Wartsila Corp Unsp/Adr

Everybody, and welcome to this news conference for Wärtsilä Results 2023. My name is Hanna-Maria Heikkinen, and I'm in charge of investor relations. Today, our CEO, Håkan Agneval, will start with the group highlights, business performance, and after that, our CFO, Arjen Behrens, will continue with the key financials. After the presentation, there is a possibility to ask questions. Please, Håkan, time to start.

Yes, thank you, Hanna-Maria, and a warm welcome to today's session. Focusing on 2023, it was a good step in the right direction for Wärtsilä. We improved in many areas and we managed to have all-time high order intake, net sales and cash flow. We are improving our profitability. We have a clear path to our 12% operating margin target. But more about that. So order intake, all-time high at over €7 billion. Net sales at all-time high at over €6 billion. And we continue to see the good progress on the service business, where the service order intake increased by 15% and the net sales on services by 13%. Comparable operating results increased by 53%. So we are on our journey. And cash flow, you will see Arjen smiling more than usual today. We had a fantastic cash flow with 822 million euros. So let's look at the summary of the numbers, and let's make some comments first, now zooming in a little bit on the quarter, and then also some summaries on the full year. So if we look on the quarter, order intake up 13%, and it's both in services and equipment. You see that equipment is up 16%, and yes, Energy power plants, they had a stronger order intake in the second half of the year compared to the first half of the year. We had a really strong run towards the very end of the year on the energy power plant side. Order book continues to develop positively. We will have a stronger order book going into 2024 compared to going into 2023. And the book-to-bill continues to be above 1, at 1.13. And now it's the 11th consecutive quarter that we have actually had a book-to-bill above 1. Net sales is down 7%, and you see services continue to go up, but it's the equipment side that is down. We will see more about that later on. Operating results up quite significantly, and comparable operating results as 10.8%. Going back then to the full year, we talked €7 billion, order intake up 16% for the full year, net sales at 6%, up 3%, and the comparable operating result landing at €497 million, 8.3%. So it's a step to the 12 still, but we are on our journey. If we look at the marine market, the market sentiments remain positive for our key segments. And in general, the appetite for new ships has increased. So the number of vessels ordered in the period increased to 1,977. That's compared to 1,538 in the comparison period, so to say, so going in the right way. The uptake of alternative fuels remained more limited, so the share was down from 30% to 23%, but that's more driven by the mix of vessels that was awarded. There was more bulkers and tankers and less LNG, so the trend is still very strong. We'll talk more about that later on the decarbonization journey in marine. There is a growing pressure to decarbonize, and we can clearly see that it supports the demand both for new build and services across the Wärtsilä key segments. And decarbonisation investments have been made in additional fleet capacity, in direct fleet replacements, efficiency upgrades, fuel conversions, and also in maintenance activities to keep the existing fleet compliant and competitive. And also interesting trend is that the yield capacity, especially in China and South Korea, continues to increase. And that helps to remove constraints from new-build ordering across vessel segments as those become available. And also we see a deacceleration of the price increases, basically. If we look on the energy side, we see solid long-term opportunities in the energy market. And the energy transition outlook is improving amid a fragile global economy. And our market share remains stable at 30 percent. And as global orders for natural gas and liquid fuel power plants decreased by 22 percent to 10 gigawatt during the 12 month period. And this and you know that this is project business. It can swing quite significantly. It's going to we see a positive demand situation going forward. Price volatility, inflation and interest rates have moderated. Global natural gas prices have decreased from previous year's extreme levels, but they are still above the pre-2021 levels. On the policy side, energy and climate policies around the world continue to evolve towards decarbonisation targets, and the mid-term energy transition looks strong. Climate policies reached new milestones in Q4, when 120 countries pledged to triple the renewable energy capacity by 2030 at COP28, which really supports the need for balancing power. And I think the decisions, the commitments that were made during COP28 They are clearly in line with Wärtsilä's net zero strategy and front-loading net zero. The coal phase-out is progressing, and since 2018, the installed coal capacity outside of China has decreased by almost 40 gigawatts. Organic order intake increased by 21%. So if you look at it from an organic perspective, it really increased even more. We had FXFX, so if you take that into consideration, order intake grew for 13%. Equipment order intake increased by 16%. And service order intake increased by 11%. We have a strong order book and rolling book to build continues to trend up. The order book for the year 2024 is certainly higher than 2023. So it is a positive development. Organic net sales decreased by 3%. Net sales decreased by 7%. Equipment net sales decreased by 19%. Service net sales increased by 8%. Profitability continues to improve. When net sales decreased by 7%, our comparable operating results increased by 90%. If we look at technology and partnership highlights, it's all about enabling the industry decarbonization. One interesting example here is how we continue to evolve our product portfolio. And we enable the acceleration of marines transition to sustainable fuels with the introduction of four methanol engines. So we are broadening our portfolio. So we will introduce four new methanol engines to our portfolio, setting a new industry benchmark with the broadest methanol engine portfolio currently available in the market. So in addition to our Wärtsilä 32 methanol engine launched last year, we will add the Wärtsilä 20, the Wärtsilä 31, the 46F and the 46TS to our portfolio. of engines enabled to operate on methanol fuels. And we are clearly one of the very few players in the marine engine market with extensive experience from methanol engines. And these four new engine types that will be available, they will be available for deliveries at different points from 2025 onwards. Now, on storage, we continue to grow and we continue to invest in new technology to fuel the growth. So we have launched