Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

So currently, we have 36 parties joined. First of all, welcome, everybody. It's already 2 past 4, Finnish time so maybe it's a good time to start. So my name is Hanna-Maria Heikkinen, I'm in charge of Investor Relations at Wärtsilä, and I have here our CEO, Hakan Agnevall. So happy to have all of you here in this call. And the purpose of this call is to provide a discussion possibility regarding our long-term opportunities. After the busy reporting season, I think it's -- everybody has better time now to discuss also the longer-term opportunities. Hakan will start with a short introduction and after that there is a good possibility to ask questions.

Good. Thank you, Hanna-Maria, and welcome, everybody, and we try out this format, a mid-quarter reflections from my side. As Hanna-Maria said, I'll start making some reflections on the market and some of the proof points that we have been able to accumulate of our strategy mid-quarter. And then we spend the vast majority of this time open up for Q&A. So that's the format of today. So if I start and reflecting on how the year has started, I think from a market perspective. And when we see the -- if we talk first about Marine side and then we talk on the Energy side, I think on the Marine side, as you probably -- I know you follow the industry, the LNG and container newbuild has started. I would say fairly, fairly okay, fairly strong. And of course, the newbuild on cruise is still very muted. And I think we should notice the Clarkson projection. I mean, if there is 1 authority in this area of making projections for the maritime industry, they project that the newbuild will be down for the full year of 2022. But the start has been in a positive way, if we talk about the market. If we look at the cruise, I think we all noted as a consequence of Omicron, CDC went out -- U.S. CDC went out and with some recommendation that we clearly say has hampered the recovery of the cruise operation. And then you know that has some correlation with our service business. However, when I talk to some of our cruising customers, they have a more optimistic view on, if you say, coming to the summer. But it was -- the recovery that was ongoing was clearly hampered in the beginning of the year and partially driven by CDC then. Scrubber market, I will still say, still quiet on the -- and the main activity in the newbuild. I mean, the fuel spread, you have seen it, it's quite favorable right now, but our customer, which is, of course, fundamentally good, they are very busy serving their customers, and therefore, they do not have time basically to bring their ships back to make the upgrades. So the retrofit market is slow and the main activity, which is overall slow is on the newbuild side. So I think that sums up the Marine side. If we look on the Energy and storage, we see a lot of continued a lot of market activities. It's very active markets on balancing power and also, I would say, on certain thermal baseload actually. So strong activity there. Challenges so far, I think we all see it in many industries, logistics situation with disturbances of the supply chain certainly there. And we do see the cost increase pressures, both on the logistics side transports and also on the material side. And that is, of course, short term, having some impact on us. And I will also -- short term, we also see that some of the COVID measures that were in place in the beginning of last year, those are, of course, not in operation now so somewhat higher cost. I think we made the point before that 2022 will be a newbuild year in the sense that the mix newbuild to services, that will be, relatively speaking, more newbuild, driven by the significant order intake that we had in Q4. And I think we also clearly highlighted that when you look at the order intake for the full year of 2021, you should really note that the Q4 was an all-time high in the history of that order intake, so to say. Finally, when it comes to the demand outlook, as you know, we give a fairly short-term demand outlook, given the uncertainty around COVID. And the demand outlook remains the same and that is that the demand environment is better than Q1 last year. So those were some of the highlights or summaries so far. And Hanna-Maria, let's open up for questions from here. And if we can kindly ask you to -- I suggest we apply the same type of discipline that 1 question for a participant, and then we can cycle around, so to say, so you can still come back.

Thank you, Hakan. So I think that's a good basic principle, so 1 question per person first. [Operator Instructions]. So Daniela Costa was the first one. Please go ahead.

Sorry, I don't know how to put the camera on. I'm not sure I have the option. I have 1 question related to, how shall we think about like the impact of like higher gas prices basically potentially on Wärtsilä? From 1 side, I guess, sort of LNG outlook and from the other side, adoption of gas engines. Can you talk about both?

So I think if I talk long term first and I would say that the whole -- the energy price -- high energy prices certainly in Europe is really as an accelerator of the whole decarbonization journey because it puts certainly the attention of politicians, of the public on energy. And people are understanding -- people, politicians, stakeholders are understanding that we need to make a shift, a shift -- high prices but also shift for the decarbonization. So I think this will accelerate the decarbonization journey. And as you know, I mean, our view is, as I said before, green is not black or white. I mean, gas is clearly a transition fuel that will be needed. First, we need to get out of coal and a lot of coal will go into gas. That will -- can then be upgraded to the green fuels. So I think this will also accelerate the investments in gas plants, if I, for instance, look at Germany. Short-term impact, we have seen that some of the power plants without fuel flexibility, people in certain areas are actually switching back to heavy fuel because the gas is so costly, which, of course, is not good for the climate. But that is a kind of immediate response in some markets, so to say. Then I take the opportunity also because I wanted to -- before we continue to the next question, I wanted to take the opportunity also to talk about some of the, I would say, proof points of our strategy and how that is evolving. I mean, we -- as you know, we formulate that we want to shape the decarbonization of energy in maritime. I mean, we want to contribute. It will not only be ourselves clearly but we could definitely be part of shaping it. And if we look at the order intake and orders we have received, in the first quarter so far, I think I would like to highlight 3 examples. I mean, first, we received from the Remontowa shipyard engines for 3 LNG RoPax vessels. I mean, basically, the first LNG RoPax in Poland ferries. And the interesting thing there is that there is a clear target of our customer. They start to operate with LNG. But they have already put a stake on the ground -- a stick in the ground, sorry, and said that by 2025, they want to operate on 100% on biomethane, so biogas so they're going to make a gradual shift. Another highlight, which I really hope you saw was that we captured a very important order Van Oord with for methanol engines. And this is our next generation of methanol. As you know, methanol is a carbon-neutral fuel if the methanol is produced using green energy. And here, this is a result of a long-term cooperation agreement that we have with the Yantai Raffles shipyard on how to develop carbon-neutral, zero-carbon fuel technologies for the future. And this Van Oord vessel will be used for installing offshore wind equipment, so to say. So 2 concrete examples on the maritime side on decarbonization journey. On the Energy side, we also received an order for 110 megawatt flexible gas power generation in Italy. You might remember last year, we were quite successful with several orders in Italy and we continue this avenue in Italy. And these power plants are put in place to support the stability of the power system as the renewables increase in Italy, so to say. So some concrete proof points. But Hanna-Maria, let's get back to the questions.

