Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to this news conference for financial statements bulletin 2021. My name is Hanna-Maria Heikkinen. I'm in charge of Investor Relations at Wärtsilä. Today, our CEO, Hakan Agnevall, will start with the group highlights, and business development, and then our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions and get solid answers. Hakan, time to start, please.

Thank you, Hanna-Maria. And welcome everybody this morning. It's snowing in Helsinki today. But I think we have a good wrap-up of 2021 and also looking, of course, into the Q4 numbers. So some key messages for 2021 full year. We start there, and then we will move into the Q4. Overall, Wärtsilä is moving in the right direction in 2021. Orders, net sales, operating results and cash flow have all improved during the year, which is positive. Order intake increased by 32%. There is growth in all businesses. Also good progress on the service side, which is very important for us. Order intake increased by 17%, and net sales increased by 11%. Profitability improved as we will see, and we had a strong cash flow. Actually, we had an all-time high in the history of Wärtsilä in our full year cash flow in 2021, really encouraging. Then on the challenges, COVID continues to have a significant impact, and it has a negative impact on our business, both on the Marine side and on the Energy side. And I think one of the important milestones during 2021 is the new ambitious financial targets and decarbonization targets that we have announced. So some key messages from 2021. If we first start to look into a little bit more detail on the numbers for the full year, and then we move to the fourth quarter. So you could say -- see here that the order intake is up, as I said, 32% to EUR 5.735 billion. And we also see that services continue in a strong way with 17%. But please note you will quickly see that the equipment has new order -- order intake for equipment has gone even stronger. It's around 47%. And this significant increase in equipment will, of course, have an impact on the mix -- the revenue mix for this year in 2022. If we look at the order book, it's growing by 14% to EUR 3.763 million (sic) [ EUR 3.763 billion ]. Net sales full year has been growing with 4%, EUR 4.7 million (sic) [ EUR 4.778 billion ], and services is also growing even faster, with 2.4 -- EUR 2.5 million (sic) [ EUR 2.5 billion ]. Book-to-bill going in the right direction, definitely with 1.2 for the full year. And if we look at the comparable operating result, we improved from 6% to 7.5% to EUR 355 million. We are on a journey, and we continue that journey. If we then zoom into the fourth quarter, I think we see another highlight, the order intake for Q4. It's up significantly. I mean EUR 2.150 billion, 92% up to same period last year. Of course, same period last year was very low. But this is another record in the history of that, so the all-time high on a quarterly order intake ever. And here, we see strong contribution, of course, on some of the big energy orders that we have taken, but there is also good orders intake in Marine Systems, in Marine Power and certainly on the services side. On the Q4, net sales, it's up 31% to EUR 1.597 billion. And we also see the increase of services with 16% to EUR 761 million. Book-to-bill also very strong at 1.35. Operating results improving 9% or -- I should say, the comparable operating result at EUR 158 million, 9.9% of sales. We all know Wärtsilä has normally a strong Q4, and that also happened in 2021. So let's here summarize the fourth quarter highlights. So the net sales at EUR 1.597 billion, 16% increase on the service sales. You can see how it is evolving. Comparable operating results at EUR 158 million, 53% growth, mostly driven by a more favorable sales mix between equipment and services. If we look at the marine market development in general, the number of vessels has -- ordered has evolved overall in a positive way this year. The increase to 1,855 vessels compared to 815 last year in 2020, I should say. In 2021, record-level vessel contracting in containers was very strong, but also new build activity in gas carriers and bulkers exceeded the pre-COVID era. Cruise, however, newbuild continues to be rather limited. The transitions to cleaner fuels has started, and 384 orders were placed globally for alternative fuel-capable vessels. And if we look at the cruise operating pace, you could say, around 17% of the cruise fleet capacity was active at the end of 2021, and there has been a gradual uptick throughout the year. During the summer, it was around 20%. Of course, we see now a little bit hit with Omicron. But when I talk to our customers, there is a strong belief in the summer season that is coming. Energy situation is improving. There is good activity on the energy storage market, also on the thermal balancing. The energy markets were recovering throughout 2021 despite of COVID. But in many of our core markets, COVID still has a significant impact on the decision-making process and also on the execution. So there are still postponements of energy projects. Energy storage with the battery business are very active and continuing at a good level. And our market share, if we look on the thermal side, it has decreased to 5%. But I -- we also know there is about a quarter time lag in these numbers, and with a good order intake that we have had in Q4, I think this will affect our market share. If we look then at the order intakes coming back here again, up by 92%. You can really see the shift here, but of course, starting from a low level. It increased over all businesses, and equipment order intake increased by 184%. And as I said before, the strong newbuild order intake will, of course, affect the mix of service and newbuild in 2022, the sales mix. Service order intake also increased in a good way by 20%. If we look at the order book, we are building the order book in a positive way. And we can also see that we are building the order book both with delivery this year but also with deliveries beyond this year. Net sales increased by 31%. And equipment sales -- net sales increased by 48%, services by 16%, going in a good direction. Then looking at technology and the partnership journey here. Wärtsilä, we are about shaping decarbonization of Marine and Energy, and it's a lot about technology and services. And here, on the technology side, see some exciting development during the last quarter and the last year, I would say. I mean the latest thing here, 2-stroke. We are doing some very interesting and promising technology development here. It's about having