the quantum high-energy storage systems with advanced safety features, and we're also increasing the energy density. As you know, one of the key differentiators for the Wärtsilä storage systems is around thermal stability and fire safety. We have launched our quantum high energy, a next generation of energy storage systems with advanced safety features and enhancing energy density, furthering also our industry leading track record on commitments to safety. And our new Quantum HE is compatible with GEMS, with the Digital Energy Management Platform, which is a cutting-edge tool to monitor and control and optimize energy assets, both on site and on portfolio level. We are the third largest energy storage system integrator, according to S&P Global, with seven and a half gigawatt hours of energy storage capacity awarded, contracted, or in deployment. Now, let's look at how the different businesses have been performing, and we start with Marine Power. So we have seen a good development in order intake and net sales. So both equipment and service net sales increased. And please note that the comparable operating margin declined due to a less favorable mix between equipment and services. We've been growing both services and equipment, but equipment has been growing more, and that has this mixed effect. So we can see order intake up. 13%, net sales up 17%. And if we look at the comparable operating results, services, good performance in services has really supported the improvement in operating results. But we have also increased our R&D costs, I mean, from 3% to 4% of net sales for the group level. And here it is affecting, of course, marine power. And if we look on the services side, we see a continued good development on our marine power service agreements. And the net sales on agreement installation is all-time high. And you can see here we continue the growth. So services is more than 60% of marine power sales. And so far, 29%, about that, about 30% of our engine installed base is covered. So there are ample growth opportunities. And I think the strong proof points that we are adding value is the renewal rates for service agreements, because it's around 90%. For me, that is the ultimate proof that we customers see and feel. that we are adding value, and that's why they keep on renewing. I'm really excited about this milestone, you could say, in Wärtsilä's history of engine development. We clearly continue to set the pace for marine decarbonization with the launch of the world's first four-stroke engine-based ammonia solution. So it's not only the engine, it's the fuel handling, it's the after-treatment system, so it's a whole system. So we are introducing the marine sector's first commercially available four-stroke engine based on ammonia as a fuel. And it's now part and available on the Wärtsilä 25 engine platform. It enables a significant advance in sustainable shipping operation during a time when ship owners are really seeking the viable options among the green fuels. So the solution, it includes the ammonia pack fuel gas supply system. It's also the Wärtsilä ammonia release mitigation system and also the NOx reducer. And of course, combined with the engine. And we have our first entry to customer. We signed a letter of intent with Virdis bulk carriers. And they're going to be the world's first zero emission shipping company. And it is intended to be the first cheap owner that benefits from the new ammonia solution. So going over to marine systems, equipment order intake increased. That's a positive one. But equipment net sales decreased, and we also have one challenging project in gas solutions to deal with. So order intake up with 5%, net sales down 46%. scrubbers gas solutions a bit of cyclicality if we look at comparable operating results it's clearly diminishing lower net sales but the significant negative impact is these 19 million provisions for a single sizable turnkey project in gas solutions that we have to make in in q4 and It's the same project that we also made a sizable provision for in Q2. So we have made two provisions, Q2 and Q4. The good part of the story, this project is now coming to an end. Painful as it is, we move on. Energy. Energy comparable operating results at a record high. So energy really making a strong comeback. Order intake up 34%. Net sales down 16%. And if you look at the profitability, you could see that it's really good performance in services. Now, when we compare to Q4 last year, you remember that we had to take a provision for the Ulko Lotto 1 and 2 project, 40 million euro. That was a project that we captured in 2013. It's an old legacy project. It's now stabilized, but of course, it makes the comparison a bit special. We also, in Q4 last year, I mean, Q4 2022, we still were heavily affected by a portfolio impacted by cost inflation. But we can see energy is on the right path and clearly stepping up in profitability. Also moving into 2024 with a project portfolio with 80% EQ instead of EPC. And that is basically a doubling of the share since when we went into 2023. So energy on a good road. On energy storage, the comparable operating result is positive, and the margin is positive, and profitability is improving. The strategic review that we communicated at the end of last year, we continue it. Nothing new to report. It goes on. But I would say the demand side here is evolving in a positive way, and storage is doing a great job. And if we look at energy services, we also see here about 30% of our installed base we have under agreements, and we are growing it, and there is significant additional growth potential. This is one of many examples, but this is really core of agreement business, what it's about. So we secured a 12-year agreement extension with a power plant operation in Pakistan. It's the operations and maintenance team. They signed the agreement with Sindh Noriabad Power Company in Pakistan, which is an independent power producer. And they have extended this service contract for another 12 years. We started the agreements in 2017, and I think the extension and also the length of extension reflects SNPC satisfaction with the services we are providing, the value that we can create. So the agreement covers two SNPC 1 and 2 power plants located in the Sim province. It's five Wärtsilä 34 SG engines and one steam turbine generator. And basically, the combined output of this plant is 100 megawatt. The order was booked in Wärtsilä in Q4. And we have many of these, so to say, type of orders. And it's really driving our agreements business. Now, to sum it all up, here's the bridge from, you could say, Q4 2022 to Q4 2023, from the 5.3 percent to 10.8 percent, so an increase by 90 percent. I think what is also very interesting, look at marine power, 11.9. Look at energy, 12.4. We are on a solid path to 12 percent for the whole group. Now, Arjen, please, other financials. Can I have the clicker?