Okay. Thank you, Hakan. Next question coming from Max Yates.

Can you hear me?

Yes.

Yes, perfect. I just wanted to -- obviously, you took EUR 700 million of orders in storage more or less last year. just -- and obviously, you're starting to deliver on those and it is a relatively new business for you in, I would say, an uneven supply chain environment with obviously different parts that you're used to procuring. So I just wonder whether you have any kind of initial takes on what challenges there might be for delivering on that business as opposed to your traditional thermal business? And anything we should think of specifically for that business from a sort of supply chain cost standpoint and obviously, batteries is clearly the natural difference or the main difference. But just any early reflections on sort of delivering that part of the business would be great.

So I mean, first of all, it's -- I think you probably follow the world market around batteries. And as you know, the prices on lithium oxide and some of the derivatives has peaked quite rapidly during the latter part of the year. And for some players, that have created challenges with supply of batteries. I mean, we have long-term contracts with our major suppliers and that business is moving along. So we have, so far, delivered on our commitments in existing orders. We also see a bit of a price increase in the market and driven by increasing material and logistics prices, I would say. So prices on battery storage overall is going up and we are part of that journey. I mean, we still see a very active market on the orders. I mean, on the market for new projects.

So you wouldn't say, if I was to sort of characterize that, that there was kind of risk of a sort of pricing versus component cost mismatch as you sort of develop that business? You've been relatively careful in terms of locking in prices for components. I just understand it's a relatively young business and sometimes these things have some subtlety. But is that fair that you're reasonably comfortable with there isn't a sort of mismatch between prices and component costs there?

No. And as I said, it's the spread between the price we charge and the cost we have. And the market prices are going up, the costs are going up. If you look at it from an overall perspective, I think we are maintaining our position, so to say. And so far, we are delivering on our commitments.

Thank you, Max. Next question coming from Sebastian Kuenne.

Yes. My question would be related to the tax issues you have had. My concern currently is that with the Energy storage business still loss-making, that you could have a longer period of high tax rates. So maybe you can give us an indication of, again, where these tax losses come from? And why you can't offset them with profits and what we should expect for this year, next year and the years after on that subject?

So in general, I mean, the tax rate is high. That is because we can't realize deferred tax assets in certain geographies. Those geographies are not primarily related to the storage business so clearly say that. That is related to certain other parts of our businesses, so to say...

Voyage, I assume?

Yes, Voyage, that's correct, Voyage. And therefore, there is a correlation also between making -- as you know, we are on a turnaround of Voyage, and we said we're going to turn that business around over the next few years. So there is a correlation with doing that and realizing some of these deferred tax assets.

How confident are you that the energy storage business will not aggravate the same issues? You mentioned earlier that this is in a high earnings country, mainly North America, but you may also have energy storage businesses in Australia, in other regions where you can't offset the losses from energy storage with profits from the same region. So how confident are you that the -- once Voyage is normalizing, that your tax rate is normalizing as well? .

So I would say if we look at the battery storage business, I mean, your logic is right. If you look at the battery storage business, it's actually, for us, it's growing in the U.S., in Australia, in other markets, but those are markets where we have a lot of other activities as well, I mean, thermal business and other profitable business, I should say. So therefore, the deferred tax asset situation is not likely to arise from the energy storage business.

Thank you, Sebastian. The next question coming from Andrew from North Rock.

Hopefully, you can hear me, i just have to ask the question. I wanted to come back to the '21 result, if I could, post the annual report. You booked EUR 23 million of income from canceled orders in 2021, which is the highest, I think you've booked for at least 6 or 7 years. Just sort of tell us what that related to? Was that sort of 1 or 2 very large orders or just a couple of small ones? And anything in particular connecting them?

No, I would say that those were not a few very big ones. So those were more of spread out, if I may say so.

Okay. And so basically, that income is you're basically going to keep down payments or what exactly was that? Because obviously, it will be a headwind to your margin this year if you don't have cancellations. Is that right?

So I mean, so far this year, we haven't had any cancellations, no, that's correct. And in general, when we look at the -- our order backlog in general, it's a rather solid order backlog.

Thank you. Next question coming from [indiscernible].

Hello. Just maybe changing topic a bit, but just wanted to understand a little bit more about your margins and how you will get to your long-term targets of 12% and also short term in terms of the higher raw material costs. And we talked about lithium, coppers, the -- et cetera, and logistic challenges. How is the dynamics worked in short term? Have you hedged some of your costs? Or what is the kind of delays between costs going up and the way you're actually able to compensate by raising prices? Is the kind of short-term headwind here?

So I would say, let's look at this from 2 angles. I mean, our pricing capability, if I may say so, and how the costs are affecting us. So if we start with the -- on the cost side, so to say, it's a mixed bag. I mean, for certain commodities, for certain supplies, we have long-term contracts. And they are rather closed in, so to say. But certainly, there are other areas where we trade more on a spot principle. And of course, there, we are affected by higher increase, both on material and logistics, I would say. Then on the -- so that's on the costing side. If you talk about the pricing, it's also a mixed bag because we have certainly, in some of the big contracts, we have -- we are locked in on the price wise, if you look at the order backlog, but we also have provisions in those projects for anticipated inflationary pressures and the cost increases. So there is a bit of a coverage. I would say where we do, if we look forward, I would say that, yes, I certainly say we have pricing -- price realization capabilities on the Energy side, and also, I would say on the services side. I think where we still see a lot of competition is on the Marine side, so to say. Now if you net this all out and you're looking for short-term impact, we will have some short-term impact, so to say. But going forward, how do we reach the 12% target? I mean, it is the levers that we have communicated before. I mean, if we look on the growth side, there is battery storage, there's thermal balancing, certainly. There is services, major drivers there. And then on the cost side, I think we have significant potential on continuous improvement as we go forward.