retrofit capability to convert, going from diesel to LNG or from heavy fuel oil to LNG but then also to continue to upgrade the engines to the future fuels, very promising. We have introduced our new IQ Series of exhaust gas treatment systems. That's the next step in the gas treatments, with a smaller footprint and with a good performance, so to say. The ammonia journey is also ongoing, one of the exciting fuel avenues going forward. And we have announced a cooperation with Eidesvik Offshore to convert offshore supply vessel to operate with ammonia fuel combustion engine, some of the early steps. Then on Voyage, smart port innovation and digitalization. We have signed a landmark memorandum of understanding with the Maritime and Port Authority of Singapore to further strengthen our collaboration and see what digital solutions can contribute to the shipping ecosystem in Singapore. If we then go and look a little bit closer business by business. So if we start with Marine Power, increase basically in all key figures. Comparable operating result increased by 67%. You can see order intake up by 50%, net sales by 20%. If we look at the operating result, we could say the positive contribution here is from the reactivation of the cruise that took place throughout 2021, and that driving the increased volume in services. We have also had efficiency improvement actions, primarily on our field service network but also in other parts of the business. The challenges is the cost inflation. We clearly feel it, and we can mitigate it to some extent. But of course, we feel it. And still, we have a relatively low factory load, building up a little bit going into this year, with the latest orders received on the Energy side. The service business and the service agreements, in this case, it's going in the right way. It's increasing after the COVID-19-related decline. An interesting example, we signed a long-time optimized maintenance agreement with NYK Shipmanagement. It's a 13-year contract, which is designed to ensure maximum uptime and equipment reliability with assured maintenance cost for LNG carriers. And this order, it includes the Expert Insight, our digital platform, which enables dynamic data-driven maintenance planning and optimized maintenance, so it's really to leverage digital tools and artificial intelligence to provide uptime reliability and create value for the customer. If we switch to Marine Systems, net sales and order intake increased. Service order intake increased by 21%. And you can see the order intake, up 131% net sales up 32%. If we look at the comparable operating results on the positive side, the demand for transactional services contributed in a good way. But there is still a low level of newbuild scrubber. And the margins on the scrubber business have come down. There is also a challenge with the mix between equipment and service that affects the operating result. Voyage, clear improvement in profitability, driven by improved sales volume, about a favorable equipment service mix but also driven by the efficiency improvement that we are performing in Voyage. Also in Voyage, we have the challenge with the cost inflation and also the continued increased investments in our digital competence. So Voyage is in a positive trajection -- trajectory. However, the Voyage was helped in Q4 also by, I would say, some strong seasonal effects on the services side. So when one looks at the overall improvement journey and the profitability of voyage, one should consider the full year result. The cloud solutions deliveries and order intake continues to grow in an accelerated way, and we are also growing our cloud simulation service business. And here, we have a very interesting example from Africa and the University of Mombasa. We are basically providing our cloud-based simulation tools to -- for modern training, technology, and that will help African seafarers to be trained remotely, of course, in COVID times, very valuable. The sessions will always be up to date with the latest content and also tailored content to be able to provide customer-specific training that is accessible for all the participants. And the cloud simulations is really a complement to the on-premise simulations and to be able to ensure top-notch remote training. Okay. If we then move to the Energy side, Energy order intake, net sales and comparable operating results all increased. And we had large single deals that came in from Mexico and Brazil, and that really supported the Energy business going forward. But we do see a little bit of a trend shift here also on the thermal side, still fully acknowledging this is a project business with what that means, so to say, in terms of the order intake. Sales volumes is clearly up, contributing to the comparable operating results, also favorable mix within services, so to say. On the challenging side affecting the operating result in a negative way is the equipment services sales mix. It's increased share also of energy storage, as we have communicated before. Currently, the energy storage business is loss-making, and we are improving it and turning it around over the next few years. And we also see we are investing in the business, ramping up our execution capabilities and growing the business. And we are also, in Energy, facing a cost inflation pressure. So the example for Energy is the significant order that we received from CFE in Mexico for EUR 480 million. CFE is a state-owned electrical utility in Mexico, and they have ordered 2 large multi-fuel power plants with a combined output of 600 megawatts. And these are actually the biggest generating capacity EPC contracts that Wärtsilä has ever received. And it includes both the 50DF dual-fuel engine and 34DF dual-fuel engines. Very important order and also very encouraging for the Energy business. But Energy also has a strong focus on services. And if we look at the installed base covered by long-term service agreement, it is really increasing, and when we talk about how to support our customer, remote support for power plant is constantly growing. And we solved a lot of cases remotely every day. So a couple of interesting data points here. 96% of the support cases were actually sold remotely in 2021, 96%, and 91% of the support cases, they were actually sold within the same day they were raised. So remote support solutions helped to reduce the operating cost and the lead time. And once again, using data and infrastructure also using the digital tool to have a quick response time and also start to work with proactive maintenance and preventing problems from occurring. Other key financials. So Arjen, please join me.