All right, other financials. After almost crying in 2022 about the operating cash flow being negative, now I can really smile. Let's say 822 million euro operating cash flow for the year is an all-time high record. I can mention it already. And as you can see from these numbers, in particular than the quarter number, a big portion of it came actually in Q4. And if you go deeper in Q4, actually, it was a lot actually in December, to be very frank. We got a lot of milestone payments as well as advances from actually customers that we actually anticipated in this year, but actually came in 2023. That also had an impact on the working capital, which is also now lending, let's say, on a negative number, which is in a way you could say a bit of extraordinary. Good cash flow supported, let's say, also our net debt situation. We improved it to 35 million euro. We paid back in the year about 90 million on the loans, and our cash increased actually with about 350 million euro. Good cash flow supports then, of course, also the gearing, now standing at 0.02, and also solvency improving to 37%. Basic earnings per share, 44 cents on the full year. Of course, a significant improvement compared to 2022. But it's good to remind that in 2022, it was, of course, heavily burdened by 200 million euro provision for the Russia closure of activities and all the projects related to it, as well as about 90 million euro related to Trieste. we look at the graphs basically it's the same story we saw a very good trend line the orange line on the left on cash flow in 2023 after let's say a very declining trend line in in 2022 if you look at the right side let's say we see two bars with negative working capital actually the the first one minus 100 in 2021 that was actually the Here that we had the previous operating cash flow record at 731 and now we beat it with 822. So really the working capital is a big contributor to the improved cash flow besides of course also significantly improving on the profitability side. Final slide from my side, dividend. The board proposes to the AGM 32 cents of dividend, which is then very well in line with our financial target of paying at least 50% of EPS out as dividend. Over to you again, Håkon.

Thank you, Arjen. So if we look at the prospects, so we guide on the demand environment for the next 12 months and we guide for marine, it's going to be better than that of the comparison period. So it's an upgrade. And on the energy side, we also guide that the demand environment will be better compared to the previous comparison period. So that sums up the presentation. And let's go into the open up for the Q&A.

