Earnings Transcript for WRT1V.HE - Q4 Fiscal Year 2023

Hanna-Maria Heikkinen: Hi, everybody, and welcome to this news conference for Wartsila Results 2023. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will start with the Group highlights, business performance. And after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Please, Hakan, time to start.

Hakan Agnevall: 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 Wartsila. We improved in many areas and we managed to have all-time high order intake, net sales, and cash flow. And 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 EUR7 billion, net sales at all-time high at over EUR6 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, I'm smiling more than usual today. We had a fantastic cash flow with EUR822 million. 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 strong 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 EUR7 billion, order intake up 16% for the full year, net sales at 6%, up 3%, and the operating -- comparable operating result landing at EUR497 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 positively 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, and that's compared to 1,538 in the comparison period, so to say. So going in the right way. The uptake of alternative fuels remain more limited. So the share was down from 30% to 23%, but that's more driven by the mix of vessels that was awarded. That was more bulkers and tankers and less LNG. So it's not a -- the trend is still very strong. We 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 newbuild and services across the Wartsila key segments. And decarbonization 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. Also interesting trend is that the yard capacity, especially in China and South Korea, continues to increase. And that helps to remove constraints from newbuild ordering across vessel segments as slots become available. And also we see a de-acceleration 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. Our market share remained stable at 13% and as global orders for natural gas and liquid fuel power plants decreased by 22% to 10 gigawatt during the 12-month period. And this -- and you know, 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 decarbonization target, and the midterm 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 we -- the decisions, the commitments that were made during COP28, they are clearly in line with Wartsila'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 -- from organic perspective, it really increased even more. We had FX effects. So if you take that into consideration, order intake growth of 13%, equipment order intake increased by 16%, and service order intake increased by 11%. We have a strong order book and rolling book-to-bill 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%. So net sales decreased by 7%, equipment net sales decreased by 19%, service net sales increased by 8%. Profitability continues to improve. And 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 Marine's 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 Wartsila 32 methanol engine launched last year, we will add the Wartsila 20, the Wartsila 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 Wartsila 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 onsite and on portfolio level. We are the third largest energy storage system integrator according to S&P Global, with 7.5 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 cost, I mean, from 3% to 4% of net sales for the Group level. And here it is affecting, of course, Marine Power. If we look on the services side, we see a good -- 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. Really excited about this milestone, you could say in Wartsila's history of engine development. It is -- and we clearly continued 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 ammonia as a fuel, and is now part available on the Wartsila 25 engine platform. It enables a significant advance in sustainable shipping operation during a time when ship owners are really seeking viable options among the green fuels. So the solution, it includes the AmmoniaPac fuel gas supply system, it's also the Wartsila Ammonia Release Mitigation System and also the NOx Reducer, and, of course, combined with the engine. And we have our first intent to customer. We signed a Letter of Intent with Viridis Bulk Carriers. And they're going to be the world's first zero-emission shipping company. And it is intended to be the first ship owner that benefit 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 is clearly diminishing lower net sales, but the significant negative impact is this EUR19 million provisions for a single sizeable turnkey project in gas solutions that we have to make 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 story -- the good part of the story, this project is now coming to an end. And, yeah, 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 will remember that we had to take a provision for the Olkiluoto 1 and 2 projects, EUR40 million. 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, in 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% EEQ instead of EPC. And that is basically a doubling of the share since when we went into 2023. So, Energy on a good role. 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. And -- 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. That's -- this is one of many examples. But this is really core of our agreement business, what it's about? So we secured a 12-year agreement extension with a power plant operation in Pakistan. So it's the operations and maintenance team. They signed the agreement with Sindh Nooriabad Power Company in Pakistan, which is an independent power producer, and they have extended this service contract for another 12 years. We started the agreement in 2017. And I think the extension, and also the length of extension extend -- reflects SNPC's satisfaction with the services we are providing and the value that we can create. So the agreement covers two, SNPC 1 and 2 power plants located in the Sindh Province. It's five Wartsila 34SG engines and one steam turbine generator. And basically, the combined output of this plant is 100 megawatt. The order was booked in Wartsila 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 would say, Q4 2022 to Q4 2023 from the 5.3% to 10.8%, so an increase by 90%. 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% for the whole Group. Now, Arjen, please, other financials.