Thank you, Hakan. Starting with cash flow, Hakan mentioned already, really good cash flow, both in Q4 as well as for the full year, a record again after the record of 2020, which was the previous one. Of course, a good contribution by the profit, but definitely the main contribution, as you can see also from this slide, came from the working capital. All the actions that we have implemented historically would, say, a couple of years back on, let's say, collection and inventory optimization, et cetera, are really paying off. Also, let's say, we had a good traction on, let's say, the supply side, let's say, with SCF programs as well. Good cash flow, of course, contributes clearly, let's say, to lowering, let's say, the net debt almost 0 and gearing also equivalently following. Solvency improving slightly, 0.5% and basic earnings going up as a consequence of increased profitability. Cash flow slide on the left side, trend is going up, really good level, I would say. Going to the right side of the slide, let's say, the fourth quarter development. Looking at the main buckets here, let's say, the trade receivables, they went up as a consequence of the high deliveries in Q4 seasonality here. Also, that has an impact to the inventories, which went down, of course, when you ship it out under very difficult circumstances, logistics. I think we have mentioned that also earlier calls. And then trade payables coming from basically all businesses, but the main business here that is in here is Energy business with a good traction and good payment terms towards suppliers. Looking at the dividend per share. The proposal is EUR 0.24, 73% of EPS, which is in line with our financial targets on the long term being above 50% of EPS. I'll give the floor to you Hakan.