So handing over to the operator, please.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Vivek Mehta from Citi. Please go ahead.

Thank you very much, everyone, and good morning. I'd like to start on the marine demand outlook upgrade, if I may. Would you be able to comment as to which you expect to be growing faster over the next 12 months, equipment or service? And just can you help us understand How much of the upgrade is driven by better underlying demand from customers, for example, in cruise, compared to easing a supply with better shipyard capacity? Thank you.

So I don't think we're going, I understand your question, but we don't go into the specifics if service is going to grow faster than the new build. I would say, and how much, I would say both will be growing. And you could say that the growth is fueled by our core segment. So it's about cruise and ferry. It's about offshore. And That's basically the focus. When it comes to the shipyard capacity, that is being expanded gradually. As you know, there is a long story of You know, if you take the 10, 15-year perspective, there was a lot of expansion, then there was construction. But now this contraction, I think the turning point was around 2020. And now, slowly, but it is expanding. And that is easing the situation in general for many different segments, energy carriers, containers, offshore, et cetera. And we do see that, you know, there was... you know, accelerating price increases when it comes to vessels, that is clearly leveling off, so to say. Arjan, do you have further comments?

No, I think you're right. Let's say it's a growth in both areas. And coming back to the shipyard capacity, we have been talking about that a lot also in single individual, let's say, investor meetings. And the low point was 2020. And since then, let's say, basically, we see increases in particular in China, 8% to 10%. increase according to, let's say, Clarkson, and about 4% in Korea and Japan. And it is also needed because it's really needed also to facilitate the decarbonization of the whole marine industry. You need yard capacity to facilitate that. And I think also yards understand that need, and that's why it's increasing.

I fully agree. And I would say there is another dimension to your capacity. That is, of course, there is a new build piece to the equation, but there will also be a retrofit piece to the equation. Because we know, I mean, if we look at the total fleet of certain tonnage, the bigger ships is about 100,000 vessels, maybe 50,000. needs to be upgrade or it makes a financial sense to upgrade that's that's something also that will require quite a lot of shipyard capacity if we take 10 15 year perspective that's great thank you very much and finally just a quick follow-up from me um on the energy power plant business where you've had a very strong

end of the year. You highlighted the Indonesian power plant orders. Which other markets contributed to the oil intake in the quarter? Thank you.

So it's actually, I mean, we highlighted Indonesia, but it's another Middle East. There are many, to put it like that, smaller orders in many different geographies. But you could say it's some of our core geographies in Southeast Asia, Middle East, also a little bit in Latin America. And also looking into 2024, we see a solid pipeline on the power plant side. There is a lot of activities in Americas, and there continues also to be activities in Indonesia and Southeast Asia.

Thanks very much.

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. I hope you can hear me and hope you're all well. My questions or my one and a half question is regarding storage. First, I guess just looking at the profitability, which you said is about 1.9% and it was negative still at the first half. So it looks like in the second half you're doing sort of maybe mid-single digits. I know it's difficult depending on the volumes. But can you talk to whether you think sort of this is like steady state? What's the potential upside that we still have? How further away are we from covering six costs in storage? And then maybe an update on sort of what have you been doing in terms of the strategic review in the last three months to the extent that you can just give us some further color there and if you have views on the timeline on when this

might finish thank you so if i start from the with your second question so the review is ongoing um i mean we have engaged people we are talking to different parties i cannot go through the details we still it's still the same message we haven't communicated a clear deadline for the review because we want to give us the opportunity to explore different avenues can also reiterate what what we said um you know triggering point um We reached one billion euro. It's now in profit. It's a good time to take a step back. How do we continue to grow this business to support our customers, but also, of course, to create shareholder value? There are ample growth opportunities. And then as part of the review, we will look at different ownership alternatives. One alternative is clearly we keep storage, as we have it today, and we continue to operate. But we will also look at alternatives, which means partial or full divestments. So it's the same scope. Then coming to how the business is developing operationally. I mean, step by step, we are taking it in the right direction. You've seen the volumes go up. And I would say that that storage profitability is, you know, on a positive trajectory in general.

Yes, I would say so. Let's say there's clearly possibilities to further improve, and we are working hard on that, let's say, by different means.