Arjen Berends: Can I have the clicker, Hakan? All right, other financials. After almost crying in 2022 about the operating cash flow being negative, now, I can really smile. Let's say, EUR822 million operating cash flow for the year is all-time high record. Hakan mentioned it already. And as you can see from these numbers, in particular, then 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 then on the working capital, which is also now landing, 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 EUR35 million. We paid back in the year about EUR90 million on the loans and our cash increase actually was about EUR350 million. 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 EUR0.44 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 EUR200 million provision for the Russia closure of activities and all the projects related to it, as well as about EUR90 million related to Trieste. If 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 2022. If you look at the right side, let's say, we see two bars with negative working capital, actually, the first one minus EUR100 million in 2021. That was actually the year that we had the previous operating cash flow record at EUR731 million, and now we beat it with EUR822 million. 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 EUR0.32 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, Hakan.

Hakan Agnevall: 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 -- and open up for the Q&A.

Hanna-Maria Heikkinen: So, handing over to the operator, please.

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

Vivek Midha: 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 could you help us understand how much of the upgrade is driven by better underlying demand from customers, for example, in cruise, compared to easing of supply with better shipyard capacity? Thank you.

Hakan Agnevall: So I don't think we go -- I understand your question, but we don't go into the -- to the specifics if service is going to grow faster than the newbuild. I would say -- and how much, I don't know. I would say both will be growing. And you could say that the growth is fueled by our core segments. 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, 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, that was accelerating price increases when it comes to vessels. That is clearly leveling off, so to say. Arjen, do you have further comments?

Arjen Berends: 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, Clarksons, and then about 4% in Korea and Japan. And that 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.

Hakan Agnevall: I fully agree. And I would say there is another dimension to your capacity. That is, of course, there is a newbuild piece to the equation, but there will also be a retrofit piece to the equation, because, we know -- I mean, if you look at the total fleet of certain tonnage, the bigger ships is about 100,000 vessels, maybe 50,000 needs to be upgraded -- or it makes a financial sense to upgrade. That's something also that will require quite a lot of shipyard capacity, if we take 10, 15-year perspective.

Vivek Midha: That's great. Thank you very much. Finally, just a quick follow-up from me on the energy power plants business, where you've had a very strong end to the year. You highlighted the Indonesian power plant orders. Which other markets contributed to the order intake in the quarter? Thank you.

Hakan Agnevall: So it's actually -- I mean, we highlighted Indonesia, but it's -- there are 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.

Vivek Midha: Thanks very much.

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

Daniela Costa: Hi. Good morning. Hope you can hear me, and hope you're all well. My question, my 1.5 question is regarding storage. First, I guess, just looking at the profitability, what 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 through 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 fixed 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.

Hakan Agnevall: So if I start from the -- with your second question. So the review is ongoing. 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. I can also reiterate what we said. Triggering point. We reached EUR1 billion. 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 the -- 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 storage profitability is on a positive trajectory, in general.

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

Hakan Agnevall: 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 risk -- right risk reward balance in our project portfolio, and consistency in the financial journey.

Daniela Costa: Thank you.

Operator: The next question comes from Akash Gupta from JPMorgan. Please go ahead.

Akash Gupta: 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-ish level average for the year. And maybe a question on why we are not seeing sequential growth here? Are there any internal factors such as constraint on sourcing of battery sales or labor or cost? Or there are external factors such as lower market activity or maybe some peers, maybe 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?