Okay. But the mix shift towards storage is negative for margins in the medium term, at least, I guess.

Yes, since we have said that the storage business is currently loss-making, we have said it would take us a few years to turn that around. So yes, that has, of course, a negative impact on our overall profitability.

Thank you. Next question comes from Antti Kansanen.

Sorry, I guess I was muted. I hope you hear me now. So a question, I mean, and Hakan, you've been mentioning that this year will be a year of equipment growth predominantly. But just maybe a reminder on the services side, and let's not focus on cruise, let's leave that aside. What are kind of the year-on-year drivers regarding services? If you look back to '21, which were the areas that clearly underperformed for you guys, where you still see kind of growth opportunities during this year? And which were the areas that were perhaps, say, unusually high levels if we could look both Energy and Marine?

I mean, if we zoom in on services, I think it's more of a continuous movement and a continuous growth. I mean, when we say that this will be a newbuild year from a sales perspective, it's because the newbuild will grow faster than the services, so to say. So this changes the mix a bit, so to say. But services, I think we are on a good growth trajectory. And then also on growth, as I clearly say, when you look at newbuild, you look at full year 2021. Do recognize that Q4 was all-time high. So -- but I mean, coming back to your question on the services, what is the growth drivers there? It's -- and this continues. I mean, we have talked and we are talking about the service value ladder. And there are a couple of steps in this service value ladder. We start with what we call the transactional business, which is spare parts and service. Then we go to agreements and then we go to the performance-based where we make certain commitments on fuel savings, uptime, reliability, et cetera. So those are the steps. And we see growth in all of these steps currently. And it's evolving in all this area. I mean, if you look on the transactional side, it's about leveraging digital tools, to work more actively with a broader set of customers than we have done before. When we're looking at agreements, it's being even more active in working close together with our customers and really activating and really highlighting the opportunities we have to bring value in terms of the cost savings, fuel reduction and uptime reliability. And then on the performance based, it is about expanding the concept, both on the Marine and Energy side, this whole notion that sign up for little bit longer-term contracts and realize benefits together. And when I say that if you look, for instance, the cruise, there it's in our opinion, as I said, we -- given CDC, given Omicron, there is, you could say, yes, the growth has stagnated a bit now because of the CDC. But when I talk to the customers, I think they have a relatively positive optimistic for the summer. Of course, it's hinging on COVID and what could come if there are new variants coming.

Okay. And maybe if I can continue with that then on kind of the profitability themes around services. If you look at '21 and you have been talking about perhaps your service network, personnel having been underutilized, a bit of traveling here and forth and also kind of reflecting on the inflation and your pricing on the services. What do you expect from margin-wise in services '22 versus last year or what should we expect? .

As you know, we don't give guidance on margins. But I would say that the dynamics, we -- yes, we are still impacted and hampered a bit by COVID. However, the utilization of our services staff is fairly okay and I would say even good. And actually, we are recruiting service staff.

Thank you, Antti. The next question, Johan Eliason.

So now I'm not muted, I hope. Yes, good. Yes, I missed the first minutes here today, but I was curious a little bit about LNG. And I understand, obviously, people want to get some sort of ability to ship LNG rather than use some of the pipelines we have seen used on today. Now the shipyards are pretty full for the LNG carriers, et cetera. But I was wondering, you talked about LNG terminals a few years ago. Would that be still a business of interest to you now?

No. I mean, those are some of the segments that we have actually exited a couple of years back, so we are not active in LNG terminals and taking new orders. We still have some engagement based on orders we have taken in the past. But for new orders, this is not a segment that we are moving in.

And is there any other way that you can see some opportunities? Or do you just have to rely on the shipyards being able to somehow sort of increase their capacity in order for you to make this a more significant business?

No, I think the growth driver is the vessel and the services, I would say. But if you look on the vessel side, and I started that if you just zoom in on the very first month of this year, there is still a lot of activities on LNG. But you're clearly right on that, that the yard capacity is building up. However, we also know, when the vessel is awarded, it takes some time. As you know, we provide through marine systems. We provide different type of gas solutions for the shipping and the tank and boil-off gas, et cetera, et cetera. And this -- there, we still see quite a lot of activity on the tendering side. That was one of the drivers. If you look last year, we were fairly successful on our Marine Systems side there, on the gas Solutions. And here, we still see some activity. But the major message on Marine Systems is that scrubbers is, as I mentioned, I don't know if you heard that, is still slow overall because of people are so busy moving their vessels around and, therefore, they don't bring them in for retrofit.

Thank you, Johan. Then Sebastian Kuenne.

Yes. Hi, everyone. Yes, I have a question on your Russia exposure. There were a couple of contracts that you received for Polar LNG vessels in the past. I was wondering what the time line is for the deliveries and also the servicing of engines and components that relate to Russian owners, just wondering how big your exposure is there.

So if you look on our 2021 sales, I would say that about 2% went to Russia. So...

But you got big orders, right, for polar vessels or medium-sized?

Yes, it's true, but some of the yards are not in Russia. And I would say the major orders were for yards not in Russia. Then how this will play out, we will have to see and be observant on.

[Operator Instructions] I do not see any hands raised. Sebastian, you want to continue? Sebastian, please go ahead.