And I would highlight one thing that, of course, we are proud about, but the team has done a great job. I think we have consistency in execution. That is the feedback that our customers are giving us in terms of being able to deliver with the right quality on time, meet your expectations, and also do that with the right risk-reward balance in our project portfolio and consistency in the financial journey.

Thank you.

The next question comes from Akash Gupta from JP Morgan. Please go ahead.

Yes, hi. Good morning, everybody, and thanks for your time. I have two as well. I'll ask one at a time. The first one is on storage, where I see your orders are kind of plateauing at around 260-level average for the year. Maybe a question on why we are not seeing sequential growth here. Are there any internal factors such as constraint on sourcing of battery cells or labor or cost? Or there are external factors such as lower market activity or maybe some peers may be a bit more aggressive than you. So maybe if you can elaborate. And just as a follow-up to that, with book-to-bill falling to 1.4 times in 2023, Shall we expect a more normal or more modest growth in 2024 in range of maybe low teens?

So when we look at the order intake for storage, we need to acknowledge it's a project business. So it can vary quite a lot up and down. I think, as I said, there are ample growth opportunities. We focused on discipline growth. As you know, we have a focused geographical strategy, US, Australia, UK, and we continue to execute consistently along that. And I don't see a supply chain bottleneck, so to say. I think the partnerships that we have with our supply chain is definitely supporting our continued growth. So it is about discipline, taking the right opportunities in the right markets, and then make sure that we execute. Where we differentiate, we talked about it when I talked to our customers, is our capability to execute consistently. It is our fire safety and thermal stability. I mean, we are taking new steps there in the next quantum generation that we are having. And it's also, with GEMS, our capability to really integrate the battery storage with other generating assets. like renewals, but also with thermal generation. And we have a couple of examples with customers that they have tried storage, but they haven't got the full benefit. And then they come to us and ask how we can help them, so to say.

I think we are confident about the growth. I think that's clear. Also, the market is clearly supporting it. We have a good pipeline. But it is a project business, as Håkan says. And let's say size is very different per project. And then also, let's say timing is very difficult to exactly estimate when it will come. Let's say between, let's say, first negotiations and final contract, it can sometimes be even Let's say years in between. So exact momentum determines also very much, let's say, when orders are booked. But I think for us, we are confident in the growth. The market is supporting it. And timing is then a bit difficult to estimate. But we will see growth going forward.

Thank you. And my second question is on the recent press news flow regarding methane emission in cruise ship powered by LNG. And I'm wondering if you can share your thoughts on this topic. And there were some studies by ICCD that were showing that cruise ship engines have an estimated methane slip of 6.4% on average. Maybe if you can say how it compared in your study or in your engines. And finally, on the same topic, this methane slippage, is this some AKPI or something as part of contract? Like, for example, if your engines are having more methane slippage, could this bring any consequences later on? I don't know if this is something you are promising in your order intake. So anything on that would be helpful.

So, I mean, methane slip should be taken very seriously, first of all. Secondly, there is a significant... I mean, if you look at the Wärtsilä development over time, methane slips have reduced significantly over time. And just the last year, we have taken further steps to even further reduce it. And there are independent studies, and we could share them with you, I think we should, by reputable academic institutions, where basically shows that Wärtsilä is world leading in methane slip on four stroke. And we are now getting very close to one gram per kilowatt hour, which is basically outstanding. We will continue the journey. So it's good to have this focus on methane slip, but you need to look at the performance of the engines from different suppliers. And you also need to look at the vintage of the engines because a new LNG-fueled engine is something completely different than an LNG engine maybe 10 years ago, so to say. When it comes to guarantees, etc., I think we are very confident on the type of performance guarantees that we are giving our customers. I mean, we are so confident that we also sign performance agreements on them. So I see that we have the risks clearly under control.

Thank you.

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

Thank you. Good morning. Could I ask a quick question on the provisions, so the 19 million that you've taken? There's a comment in the release that talks about the provisions being 38 million, sorry, 48 million for the full year rather than 38, which I would guess kind of you took one in Q2 that was 19, another one this quarter that was 19, so it should be 38, not 48. I'm just trying to understand, what was the full year provision number for the project and gas solutions?

It's a very good observation. So the overall provision is 48 for the full year. And you're fully correct that we did 19 in Q2 and 19 in Q4. So along the way, we have also done an additional 10. So 19 plus 19 plus 10, 48. And 19 has not been material enough that we have disclosed this in our quarterly reporting. So that's why it's adding up to 48.