Hakan Agnevall: 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 disciplined growth. As you know, we have a focused geographical strategy, US, Australia, UK and we continue to execute consistently along that. I don't see supply chain bottlenecks, 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. And where we differentiate, we talked about it. If you -- when I talk to our customers, it 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 renewables, 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.

Arjen Berends: I think we are confident about the growth. I think that's clear and also the market is clearly supporting it. We have a good pipeline. But it is a project business, as Hakan 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.

Akash Gupta: 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 ICCT 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 KPI or something as part of contracts? So, 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. Thank you.

Hakan Agnevall: 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 Wartsila development over time, the 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, and I think we should, by reputable academic institutions where it basically shows that Wartsila is world-leading in methane slip on four-stroke and we are now getting very close to 1 gram/kw hour, which is basically outstanding. We will continue the journey. So when -- and 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, et cetera, 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. And so I see that we have the risks clearly under control.

Akash Gupta: Thank you.

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

Max Yates: Thank you. Good morning. Could I just ask a quick question on the provisions, so the EUR19 million that you've taken? There's a comment in the release that talks about the provisions being EUR38 million -- sorry, EUR48 million for the full year rather than EUR38 million, which I would guess kind of you took one in Q2, that was EUR19 million, another one this quarter, that was EUR19 million. So it should be EUR38 million, not EUR48 million. I'm just trying to understand what was the full-year provision number for the projects in Gas Solutions. Thank you.

Hakan Agnevall: It's a very good observation. So the overall provision is EUR48 million for the full year. And you're fully correct that we did EUR19 million in Q2 and EUR19 million in Q4. So we have -- along the way, we have also done an additional EUR10 million. So EUR19 million plus EUR19 million plus EUR10 million, EUR48 million. And EUR19 million has not been material enough that we have disclosed this in our quarterly reporting. So that's why it's adding up to EUR48 million.

Arjen Berends: The additional EUR10 million, you mean.

Hakan Agnevall: Yeah, the additional EUR10 million. So we have disclosed the EUR19 million, EUR19 million, not the EUR10 million. 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.

Max Yates: 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 kind of volume or order numbers, are we actually seeing volumes grow and prices down? And how should we think about that going forward?

Hakan Agnevall: No, prices are clearly down because the lithium-ion costs have been coming down. And, I mean, after the dynamics that we had in the second -- I mean, the first half of 2022, I mean, the general principle of having material indices are clearly established in the market. And I think you've also seen, Max, that we delivered, if you look full year, I think there is 4.5 gigawatt hours. And if you compare to the fee 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. But it is related -- and that is related, much of it, to the raw material prices and indices that are passed through the system.

Max Yates: Okay. And just my final question -- sorry, 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?

Arjen Berends: 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.

Max Yates: 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 of shipping. How should we think about that affecting your business? I remember when you had said quite a lot of components inflation, that was mostly actually because of your kind of European component supplies. 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? And are you seeing anything so far? And then secondly, thinking about 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 -- how to think about that would be helpful.

Hakan Agnevall: 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 2 and Tier 3 level, they are 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.

Arjen Berends: I think, let's say, 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 Hakan says, we don't see any major financial impact.

Max Yates: Okay. That's great. Thank you very much.

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

Sven Weier: 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 US election risk? That's the first question.

Hakan Agnevall: No, I think we delineate the US election from our street [related] (ph) view. I don't think we will let that kind of macro event affect the time schedule.

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

Hakan Agnevall: Yeah. Then I mean, I'm not -- I think there is a lot of uncertainty around the US elections outcome, what impacts it could have, et cetera. 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.

Arjen Berends: It can be more influencing factors on this as well.

Sven Weier: Second question was on the marine upgrade 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, especially on the capital equipment side, obviously or so also that you see also strong offshore shipyard orders in 2024?

Hakan Agnevall: 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 newbuild side as well. So it's a combination of newbuild and services. But as I said, the upgrade of the guidance, it's broader for Marine Power, it's broader -- or for Marine, as we call it nowadays, it's broader than just offshore.