Thank you, Arjen. So -- and then to the final part of the presentation, the prospects. So we expect the demand environment in the first quarter of this year to be better than of the corresponding period in the previous year. However, the prevailing market conditions make the outlook uncertain. COVID is still impacting our business and is creating uncertainty, so to say. So with that, that was the presentation, Arjen. I think we open up for questions.

Yes, exactly. Thank you, Hakan. Thank you, Arjen. Now time for good questions. Handing over to the operator, please.

[Operator Instructions] Sebastian Kuenne from RBC Capital Market.

My key question is on the tax rate today. I spoke to IR this morning, and there seems some issue with losses in the Voyage business that leads to, let's say, regional differences. We have loss from one region, gains in another region we can't offset really, leading to a high tax rate that was probably the main disappointment today. What do you expect for the next year? Do we have a similar headwind on -- from tax? And what does it mean when the energy storage business is growing, this is loss-making; this could make large losses in one region? Do we have to expect tax rates of 40%, 50% going forward? Maybe you can elaborate a little bit on that.

Thank you, Sebastian, for the question. A very valid one as well. I would say, 40%, 50% is really high, so I don't expect that. But we have been having unusually high ETR over the past years. And it's really, as you also commented, actually, driven by losses in a few countries that we cannot, let's say, yet at least recognize the deferred tax assets. We are working on a turnaround, let's say, as you mentioned. Let's say, big part is related to the Voyage turnaround as well, not all of it, but let's say, a big part of it is. But it will take some time to turn it around. So it will not be, let's say, low this year. It will be on the higher end this year, but it will not go to 40%, 50%. That's too much, I would say.

And then the energy storage...

Energy storage is growing fast...

And -- sorry, good point on the storage. Of course, storage is, let's say, not making any profits today. But of course, let's say, it depends very much on, let's say, where storage is, in which country, and let's say, are there any other businesses of Wärtsilä profits in that country as well. So it depends very much, let's say, where it is and whether you can or cannot, let's say, recognize deferred tax assets. And in storage case, there is more in that unit where storage is.

Yes. And I would say, I mean, if we look overall, I think storage is very active in the U.S. And as you know, we have been very strong in North America in our thermal order intake.

And also services, yes.

And services.

Next question on the line, [Operator Instructions] Sven Weier from UBS.

Yes. My question is on the margin trajectory, right? You mentioned the mix comment that has an impact in 2022. On the other hand, we had the CMD, the 12% margin target. And I think there, you talked about a steady margin improvement towards that goal. So is that still consistent? Should we also look for some sort of margin improvement in 2022? Or has your mind changed on that end?

No, I think we are on a journey, so to say, which -- and we have clear targets. But we also said that it -- and as you know, Sven, that our business is, especially in the Energy side, is project-driven, so to say. So that means that you can have certain variances through the years, so to say. And it's clearly so that when you have a strong order intake on the equipment side, which fundamentally is positive, then you go into a time period where you deliver. I mean we will deliver Mexico, Brazil, et cetera. And then that has a certain impact on the mix between newbuild and services.

But it doesn't mean that margins will be, I don't know, stable or down this year even.

I mean we don't provide guidance for profit margin development for a year. But I think that if you have a year with a lot of newbuild relative to service, that will have a certain impact on the margin.

And why did you refrain from giving a guidance for 2022? I think that was one potential idea to go back to giving a guidance.

It's really about the uncertainty of the market situation. COVID still has a significant impact. I mean looking at Omicron here, I think now we are moving by the weeks. Maybe now that in a global scale, there is a more optimistic outlook in terms of countries opening up. But if we go back only a couple of weeks, there were serious concerns about lockdowns again. There was CDC, who are making certain recommendations, affecting cruise, et cetera. I think this just recent development really shows the uncertainty that COVID is creating, and that is the background.

And the infection rates go up in many places.

Next question on the line, please, you can ask your question, Nancy Ni from Goldman Sachs.