The additional 10, you mean?

Yeah, the additional 10. Correct. So we have disclosed the 19, 19, not the 10. But now we disclose everything. So that's the mathematics behind. And then also just to reiterate also some of the background, I mean, this is one singular project in gas solutions. It's an EPC project. We have stopped selling EPC in gas solutions since many, many years, since I think three years now. And this project, it's coming to an end.

Okay, that's clear. Just the second question is around sort of what you're seeing on the lithium prices in your battery or your energy storage business. So I guess I just wanted to understand, when I look at your order intake, are you seeing any sizable sort of price decrease? Because I imagine you will need to adjust your prices to reflect battery costs. So I'm just trying to understand, actually, when we look at your energy storage order numbers, are we actually seeing volumes grow and prices down? And how should we think about that going forward?

Prices are clearly down because the lithium-ion costs have been coming down. And after the dynamics that we had in the first half of 2022, the general principle of having material indices are clearly established in the market. And I think you also see, Max, that we delivered, if you look full year, I think there is 4.5 gigawatt hours. And if you compare to the feed and you see that the sales revenues are a little bit up, you clearly see the mathematics there, that prices per megawatt hour, gigawatt hour is going down. it is relate and that is related uh much of it to to to the to the raw material uh prices and indices that are passed through the system uh okay uh and and just my my final question so i've got two really quick ones hopefully just on your working capital

to sales, could you just give us an idea? Because I mean, obviously negative working capital is not normal for a business like this. Could you give us just an idea of over the cycle, what do you think is the right working capital to sales for your business?

We are not guiding on working capital, but let's say clearly, let's say a negative, as I mentioned, is an extraordinary situation. We had the same extraordinary situation in 2021 at the year end, which was the previous record on operating cash flow, very much driven by, let's say, payments that we received in both years, actually, which were actually expected, let's say, in the year after, beginning of the year after. What is a normal level? I think it would be pretty good to look at, let's say, the graph that we are producing every quarter on, let's say, what is an average level, and I think you can extract pretty much a range from there. I will not be guiding exactly on what is the right percentage or turnover days.

Okay, and maybe just a very quick final one on sort of components and what's happening in the Red Sea with obviously the disruption over shipping. How should we think about that affecting your business? I remember when you had sort of quite a lot of component inflation, it was mostly actually because of your kind of European component supplies. So I guess firstly, kind of how much or what is the risk of actually components imported from China? Are there sort of quite a lot of those if those are being disrupted? Are you seeing anything so far? And then secondly, thinking about sort of shipping the other way, Are you what percentage of your sales is sort of sea freight? And do you use that kind of Europe to Asia channel quite extensively? So any any how to think about that would be helpful.

So, I mean, first of all, I mean, you're fully right that if you look on our supply chain, it is euro-centered, with one exception, and that is, of course, storage. But it's euro-centered. Then, of course, on tier two and tier three level, there are you know, sourcing from China, electronics. And I think we saw that that impacted us to a certain extent when we had the previous disruption of supply chains. I mean, however, we haven't seen major impact so far. We follow the situation very closely, but no major impact so far, I would say.

I think it's different dimensions to it as well. Let's say, of course, let's say from a running hours point of view, if they have to go all around Africa, that's, of course, running hours relates to service business. So that's a positive one. But it's clearly, let's say, the risk is in the delivery times and potential delays that you run into. And that might impact. But so far, as Håkan says, we don't see any major financial impact.

All right. Okay, that's great. Thank you very much.

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

Yes, good morning. It's Sven. A few questions from my side, if I may. The first one is a follow-up question on storage. I was just wondering, I mean, I understand there is no clear deadline from you on when you have to come up with an announcement here. But is it not fair to assume that if you go the disposal route for the business that you have to do it rather sooner than later with a view to the U.S. election risk? That's the first question.

No, I think we delineate the US election from our strategic view. I don't think we will let that kind of macro event affect the time schedule.

Yeah, but it could have quite an adverse effect how renewable assets are valued, especially with your high US sales share that you have.

I think there is a lot of uncertainty around the US elections outcome, what impacts it could have, etc. IRA, I mean, there are different views on this. But as I said before, we focus on the fundamentals. We do a proper work. We will not accelerate given this type of, I mean, very important, but still externality, so to say.

influencing factors on this as well.