Yes, I have 1 more question. In energy storage, I mean, you did mention several times that the business will be loss-making at least on EBIT level for several years. Do you have a certain budget of how much losses you can absorb in a single year? I mean, how big of an impact do you expect in the next year? Are we talking EUR 5 million? Are we talking EUR 50 million? Are we talking EUR 200 million of losses that you have in your plans that you would be willing to absorb?

So I will not go into those details. I think the team, the battery storage team, they have a very clear turnaround plan. And as we talked about before, the goal is to turn around it over the next few years. And we are confident in that plan, but I'm not going into the details of that plan.

But you signed the budget. I mean, they take very large orders in that business, extremely large orders. You don't see the risk that this could kind of put pressure on your financials going forward?

I mean, as long as the team is executing according to the plan they have made and we have agreed to, I'm confident in them, so to say, so -- and they are moving according to plan.

Thank you. Next question coming from Luis Fananas.

It is 2 questions, if I may. In the Energy unit, do you see -- I mean, given the context of so high energy prices for quite some time now, do they see any reaction on the market from existing customers or potential new customers reacting to this unusual high level of energy prices?

Okay. You said you had 2 questions. So I was -- okay, well, I start with this one. No, for sure, this is a concern of our customers and I think it's the concern of the public. I think we all follow what happens certainly in Europe, different parts of countries, et cetera, et cetera. And I would say -- but I don't see -- in general, I don't see that hampering our business. Actually, as I said before, mid, long term, I think this will accelerate the shift from coal to gas. This will accelerate the focus on energy. And that is good for a business like Wärtsilä, because we have the solutions for the future. I mean, as you know, we very much make the case for that shift to 100% renewables. I mean, solar and wind in many, many countries will be the major way forward to move to decarbonization of the energy system. But the sun doesn't always shine and the wind doesn't always blow so you need balancing power. And there are different balancing solutions. But our engines and our battery storage is some of the major solutions for this. And today, our engines are running on gas, and tomorrow, they will run on either carbon-neutral or zero-carbon fuels. And as you know, we have communicated our strategy. I mean, we will have ammonia concept, engine concept by 2023 and a 100% hydrogen concept by 2025. I mean, already today, you can -- our are fully capable of running on all the biofuels and the zero-carbon fuels and all up to 25% hydrogen.

Okay. And the second question is linked to this answer. When you see the plans of all the European countries up to 2030 becoming significantly dependent on renewables? Obviously, there is going to be a lot of new gas but there is going to be huge storage. Obviously, in the storage business, you are already seeing an increase in the business. But when you see the numbers just by countries in Europe, the numbers are immense. I guess, you are going to take the opportunity of this energy transition even much more than what we see today because when you see the numbers that the plant that some countries are disclosing, the absolute numbers of storage, it's -- I mean, it's multiple, multiple times than what we have today. I mean if you just assume that your company can capture part of that in just 5, 6 years, this business should be a huge part of the business. Do you agree with this?

Well, I mean, we have a fairly optimistic view of the growth. And I mean, as you might have seen in our CMD, our view is that the balancing power, in general, will grow by a factor of 8 to 2030. But here, I think 1 needs to be careful because it's not only going to be battery storage. So I think here, we need to be a little bit more granular because batteries is not the solution to everything. I mean -- and we provide both batteries and thermals, so we can provide the major avenues. And batteries are solutions for a couple of hours, but clearly, batteries will not be the single major solution. It will be one of the major solutions. But the thermal side, which is engines and gas turbines, et cetera, they will be also major avenues going forward. So both of these technologies will benefit from the growth that you're talking about. It's also very important. We don't see the engines and the battery storage as cannibalizing solutions. They address different needs, so to say.

Thank you, Luis. [indiscernible] please go ahead.

I appreciate that you don't want to go into detail on the battery business. I mean, I understand it. I don't appreciate it, let me be more specific. I know it. Now can you talk about it on a high level though, give us an idea of how you will become profitable in it. Because it sounds at the moment like the batteries themselves, which are the expensive part of an installation, which are most of what your order book will consist of is essentially a pass-through. So if anyone's going to make money, it's the fellows who make the batteries, not you. So can you just talk about the economics of how this is going to turn into a good business for you? Or is it essentially that it's a loss leader that will help you sell more engines ultimately? Is that the strategy? Just give us an idea of where all this is going.

So I think to -- how are we going to turn our battery storage business around? I mean, first, one needs to recognize that we are investing a lot of R&D and scaling up right now. I earlier got a question. So are you loss-making gross margin or EBIT margin? And we clearly said we have loss-making EBIT margin. So 1 thing we need to consider. We are currently investing and building up. So what are we investing in and what are we building up? I think the -- we see storage, energy storage as one of the balancing solutions, and it's a vital component in optimizing the generation and therefore, energy cost of our energy system. And this is where we see the potential for Wärtsilä to differentiate and make a difference because we are a power generation company. And we have been in power generation. And you could say the design of power systems and the control and running of power systems for decades is part of our, you could say, industrial core. This is also why I don't know if you have followed us when we advocate, we talk about our power system analysis. I mean anybody can do it, but we are doing it, and we are working like engineers, on looking at the system, how can you really optimize the operation, use different tools and battery storage is one of the tools and use optimization solutions to create value for our customers, take down the cost? And this is the area which we are investing and this is part of the turnaround story of our storage business.

Thank you. Next question coming from Anders Roslund. Please go ahead.

Yes, here. Hello. I missed the beginning here, and I just came in when you talked about the Clarkson outlook for this year. Have you any idea about the various ship types here? Or is it just an overall view that yard contracting is going to be slightly lower this year? Do you see any trends within that?

No, I think this is a general observation. And I think also, I mean, many of us, you have followed Clarkson. We have a lot of respect for them but we also know it's rather difficult to forecast in this industry. So I think we need to be a bit careful there. But I mean, as I said, Clarkson conclusion is that overall full year, it will be down compared to last year.