So my question is, you recently announced a large newbuild methanol order. And I was wondering, given that you've had this technology since 2014, kind of what -- how come you've only just had your first large one? And do you expect this to pick up going forward?

So you could say this is the first order with our methanol 2.0 offering, so to say. The very, very first order was with Stena a couple of years back. But this is the next generation taking it to the next level. So that's why we call it -- it's the first on the new generation of methanol engines. And when we have talked about future fuels, methanol is, in our view, certainly one of the future fuels. And as we discussed, our thinking is that in the era that is coming and then era is a couple of decades, we are moving into space where there will be multiple fuels, depending on availability of the fuel but also depending on which application you operate, et cetera. So methanol will, in our view, be one of the major avenues, but there will be other avenues as well. There will be ammonia. There will be hydrogen blends. There will be electric. There will still be LNG and fossil fuel as well and biofuels. So -- but methanol is one of the major avenues forward.

I'm please you can ask your question, Max Yates.

Just my question was around the Energy margins. And I mean, I guess, you mentioned a few things that have impacted the margins and why it's down year-over-year. You talked about the mix from storage and also cost inflation. So I guess my question was, which of those 2 impacts, sort of storage mix or cost inflation, would you say was the bigger of the 2 issues? And as we think about next year, I'd like to understand a little bit better how it works when you take a contract in Energy, say, like the EUR 480 million order and how you manage your cost as you come to deliver that order in 2022? Is there any risk that you take a fixed-price contract, and we're seeing it from some other project companies that their cost profile looks very different as you start to deliver it? I imagine that's a challenge in inflationary environment. So how do you manage that?

So I'll start with your second question, and then I will ask Arjen to answer your first question. But if I start, if you take a big order like the Mexico order, how does that affect in the landscape that we are currently moving with cost inflation? I mean when we look at contract, when we sign a contract with a customer, like we signed with CFE, of course, we have a very solid cost calculation and well worked-through cost calculation, where we have included assumptions on inflations in various areas. So -- and as we then go in to deliver in 2022, we will, yes, invoice, and we will realize the margin content and the provisions that we had. So I think the Mexico, it's a very solid order. My comment on the mix is that I talked about before is, of course, that if you install an engine, and we will store quite a few engines in the power plants, the services will only come later. And so we will see the impact and the benefit of the service later than 2022.

Yes. Then on your question on mix, let's say, storage now in Q4 has EUR 150 million more sales than, let's say, last year in the same quarter. So that clearly has an impact. As I said, this is, at the moment, a loss-making business. We are turning it around. Let's say, in a few years, we believe it will be profitable as well. But of course, you have always, let's say, within the newbuild, even on project level, you have mix differences. Let's say, one project has a different profitability than another. And then, of course, you have also, let's say, the same within the service environment. Let's say, the variation between, let's say, spare parts, field service agreements and projects in the service side also have different margin levels. So that all has an impact on the mix going forward. And as Hakan also mentioned earlier, also in Energy, we will see quite significantly, I would say, in particular, in Energy, a very heavy newbuild year in 2022.

Next question on the line, please, you can ask your question, Manu Rimpelä from Nordea.

My question would be relating to this mix impacts we talked about already. So if you kind of -- you know your backlog, so you obviously have a pretty decent view about what's in there and how that mix looks, so we're -- I don't really sense that you're helping us to really understand how to model the margin in '22. I'm not asking for any guidance, but if you look at the backlog, so can you see that the kind of equipment-only backlog. So will the equipment margins, if you take out the storage part of the business, so will you see that part of the business thinking going margins up because you have higher utilization rates, which should be then driving operating leverage? Or will that part then be offset by cost inflation? Or is the mix within that equipment part negative?

So I mean, first of all, we don't provide any guidance. I would say that the -- what we are signaling is clearly that, if I may say, 2022 will be a year with a lot of newbuild. That is what we are signaling. And as I said before, based on the question that we got, if you look at some of the key orders that we have taken recently, of course, we have factored in various cost elements in that.