Second question was on the marine upgrades, because one of the areas we are turning more bullish is offshore. I was just wondering, if you look at other companies in the sector, they already had a very strong offshore year last year on large orders. So I was just wondering, is the upgrades kind of reflecting the strengths that we already had in yard orders last year, or can maybe, and especially on the capital equipment side, obviously, or is it also that you see also strong offshore shipyard orders in 2024?

So, I mean, the upgrade of the guidance, it's driven by all sectors that are core, I mean, cruise, ferries, and offshore. I think on the services side, we saw a strong growth last year on offshore. Now we start, we think we will start, we will see some start on the growth on the new build side as well. So it's a combination. of new bill and services. But as I said, the upgrade of the guidance, it's broader for marine power. It's broader for marine, as we call it nowadays. It's broader than just offshore.

The utilization of the existing fleet has been really high, actually. And that's also what we saw in the service business. And let's say with the fundamentals staying quite good level, actually, for quite a while already, we believe also that some new built activities will reactivate in the coming time.

And then maybe finally, if I may, just on the... Could you just remind us on the capital allocation priorities because obviously you're almost net cash. You have likely good cash flow also this year, maybe not as good as last year. And then you have potentially a lot of disposal income. So can you just remind us of your priorities there on using that excess cash flow?

I can answer that. Let's say that, of course, the principles don't change. Let's say, first of all, let's say we have our financial target of paying 50% of EPS out as dividend. Furthermore, let's say we need, of course, cash for, let's say, our fixed assets, let's say, that you continuously need to work on as well. We anticipate it to be around, let's say, the same level as depreciation in the coming time. financial items of course also we don't expect major changes let's say in financial cost compared to let's say 2023 and of course our r&d let's say we have lifted the r&d the last years basically to a closer to four percent level rather than the historical let's say three percent and that's well, let's say it's a conscious decision to really be a frontrunner and maintain frontrunner position as well in the decarbonization journey. So those are for us the priorities and they don't change.

And I would say on the M&A side, it's still the consistency that, you know, we can we certainly have the the firepower to do, but the focus on Bolton acquisitions, bringing in critical competence or technologies, that is still the focus.

And buyback is not part of the capital allocation?

So far, the board has not entertained this discussion.

Okay, thank you.

The next question comes from Johan Eliasson from Kepler-Chervreau. Please go ahead.

Yes, good morning. This is Johan at Kepler-Chervreau. You didn't want to discuss timing of storage outcomes, but what about gas solutions? I mean, we seem to have some problem projects still running. Do we have to wait for all of these legacy projects to be done, or can gas solutions be sold at an earlier stage?

I think that gas solutions, we have practical things to do there, the carve-out and all the administrative undertakings. I think we also need to work out this particular project.

Which is nearing completion.

Which is nearing completion, so to say. So we haven't communicated a proper timeline this year, next year. But we have a couple of stand-up steps to take before we can go to market, so to say.

Okay, so it could be next year as well. There's not sort of any imminent timing on that one, I understand.

It's definitely possible.

And then on the service contract, it seems like you're now sort of both in marine and energy around 30 percent of the installed base. But I guess, I mean, how big share you can reach depends on the age profile of the installed base as well. I mean, is there some sort of realistic target setting of contract coverage, you think, that could foresee for for both the marine and the energy side?

It's a very reasonable question, but for competitive reasons, we are not going out with that. The only thing I can say is that we do see continued growth opportunities. Of course, the theoretical limit is 100%, but that is theoretical. There is a practical somewhere along the route, but we don't give out those numbers. As I said, there are continued growth opportunities. And also, please don't forget that when we talk about our service strategy, we talk about moving up the service value ladder. And we have four different steps in the ladder. We have the transactional piece, which is the spare parts, service hours. We have the agreements. We have retrofits. And then we have the performance-based agreements. And agreements is one of those steps. We are also growing the other steps in this service value ladder.

Excellent. And then just one final question. You have in earlier years sort of indicated that backlog is tilted towards equipment deliveries rather than service revenues, et cetera, which would have an impact on the margin you could achieve in the coming year. You haven't said anything about this, but services continues to grow well, and we obviously have the legacy impacted projects from the inflationary period, all pointing to the fact that we should expect margins to improve in 2024 over 2023. Are there any things you would like to highlight to sort of make my assumptions on the margin development a bit more cautious that one needs to consider?