But you have no idea yourself about the various segments where you will see more for its special ships or LNG or any other types of...

We talked about that before. LNG has started the year in a good way, but we also talked about that there is, of course, a limitation of shipyard capacity. I mean, we know Qatar is coming out big projects. They talk about 100 vessels. They started to contract. So there is a lot of a lot of interest, but I think the shipyard capacity is certainly an element. Similar on the container side, large container ships awarded. I think the year started in a good way, but we also talked about limitations on the yard capacity. Oil and gas is still very, very, very slow. If you talk about offshore installation wind farms, et cetera, I think this is a segment that is starting to -- it's growing but from a subdued level -- a small level. And then if you talk about the cruise, it's -- on the newbuild side is still going to be very slow.

Okay, then I'm fully updated.

Thank you, Anders. Next question coming from Tomi Railo.

Sorry, Tomi, we can't hear you.

Okay. Can you hear me now? No, we can hear you. Jumping here for myself. So good to unmute. Just a question on the thermal side. In the beginning, of course, you said that there's still good activity. Can you just maybe comment geographically where do you see the activity? And then maybe as overall comment, do you think that this activity, in a way, improvement is coming from the pipeline or do you see actually pipeline increasing? And maybe third part of the question, do you see still a similar type of mega orders as you booked last year, a couple of those?

So if you look at some of the markets with the high level of activity, I would say, North America and South America. I mean, we recently took another order in Italy, but -- so that is another one. Then I would say some of our core emerging markets is still a similar situation we have communicated before. Heavily affected by COVID, vaccination programs takes time. But we do see a little bit of increased activity also there. Then coming to your mega orders. I mean, these were clearly, as you put it, mega orders in Q4. And that's why I'm so careful when you look -- when you consider the full year order intake for 2021. I mean, we had a real home run in Q4, which was, of course, encouraging. And -- but these megaprojects doesn't come every quarter, so to say.

Thank you, Tomi. Next question coming from Saverio Filippo.

Just a quick 1 from my side. We are noticing that there has been a shift in the LNG propulsion engine market from 4-stroke to 2-stroke. Can you give us your view on that?

I think that's the trend that has been going on for quite some time. And I would say today, if you're looking at the conventional LNG transport where you basically have a very steady operation, you use a 2-stroke because of its energy efficiency. And then where you use still 4-stroke on LNG is when you have more challenging applications, when you have optic applications or applications where you need power peaks and et cetera. Then of course, so this is today, and then, of course, we are looking into new concept, how we can utilize some of the advantages with the 4-stroke going forward, so to say. But this is at the very early stage.

Thank you. Next question coming from [indiscernible].

Hello, I wanted to just ask about the scrubbers. I see your point that if you have a container line and you have fantastic earnings and lack of capacity, you don't want to take it out of service to do retrofits. But still, if I speak to container lines and car carriers, role of company , et cetera, there seems to be still quite a lot of skepticism towards scrubbers, that it is kind of a temporary solution. Of course, we can calculate the profitability on the fuel spread and -- but the need to have a short payback times because seems like most shipping companies don't see it as a long-term solution. Is that something you kind of buy into? And what type of -- do you need?

With a lot of respect, I would have to completely disagree. If you look on the number of container vessels that was awarded last year and if you go back, how many of them -- and these are 2-stroke applications, by the way, how many of them have scrubbers, the clear majority, I don't have the exact percentage, have scrubbers. So I mean, this is not -- the picture I get when I talk to our customers and some of the major container vessel operators in the world.

Okay. And what type of fuel spread is needed, do you think? And what kind of -- how many years payback is typical for shipping companies?

I mean, I would say -- I mean, when I listen to our customers, there are different figures, about $100, $120 and spread something around -- certainly above $100. Today, I believe it's at $150, $160 and this has been stable about $120 for quite some time now. So the spread is clearly there. I mean, but the container operators that needs the retrofit, they are clearly too busy and we all know why. Maybe the logistics challenges we have.

The slower segments like oil tankers come in and doing retrofits?

I'm talking container vessels now.

Yes, yes, I understand. They have the strong market, but the ones that have the weaker markets like tankers, are they doing retrofits now to take the opportunity when the earnings are low?

Yes, they are likely to come back, yes.

Thank you. Next question coming from...

Then of course, the question is, okay, when do you think that will happen? I think there, I would even ask you when do you think that will happen because that is, of course, related to the economy and the transport. But as we see it at least, the transport activities on the container side is still at a very high level.

Thank you. Next question coming from Max Yates.

Just my question was around the software business within energy storage. So are you able to give us a feel of the EUR 700 million, say, that you will deliver mostly next year, what the sort of annual sort of software delivery on that will be? So not necessarily the orders but just the annual sort of -- the annual software. And I also wanted to understand, are there any orders within that where you sell the energy storage system but there is another type of software being used? I guess I wanted to understand the interoperability of the software and the storage systems across the players and whether that's something that's developing.

Yes. So I would say that every battery storage we sell has GEMS so it's closely interlinked. And the reason why, there are many reasons. But one of the reasons is that GEMS is also part of the safety control and monitoring system. We have some real-time analytics of how the battery is behaving, and we use that to optimize the operation and the lifetime of that. So GEMS, the software platform is on every storage installation we have. On top of that, we are also using GEMS for some of the power system optimization that we do when we -- for instance, we have a couple of examples when we integrate solar farm with thermal and a battery storage. So we also use it not only to control the -- and protect the battery system, we also use it to optimize the operation with other generating assets. And this is where my power system logic that I explored earlier came in. Now my understanding, how big share of the revenue is la, la, la, we don't open up. But clearly, so far, the software business per se today as part of the revenue is a minor portion, but we are not breaking it out. But we do see it as a growth avenue going forward.