Okay. But if you think about the newbuild part of the business, so I mean if you think about the moving elements you have in that. So you have cost inflation working against you. Then you have pricing. Do you say that, that will be kind of net positive or negative? And then on top of that, we should have a very significant step-up in the utilization rates. So shouldn't that mean that, that part of the business profitability should nonetheless go up if we just think about the equipment?

So as I said before, I mean, the signal we are sending, it's the mix. That is -- it will have an effect on 2022. I also said in Mexico and other Energy projects, of course, we have done a solid cost calculation on what goes in into the project.

So on the line, please, you can ask your question, Sean McLoughlin from HSBC.

I just wanted to look at a very strong cash flow situation. You enter '22 effectively at a -- well, a neutral net debt position. I mean, how does that -- or does that influence your thinking around M&A? And what are the areas that you would target?

So if I start, and then, Arjen, I ask you to continue. I mean we have -- at CMD, we also communicated. When we look at M&A, we see more of the type of bolt-on acquisitions. I mean acquiring technical competence, core -- I mean peak technical competence that we could bring into our core business, so to say. And we have also communicated that we do think that we have a balance sheet that would support such a strategy. And I think that strategy remains.

Yes. I would almost say there's nothing more to add, right? Let's say, our view on M&A definitely has not changed since CMD. Let's say, we are looking for these, let's say, strategic relevant items all the time. And let's say, we will pursue them if feasible. So I would say it's -- you could say almost independent of the cash flow. Let's say, we, as a company, are always scanning the market for, let's say, useful M&A opportunities.

Next question on the line, please, you can ask your question, Antti Kansanen from SEB.

It's Antti from SEB. So you mentioned that it will be a pretty equipment-heavy year in '22. But then if we look at the service business, what are you kind of seeing still, as say, potentials to improve. And I mean like if we're going to see the COVID impact starting to fade, and obviously, cruise is still a tailwind for the first half, so where are we if you think about the normalization of profitability where there are still potential to grow faster than what the, let's say, the structural growth in services? So could you provide a bit more outlook on the services side regarding Marine divisions and Energy?

Yes. So I mean, if we talk long term or mid- to long term, I mean, clearly, we are excited about the opportunities on the services side. And we talked about the service value ladder where we do see growth potential both on the transactional side, on the agreement side and the performance-based side, and I will also say on the retrofit side. And those still hold. Now coming back to cruise, which is, of course, very important for Marine Power. It is -- there is a strong correlation between the utilization of the vessels and our service business. So when you see the cruise utilization moving, our service business moves correlated with that. And as I said, when I talk to our cruise customers, they -- there was a setback, I would say, a slight setback considering Omicron. But when I listen to them now, they are fairly optimistic about the summer. So -- and then if you talk about the performance-based services and agreements, I think we showed some examples here earlier. It is evolving in a positive direction.

All right. And then if we think about the service project business, I guess you have flagged that there has been, in certain areas, a bit high activity in '21. So is this something that we should be concerned regarding year-over-year basis? Or is the demand kind of accelerating on that front still?

I would say service -- the project services business, it's on a high level. And yes, we see it's continuing into 2022.

Okay. And then last question for me. If we look at the backlog that you have to be delivered in next year and year beyond that, we are looking at like 15% to 20% growth year-over-year. Can you comment a little bit on what's the volume or the price impact on that growth?

Could you repeat the question? Sorry, I didn't get it.

So the pricing in the backlog, I mean, we see that the backlog value is significantly up year-over-year. What's the component of price in that one?

Yes. I would say that projects have been taken -- it's a mix, I would say. There is still, of course, a competitive pressure, no doubt. But with new technologies and new applications, there are also opportunities for price realization. I would say it's a mixed picture.