I think we don't give guidance on margins, but to go through the logics, first of all, if we look at the order backlog, the biggest chunk is clearly around new build, because services, the turnover time is much faster. So there is definitely more new build than service in the order backlog. And that's part of the general business dynamic. Now, what is positive for the order backlog and the new build side is in energy, this focus and where we have now 80% of the energy order backlog is equipment related. It's not EPC. And we talked about that when we went into 2022. I mean, 40% was equipment. So we have basically gone from 40% to 80% equipment share of the energy backlog with a better risk reward balance. So that sets us up, I would say, in a better way for 2024. And then, as you alluded to, we have been very clear that the previous order backlog was heavily impacted by this acceleration of cost inflation in the beginning of 2022, the Ukrainian war. We have now worked that out by the end of quarter three. So that also sets us up in a good way for 2024 and onwards, I would say.

And there are no sort of cautions that we should bear in mind as well on the margin.

I mean, as I said, I think we have a project portfolio that clearly has a better risk-reward balance.

Okay, excellent. Thank you very much.

The next question comes from Antti Kantonen from SEB. Please go ahead.

Yeah. Hi, guys. It's Antti from SCB. I guess only one question at that point. So I want to ask about the order book delivery schedule that you provide on a group level. Does that differentiate very much between marine and energy? I mean, you've been flagging that the change on being more EEQ deliveries might have an impact on revenue recognition and also on energy. We see orders picked up quite strongly on second half. So is it a fair assumption that

order book is longer and perhaps more geared towards next year and onwards on on energy i i think there are many elements in the order book that let's say can be different uh very much let's say of course the the shift from epc to eq that also changes let's say the the revenue recognition methodology from percentage of completion to Let's say completed contract delivery. So where earlier with more EPC, you could say it's more spread throughout the year or the year beyond. So one project can be in two years, basically. I think that has clearly changed. And I think now what we see more and more on the energy side and in particular is more EQ, which means more, let's say, completed contract methodology. If you now have, let's say, a sizable order intake that we saw in the second half of 2023, most likely that will be going out in 2024, second half. Typically, it's about a year in between average, but it can vary per project as well.

Okay, and I want to quickly follow up on something that you said, Arjan, on the cash flow that you had a strong December. Was that driven by completions or advances, or I mean milestone payments or advanced payments in the sense that did you get more orders in December that you thought you would, or did you just complete more projects?

Both, both. And let's say if you look at the receivable balance throughout 2023, let's say with sales going up, our receivable balance went about 120 million out of my head down. And clearly, let's say also advances received was a couple of hundred million actually up. So it's both. It's not one.

And I would compliment Arjen by saying that the team, both on energy and marine side, I think we have taken steps forward, very good steps forward in managing our working capital requirements.

Absolutely, absolutely. And still ongoing. It's not stopping.

The next question comes from Pony Leighton-Markey from Danske Bank. Please go ahead.

Thank you. I wanted to ask on the marine power margins, which were down year on year in Q4, and you had like 100 million higher sales than last year, but EBIT was up by only 2 million. So I guess the mix change doesn't fully explain that. And the question is that how much did the R&D costs increase? And is this kind of front end loaded or how should we think about the margins in marine power going forward?

I think it's good to remind that there is, of course, always the mix between new build and equipment, which is clearly one factor. But it's also, let's say, the mix within, let's say, services, because within services you have different revenue streams, let's say, spare part field service projects and agreements, basically. And that mix can also be or has actually an impact on this equation. Besides that, there is also within the new build side, margins are not equal project by project. So there is also mix effect there. So in the biggest portion, it's new build services, but let's say there is also mixes within those two pillars, you could say. And we are not, let's say, opening up. Yeah, specifically on R&D, we are not opening up by sector or by segment, sorry. Because R&D spend is also partially related to both businesses.

Okay, thank you.

Thank you, everybody, for great questions. Thank you, Håkan and Arin, for the answers and for the presentation. Wärtsilä Q1 will be published on April 29. Hope to see you there. I would like to also remind you that we are hosting several public calls before that. The next one is the strategy call with CEO Håkan Angdevall on February 29. Hope to see you there. Thank you.

Thank you for today. Thank you.