Is it fair to say, though, the real value-add is in the way that it interacts with the grid, so it's not so much the sort of GEMS monitoring the battery because it almost feels like every system would have an element of battery monitoring. The real value add is and the real revenue opportunity is when it interacts with the grid. So is that going to be a much bigger defining factor in your success of your software business, is that fair?

No. I would say that it's actually 2 things because one of the major drivers of performance and economy in battery storage is, of course, knowing your batteries very well, knowing how they have been utilized and using that knowledge in digital twin, et cetera, to make the assessment how long will this battery last? When do we need to replace it? How much power can you use it at every time, considering temperature? So you could say that GEMS is -- or the battery -- the software system is actually, you can use this like any control system to really make sure that you optimize the operation of the device, the battery. So there is actually a value in it. It's just not a stupid monitoring system and you can apply any -- we like to use this to really make sure that we, if I may say so, cram out the most we can of the batteries, to create value for the customer and, of course, to be competitive. Then the other element, as you pointed out, is clearly the capability to provide power system optimization services, which can be everything from operating a battery together with other generating assets to make sure that you have the lowest energy cost or it could also be to provide trading facilities for energy companies, where they can actually utilize the battery storage as a tool in their trading strategy.

Could I ask just 1 very quick yes or no question, which is, do you think your market share in software is different to the hardware i.e., the battery storage when you look at energy storage software versus hardware, or do you still think you're a top 3 player in both?

No, I think there's a strong correlation so I would say we are top. Because we don't have any other companies, software system installed in our batteries.

Thank you. Next question coming from Johan Eliason.

Yes. While we are at this subject, how the business model will work around the battery games and your thermal plants, were there, last year, sort of any orders where you have both the thermal and the battery backup or a path to future thermal or whatever? Any links between them basically?

Yes. And this is what we are evolving. We have some island installations where we have that. And this is one of the avenues we clearly see as a very interesting area where we can create value, especially for our industrial customers. The industrial customers, they are often, like mines, cement factories, big power consumers, many times located in remote areas or in countries or regions with weak power systems. And this is where we can bring in battery storage. We can bring in solar, wind, we can bring in our thermal and we can make a mix out of this and use GEMS as a quarterback in this system to make sure that the customer has the lowest energy cost and the needed uptime reliability. Because in those industrial applications, uptime and reliability is so important. If a mine is standing still, the costs are huge.

And then I get to the question, where do you expect to generate the profits because the storage is with some certain competitors, the thermal is with other competitors, I'm guessing today. How do you see -- are they each going to be profitable on its own or is it a combination?

I would say the thermal will be with us. The storage will be with us. Wind and solar will be with somebody else. And basically, we provide equipment and then we have a service agreement and a performance-based service agreement coming back to the service value ladder that I talked about before, where we can warrant certain uptime reliability and certain fuel or energy consumptions, and we tap into that.

Okay. And then generally, I mean, we have been talking about this thermal backup potential when the renewable world is here for a decade or so. We haven't seen much. But now we are starting to see the battery backup coming strongly. Do you see this as the first step, and the next step will be the thermal backup as well, or why is there the difference?

I say with a smile and I'm humble, I mean, we do have the proof form. It goes back to the last year's order intake. We have Omaha. We have Italy, we have da, da, da it's coming. I agree fully that vessel has had this message for quite a few years about balancing power and the need for balancing power. And it has taken longer time for things to materialize but it's happening as we speak. I mean, last year, we had very concrete proof points.

And it goes hand-in-hand with the battery backup business today, you say?

Yes, we should -- sorry, we need to change the language. It's not backup, it's balancing power. And as I said before, -- I mean, batteries and thermal, they are complementary. They are not direct competition because they cater to different needs of the power system.

Thank you, Johan. Next question coming from Andrew from North Rock.

I wanted to stay on the energy storage business. Obviously, you had just phenomenal growth in 2021, 6x -- your orders on the megawatts were up 6 or 7 times. Did you sort of take material share in the market or did the market grow that quickly? And if I think about the '22-'23 order intake, can it grow materially again along that sort of 30% market growth you outlined at the Capital Markets Day? Or did you sort of overgrow in '21 as there a little period of digestion here?

So a couple of things. I mean, firstly, if we look on the overall market growth going into 2022 and beyond, we still, as I say, see a lot of activity, for sure. Then I also said that we do see, you could say, a general price increase driven by the supply chain that we talked about. I think that might impact the speed of the market, so to say, because prices are going up and that is affecting the market price, not the Wärtsilä price. The market price is going up. And that might affect or might delay a little bit some projects. But I do think that as some gentlemen here earlier in the call pointed out, there is a lot of demand, so to say. So overall, the growth of battery storage, I see it rather positive with, maybe with a hiccup because of this, the supply chain challenge, so to say. Then coming to Wärtsilä in 2021, I think that we grew faster than the market last year. So you could say that we increased our market share last year with the order intake that we had. And we will continue to grow with the speed that we can deliver on. I think this is critical for us that we can also execute on our order backlog.

Got it. And just on the pricing comment. Obviously, with the battery things a big component of that, I guess the prices of battery is going up. How does your supply chain work? Are you locking in prices 12 months in advance? We've seen, I think, FREYR Battery announced a storage provider has signed a long-term agreement. Do you have this in place or how does that work?

Yes. No, we have long-term contracts in place with our key suppliers.

Okay, perfect. And just 1 last 1 and I'll hand it back. On the large EUR 480 million order you took in 4Q on the power generation side, are those sort of rolling out as planned? Obviously, it's a different industry, but Siemens can amass pretty material problems with some power projects in Latin America. Are you comfortable with that?