Yes, I fully support that. Let's say, it's, of course, very different in different markets. And -- but in general, I would say that the price pressure is, in none of our markets, really less. It's either stable or let's say, pressing even more because if you take the Marine side, for example, let's say, the volumes are still rather low. So you're in a smaller market fighting with the same competitors. And that has not really improved. So price pressure, I wouldn't say has really deteriorated a lot, but it's definitely absolutely still there to a large extent.

And I would say, I mean, what is balancing that is, of course, us moving up the service value ladder, when we move to more performance-based, when we take on more risk that we manage and we do it in a profitable way. So there, we see some exciting opportunities for price realization.

And the technology leadership.

Yes.

But you're not willing to provide any, let's say, ballpark on price increases that you realized during '21 orders or in the backlog, just any numerical?

No. And for competitive reasons, I don't think we would do that, no.

On the line, please, you can ask your question, Vivek Midha from Citi Research. Vivek Midha from Citi research, you can ask your question now.

Sorry about that. So in the Marine Power and Marine Systems businesses, you've called out the effect of large orders. Could you maybe give us some commentary on how smaller or base orders are developing in those businesses?

So if I start with Marine Power, I think it's developing in a good way. I mean why for Q4 was -- as I said before, Q4 normally, in Wärtsilä, is a quarter with a lot of business ongoing. And Q4 2021 was no exception. I would, I mean -- but 2021 was exceptional from the sense that we are hitting the all-time high, so to say, and that the all-time highs, they are driven by the big orders. I would say on Marine Power, the smaller orders, they are on a fairly stable level. Now coming to Marine Systems, it is a little bit more challenging because the scrubber business is down. And so there, we -- it's a bit weaker, so to say. If you look at the order intake for Marine Systems, the uptick here is mostly driven by gas solutions. So it's a mixed piece. Scrubber is down; gas solutions is up.

Next question on the line, please, you can ask your question, Erkki Vesola from Inderes.

About the storage market competition dynamics, I mean, what are currently the major decision factors the customers have? Is it integration capabilities and track record? Is it the optimization software? Is it price? Is it lead times? I mean, how is the current competitive arena vis-a-vis the likes of Tesla influence? And what makes you win the contracts if and when you do?

So I mean once you first -- there is not only one customer. There are different customer segments. They are the utilities, they are the IPPs, there is the industrial customers, and they have a little bit different profile of what criteria is on the top of their list. And I think where we're having our biggest success is some with the biggest utilities. They are really looking for a credible supplier with a strong track record, strong execution skills that can also integrate into the power system. The other segment where we are strong is on the industrial side, where we can really combine different generating assets to provide uptime reliability and energy savings. So these characteristics that I mentioned here, this is clearly how we want to position Wärtsilä. I mean we come with a strong power system background and power system capability, and we try to leverage that by bringing in the storage. The battery storage is one tool in our toolbox and then combine it with thermal, renewables and, as some of our customers are saying, games or software platform. That's the quarterback of the system. This is where we implement our power system knowledge.

Okay. We have one more question left, please, you can ask your question, Sebastian Kuenne from RBC Capital Market.

I have a follow-up on the energy storage again. There's talk that battery prices go up this year rather than down per kilowatt hour. How do you hedge that business because this is now becoming almost half of your Energy business? This is extremely high growth rates. So how -- can you explain how you hedge the costs in that particular business? And on the margin, just briefly, you say it's loss-making, sure, but is it loss-making on the gross profit level or just on the EBIT level? Because if it's loss-making on the gross profit level, we can grow it as much as you like. It will never turn positive.

Okay. So first, how do we hedge? I mean we have key partnerships with battery cell providers, and we have long-term agreements with them. So that's how we hedge our position. And then we have also said in the past that the storage business, it's a growth business. We are investing in R&D. We are investing in scaling up, and it is negative now.

On EBIT level.

On EBIT level.

So positive on gross profit. So you have a contribution margin from that business currently.

Yes.