Arjen Berends: 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.

Sven Weier: 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?

Arjen Berends: 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 -- closer to 4% level rather than the historical, let's say, 3%. 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.

Hakan Agnevall: And I would say on the M&A side, it's still consistency that we can -- we certainly have the firepower to do. But the focus on bolt-on acquisitions bringing in critical competence or technologies, that is still the focus.

Sven Weier: And buyback is not part of the capital allocation?

Hakan Agnevall: So far, the Board has not entertained this option.

Arjen Berends: No.

Sven Weier: Okay. Thank you.

Operator: The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.

Johan Eliason: Yes. Good morning. This is Johan at Kepler Cheuvreux. 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. Are we -- do we have to wait for all of these legacy projects to be done or can Gas Solutions be sold at an earlier stage?

Hakan Agnevall: No. So I think that Gas Solutions, we have practical things to do there, the callout and all the administrative undertakings. I think we also need to work out this particular project. So…

Arjen Berends: Which is nearing completion.

Hakan Agnevall: 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.

Johan Eliason: Okay. So it could be next year as well. There's not sort of an imminent timing on that one, I understand.

Hakan Agnevall: It's definitely possible.

Johan Eliason: And then, on the service contract, it seems like you are now sort of both in Marine and Energy around 30% 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 you could foresee for both the Marine and the Energy side?

Hakan Agnevall: We are not. I mean, it's a very reasonable question, but we are not -- for competitive reasons, we are not going out with that. The only thing I can say 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, so to say. 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 part 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.

Johan Eliason: 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 need to consider?

Hakan Agnevall: I think we don't give guidance on margins. But, I mean, to go through the logics, first of all, if we look at the order backlog, it -- the biggest chunk is clearly around newbuild, because services, the turnover time is much faster. So it's -- there is definitely more newbuild 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 newbuild 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, 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 we have -- the order backlog -- the previous order backlog was heavily impacted by this acceleration of cost inflation in the beginning of 2022, I mean, 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.

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

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

Johan Eliason: Okay. Excellent. Thank you very much.

Hakan Agnevall: For the next questions, I ask that only one question for the next part. Thank you.

Operator: The next question comes from Antti Kansanen from SEB. Please go ahead.

Antti Kansanen: Yeah. Hi, guys. It's Antti from SEB. I guess, only one question at this 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 the order book is longer and perhaps more geared towards next year and onwards on Energy?

Arjen Berends: I think there are many elements in the order book that, let's say, can be different very much. Let's say, of course, the shift from EPC to EEQ, that also changes, let's say, 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 than in particular is more EEQ, 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 by project as well.

Antti Kansanen: Okay. And I want to quickly follow up on something that you said, Arjen, on the cash flow that you had a strong December. Was that driven by completions or advanced -- 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?

Arjen Berends: Both. Both. And then let's say, if you look at the receivable balance throughout 2023, let's say, with sales going up, our receivable balance went about EUR120 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.

Hakan Agnevall: And I would say -- and I would complement 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.

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

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

Panu Laitinmaki: Thank you. I wanted to ask on the Marine Power margins, which were down year-on-year in Q4. And you had like EUR100 million higher sales than last year, but EBIT was up by only EUR2 million. So I guess the mix change doesn't fully explain that. And the question is that, how much did 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?

Arjen Berends: I think, it -- let's say, it's good to remind and, let's say, okay, there is, of course, always the mix between newbuild 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 parts, 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 newbuild side, margins are not equal project by project. So there is also mix effect there. So it's a -- in the biggest portion, it's newbuild 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.

Panu Laitinmaki: Okay. Thank you.

Hanna-Maria Heikkinen: Thank you, everybody, for great questions. Thank you, Hakan and Arjen, for the answers and for the presentation. Wartsila 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, Hakan Agnevall, on February 29. Hope to see you there. Thank you.

Hakan Agnevall: Thank you for today.

Arjen Berends: Thank you.