpful. Thank you.

The next question comes from Sebastian Kuen from RBC. Please go ahead.

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 drops or deliveries drop by 80% year-on-year. So, first of all, I would assume that the margin increase you have in energy, the 500 bits, 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. So basically, and I'll let Arjen also comment, I mean, you could say that, I mean, 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 just to clarify this with periodization, 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 quarterly reporting. So it's not that things are slipping and sliding. It's just that the business has projects in the business that have a certain cadence, and it leads to sales recognition in certain times. And as I said, if a 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 in sales in q1 so just underlining that there's 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 so you know planning of of distinct milestone can can have this impact on our on our sales recognition But Arjen, I give over to you.

Yeah, I think you said many things already. Let's say one thing to add. You're absolutely right, Sebastian, that, 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.

But it would basically 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.

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 working process.

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&A. So it's not that we are reallocating the S&A.

Exactly.

So I think that also shows the underlying strength of the project execution in storage. I think we have a very solid project portfolio, and we have, you know, a good profitability development of that portfolio. So storage keeps on carrying its own S&A, by all means.

Okay. Thank you so much.

The next question comes from Vlad Sergevsky from Barclays. Please go ahead.

Good morning. Thank you very much for the opportunity. I was just trying to understand the 75% drop in storage sales. I assume significant parts of sales are recognized here as cost-to-cost methods and therefore shouldn't be impacted by delivery milestones or invoices. 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.

I'm not sure if I fully understand your question, but I think you refer 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 at least what I understood through the line is that you think that it should be more, let's say, gradual coming 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 customer. 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 it does thank you very much

The next question comes from Chitrita Sinha from JP Morgan. Please go ahead.

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 can you also tell us what level of inflation you saw in your cost base versus revenues in the Q1? Thank you.

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 costs being down on a, let's say, just quarterly basis, I think it's a bit, on a standalone quarter, a 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 one-to-one. 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.

Thank you.

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

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

No, storage sales is not, let's say, that's not the new normal. Let's say 62 million euro, 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.

Okay, so just to be clear, you're not seeing order push-outs of any real magnitude?

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. Thank you.

The next question comes from Ponu Leighton-Maki from Danske Bank. Please go ahead.

Thank you. I have a question on the energy market outlook. I mean, storage orders went down and you mentioned some slower decision making in the commentary, but the energy outlook is unchanged and you expect improvement. 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 this still the case?

Yeah. 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., etc. So a lot of market activities. And it's really, it is this narrative about more renewables, challenges with stability of the power system, and the need for balancing power. So that's a clear driver for the 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 dialogues 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, You know, 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. Yeah, 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.

Okay, so no changes to the statements, basically.

Correct.

Okay, thank you.

The next question comes from Mikael Doppel from Nordea. Please go ahead.

Thank you. Just coming briefly back to the aftermarket business where I guess you had probably 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 of quarters. Within that, I can see that marine seem to be very, very strong. Energy seem to be a bit more muted based on the year-over-year level. So I was just wondering, you know, is this the level of growth fair to assume going forward as well? And if we can energy our things kind of slowing down there, we get some more color on this. It would be great.

So I didn't hear in the beginning, were you focusing on service business or new business? Can you just start the first part? You're talking about service? Yes. I'm talking about service. 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, you know, strong underlying operations of the assets. and 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 the 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 the marine industry joining Europe's ETS, strong focus for ship owners to develop their CI, their carbon intensity index strategy, how to drive down the CO2 emissions. Yeah, they start maybe with slow steaming, but then it comes to retrofits of maybe bringing hybrid system, bringing methane slip down, doing drastic derating 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, 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.

The next question comes from Tommy Raylow from DNB. Please go ahead

Good morning, Håkan Arjen, and Hanna, it's Tome from BNB. Question on marine equipment. Would you be able to share how much engines represent of marine equipment orders and how much alternative fuels represent out of engine orders in the first?

I think in the first quarter, but that was more a market trend, I think it was 45% alternative fuel generated orders. 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.

We see, I mean, so far we haven't, you know, 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, you know, 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.

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

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 swings. So I don't think we should talk about the percentage for every quarter, because it's going to swing a lot.

I would say the 80% has not been diluted.

No, exactly. I think the trend is very clear and it continues.

Yeah.

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.

Yeah. 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. Thank you very much.

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

Yeah, 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 yard constraints, but I'm more curious about your constraints that you have on the capacity side potentially.

First, a general remark. I think the trend for shipyard capacity is turning. 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. 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 Vasa 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 Vasa and in China. 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.

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's numbers in the factories.

Yeah, no, I mean, as you know, we invested about 250 million euro in STH in Vasa. 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.

Okay. Thank you, Håkon.

The next question comes from Vlad Sergevski from Barclays. Please go ahead.

Yeah, 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.

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 are 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.

No problem. Thank you very much for sharing that.

It seems like 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 a good time to answer.

No questions.

All right. Thank you. Thank you, Håkan. 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.

Thank you for today. Thank you.