Next question on the line, please, you can ask your question, Matthew Donen from Morningstar.

Just another question on the sales mix in the Energy segment. At the CMD, you alluded to storage order book of more than EUR 700 million. What did you manage to achieve for the full year? And then maybe just a follow-up on that, how lead times due to the transportation shortages being impacted this year? And have you had any penalties as a result?

So I mean -- and these are numbers that we are now providing openly, so to say. If we look at the full year order intake for energy storage, it was EUR 720 million. And if you look at the sales recognition, it was...

EUR 325 million.

EUR 325 million. So there you have the balance. When it comes to the execution, you could say that we are still relatively early and ramping up our execution capabilities, but so far, I think we are progressing in a good way, like you would expect from a well-run project business.

But the larger part of the EUR 720 million will be in delivery this year.

Next question on the line, please, you can ask your question, Max Yates.

I just wanted to come back on working capital. You've had a good performance in terms of the reduction. I just wanted to understand how you think about it in -- as we go into 2022 because obviously, your sales are going to be up. But as a percentage of sales, do you see the kind of levels where we are now as achievable? Or was there anything sort of abnormal in terms of how quickly you were able to bring that down but maybe you need to invest a little bit as we go into a sales recovery?

I would say, if I start, I mean, we had one exceptional situation, and that is, of course, we had a lot of big orders coming in with down payments in Q4. So those were exceptional occasions. And however, as Arjen pointed out, we have a continuous and fairly successful program to bring down the working capital. But one, I would say, Q4 was exceptional, which leads the full year of 2021 of being exceptional.

Yes. I would almost say that, okay, we have now broken the operating cash flow record 2 years in a row, right? I, to be honest, don't expect that to happen again in 2022. You never know, but I don't think so. I think now as Hakan said, we have received quite some significant milestones, and you can see also in the Q4 numbers. Actually, Q4, on a stand-alone basis, operating cash flow was also a record, so it's really high. And let's say, we got a lot of milestone payments, not only, let's say, down payments but also, let's say, milestone payments on big projects in Q4. Some even earlier than anticipated. So in a way, you eat from then, let's say, this year, basically 2022. So I would still expect a good cash flow for 2022, but I don't think we will break the record again. And working capital will likely go up -- sorry. Sorry, what was your question?

No, no, no. That's great.

Next question on the line, please, you can ask your question, Nancy Ni from Goldman Sachs.

Just a quick one for me. I was wondering if you could provide a split within your energy storage orders between hardware and software?

I don't think we disclose that.

No.

No. Sorry about that. We don't disclose that.

Next question on the line, please, you can ask your question, Sean McLoughlin from HSBC.

Just back on energy storage. If you could give us an indication, EUR 720 million is not going to be enough to take you to positive EBIT. Do we need to see that double again? Do we need to see that treble again before you reach EBIT profitability?

I don't think we go into those details. I mean in the comments, we said the road to profitability is a road that will take us a few years. I think we leave it at that. And also, clearly, there is an expected growth in the market but also growth of our business.

And is it then something fundamental in the contract structure? Or is it your scale that drives you to EBIT profitability looking at what you expect in '22?

I would say what is driving the profitability of our way of looking at the business, is, of course, there is an element that -- which there is, in all industries, you need to be cost competitive. But the other part of the equation that we found very important is how you can integrate the battery system to the overall power system and then unlock values, so to say. And you manifest that in the software platform that you provide. So to say.

And the synergies with the thermal energy business, right?

Yes. And there -- from our side, we can also leverage the synergies that we have on our thermal balancing.

Are there further questions? It seems like not. Thank you, Hakan. Thank you, Arjen. Thank you for great questions. Wärtsilä Q1 report will be published on April 28, but we will be also active during Q1. We are hosting several events for investors and analysts. One of those is sustainability event, which will take place virtually on February 25, more information from IR team or from our website. Stay safe and healthy. Thank you.

Thank you.

Thank you.