So in general, I'm confident on our execution, I would say, both on our thermal side and our battery storage side because we are leveraging the competence that we have from before and from the thermal side into the new business. I mean, we all know -- many of us know the challenges that Wärtsilä have had on project execution, if we go a couple of years back. But I would say there had been some serious learning made and also some actions taking, stepping out of certain segments. We talk about the LNG terminals here earlier, but also stepping out to certain other segments and also strengthening the project execution and also making some change to the team and management. So I think we are going in the right direction when it comes to the project execution. Then we are a project business and in a project business with a portfolio, you will always have -- projects are doing very well, you will have projects that are doing less well, but you should really avoid those really outliers -- negative outliers, I must say.

Thank you. The next question is coming from Josh.

Sorry about that. Staying on the storage business. So if I understand you right, the GEMS software is the differentiator. It's clearly not the battery since you buy those in. How long can you keep that -- I mean, to what extent is that a competitive advantage for you at this point? Is your software better than other people's? I mean, I know your competitors talk about their software as doing all the great things that yours does. Is there really a difference between them? Will that difference be sustainable? Or will even the management of these battery systems become commoditized within a few years?

So of course, the software in itself is just a -- you could say, we implement knowledge in the software. I mean, the value creation and differentiation is, of course, the knowledge that we have implemented in the software. I mean, anybody can write code. So do we have an edge on that? And at least that's why some of our major customers are telling us that. So I can -- I think we get some good customer feedback. And here, I think we do have -- considering our DNA, considering our heritage from the power industry, I think we have some fairly in-depth knowledge on how you run thermal power plants. And we are deep. When we cooperate our storage with thermal, we are deep into our own control systems, and we can make some good stuff out of that. And if you haven't been in that industry, I think it's -- yes, it's very hard to do so. Then to balance this statement, do you need that knowledge for every battery application that is out there? No, clearly not. I mean, the -- and that is also -- I think we will need to be a little bit more granular on -- first of all, there are different customer segments and with different needs in the storage market. There is storage, there is storage, there is another storage. There will be highly commoditized applications. There will be differentiated applications. So -- and I think the market, the customers, we will learn more about this as we move forward. But coming back to your point, could you actually create sustainable competitive advantage with your knowledge implemented in your software? I would argue so, because to learn how you run the thermal in combination with battery, it takes some -- well, it has taken us some experience, some years to build that experience.

Okay. So you're taking business now where a customer is already running thermal plant. And if he isn't, then maybe that's not necessarily where you win the deal. I assume a lot of the price -- a lot of the competition is on the basis of price, too, right?

Yes, it's a combination. It's a combination. As I said, it's not clear cut. And I was just trying to deepen the perspective a little bit about different segments. But it's not like -- we are clearly taking orders also when it's also only battery storage without thermal, but -- so it's not a clear-cut solution. I mean, sometimes or if you take a single battery without thermal, it could be an island application where you have a fairly complicated grid situation with the wind power and you have a cable to shore, et cetera, et cetera. So there are different applications where we can really leverage our power system knowledge.

Thank you. Next question coming from Antti Kansanen.

I'm going to follow up with the same theme of battery storage. And it's been mentioned many times that it's potentially a huge market. And Hakan, you also said that you will only book orders so that you can actually deliver them. So could you talk about -- a little bit about maybe choosing certain target industries, whether it be geographical or whether it be something that the complexity is in line with your software capabilities, perhaps have synergies with your thermal business. So when do you think it's the time to be more selective and which could be the most attractive target markets for you?

So I mean, this is also what we communicated at CMD because some questions were raised about our growth trajectories and the overall world growth trajectory. So clearly, I think we communicated already then that we have certain geographical focus. I mean, North America, South America. China is not in focus. India is not in focus. So we have already -- Europe is, certain countries in Europe are in focus. So we do have some geographical focus areas.

But nothing more specific than that regarding you're still going to target industrial, you're going to still target oil producers, trading companies, all of...

Yes, we do target those different customer segments. But I think clearly, our power system, you could say, angle, has a lot of value in the industry segments. And for some utilities and for some IPPs, it has and for some, don't. So we are active in all customer segments where we can find an angle.

Okay. And then perhaps I'm not sure if I'm going to get an answer here, but thinking about kind of the investments that you are making to build up the scale of the business, and I'm sure you won't mention the size of those investments that you are making. At the same time, you are talking about taking orders only so much that you can deliver. So can we get a sense of just size and scope that you are kind of targeting for the business perhaps before it starts to mature and show profits or any guidance regarding how far away are we from that time?

No. I mean, I think we're going to continue to grow the business. It's not -- we're going to flatten out, so to say. We're going to continue to grow.

Thank you, Antti. Next question coming from [indiscernible].

Regarding -- if we go back to the margins, we see now that order intake and sales are not so far from where we were 2017/'18 around almost EUR 5 billion in sales. Back then, you had margins around 11%, 12%, something like that. So if we take a look at -- if we exclude your battery business, if we call it like that, could we see the same margins that we have back then with that turnover that you will have?

As I said, we don't give guidance on margins. I mean, we clearly said that our target is to get to 12% over the next few years. And I think we also indicated the drivers to get us there. I mean, it's a combination of growth in thermal, in batteries, certainly in services and working with continuous improvements. This is the way -- this is the plan how to get them.

Okay. Because you can also calculate backwards that you can see that the order intake, if you exclude the batteries is around EUR 5 billion. So had the other businesses shrined the last 3, 4 years, so that is also 1 reason why we don't see margins on the same levels that we saw before the COVID, you can say.

Yes. But there are a couple of elements to that and 1 is the scrubber business. As you know, the scrubber business went through a boom, and just in front of the introduction of the regulation. And scrubbers have become a much more competitive space. So that is 1 component. Another component, as we all know, I mean, the thermal business have been running fairly slow. I mean, if you go back 2020/2021, beginning of 2021, it was fairly slow. So still with fairly low utilization and we talked about that in the past. So there are those -- a couple of those elements. And then you can also say that the -- yes, for a while, the service business, especially on the cruise side, was really down.

Okay. So there we pinpoint service in Marine, then thermal, a bit lower activity and then price pressure and competition in scrubbers mix -- mix up. And of course, the investments in the battery side also on top of that. So because when you take a look at the -- sorry, I take a longer time because if you see other companies in the capital goods sector, many of them are back with record margins. And so that is the reason why I'm asking. So you are lagging a little bit behind your other engineering companies in the Nordics. So we have to find out why is that, so okay. Thank you very much.

Thank you. Next question coming from Daniela Costa.

It's just a very quick 1 and really just more to understand sort of -- you mentioned a few times you don't give guidance on margins. But Wärtsilä is a backlog-driven business in a large part of the business. So just wanted to understand a bit more with why you decided to not give guidance on margins. Is it timing uncertainty? Is new technology in Wärtsilä, what's the rationale?

No, I think the major element continues to be COVID and the situation that, that is creating. And one might think -- I mean, if you're sitting in certain parts of the world, I mean, we feel that COVID is over. Certainly, I'm here in Finland and by end of March, Finland will be opening up and many countries in Europe are opening up. But if you take more of a global perspective, there are still many countries, Asia and many other countries, that are heavily affected by COVID, where business is clearly hampered and that is affecting us. And it makes the -- it's very hard to make a forecast quite frankly. I mean, just put -- now we went through Omicron. I mean, in 2 weeks, that could be a next variant.

But COVID -- ex COVID, in your -- when you look at your backlog in terms of like the gross margins on your backlog versus how they were in the past, could you maybe comment on that?

Yes. But even if we have a backlog, if we get a standstill, we will not be able to service our customer properly. I mean, we have faced those in 2020, where it's very hard to get on the ships because there are so much restrictions. Backlog, we have had in 2020 -- 2021, we had project executions in certain countries where we need to stop the execution because we -- you cannot work on the site when you get COVID, and then, of course, that affects the whole sales process. So even if you have an order backlog, which we do, there is still levels of uncertainty on the execution of that.

Thank you, Daniela. Next question coming from Tomi Railo.

One year as CEO of Wärtsilä, a little bit over, actually. Hakan, if you would need to list successes or disappointments, learnings, what to focus on going forward and the development areas, what would you say?

I think it's been a really interesting year. I mean, it's not been easy to come in when you cannot meet with your teams, considering the COVID, we talked a lot about that. But I must say that on the positive side, I must say that, what surprises me is the strength of the decarbonization movement. And both on the Maritime side and the Energy side, there is a lot of interest from our customers. We can clearly say that. Then, of course, we all know these are capital-intensive, big project industries. They don't move from 1 quarter to the other. It takes years to evolve. But I think this is very, very interesting. I think other reflections is that considering our execution issues that we had a couple of years before, I think there was some good -- painful learnings but good learnings made. And we're going to continue to implement some of the discipline about tender execution, which markets you're going to be in and project execution. I mean, major -- what are the risks or what are the uncertainties? And I -- when you look at the growth avenue and the journey for the operating income margin. I would say it's COVID, but it's, of course, also the speed of the decarbonization because the faster it will go, I would argue the better it is for the world and the better it is for Wärtsilä because we have the solutions for the future. But I mean, I'm also very humbled because it will take different time in different parts of the world. And to the point that somebody made earlier, we were very early out with the balancing. It has taken a couple of years for this to really concretize, but we do see it coming. So I think the 2 major uncertainties around that sort of story, if you may, so is still COVID and is the pace in the decarbonization transition.

Thank you, Tomi. Next question coming from Matthew Donen, please go ahead.

How should we think about the impact on profitability for the Marine Systems business due to the shift in product mix away from scrubbers towards the gas handling equipment where you've had some big orders? And do you see the shift in mix as something quite temporary and then return back to normal once the container ships come back to the yard?

So I think when it comes to exhaust and the scrubber business, that was a business that went through a period of very high profitability. But I think we went through that peak. And the price level is clearly at lower levels. I think the 2.0 there is carbon capture. And as you know, and we have talked about that, we are spending a lot on R&D and focus on developing carbon capture in the -- in our exhaust business. And we are teaming up, et cetera, et cetera. So yes, I think that as -- and then I should -- but it would take a couple of years for carbon capture to evolve. I mean, we are in the -- you could say, in the R&D or development phase now.

Okay. And then just a quick follow-up. Do you think then the mix will shift back towards the scrubber business as you make those investments and the container ships come and do their retrofits?

Well, if we talk about -- you could say, if we talk about the scrubber business, the ships will come back for retrofits, they will. But as I said before, if you go back a couple of years, if you compare the profit margin of the business, it has gone down. But then comes to the next step after that. And this is where we start to launch our carbon capture business, and then that's the start of the next journey, so to say.

Thank you. Next question coming from Ethan Chung. We cannot hear you. Please go ahead with your question. Okay. Maybe let's take [indiscernible].

Sorry, it always takes a little bit of time. Not many years ago, do you -- they said that you could have more competition from smaller gas turbines when it comes to power business. Like Mitsubishi and Hitachi developed a new small turbine to compete with you, with the power plants below 500 megawatt. And that could put pressure on your margins. Have you seen anything of that? And we have seen also since '17/'18, that the total power market has grown from 30 gigawatt up to 46 gigawatts. So now we are back where we were 2014, '15, something like that. So have you -- had the development helped you? But on the other hand, have you got the headwinds from the small turbines that maybe came in play? I don't know. So that's the reason why I'm asking.

So yes, we are not in 500 megawatts. We are like in 10 megawatts and over, but that's a detail. I mean, the lot of your question is still very clear. I would say that yes, we are competing with the gas turbine guys. And sometimes they win and sometimes we win. And I get a lot of questions about market share because if you look on our market shares now and we've communicated, it's like 5%. Normally, we have been 10%. I think we peaked at 14% if you go back a couple of years. But I would say I'm cautiously optimistic because in this project-oriented business, you take a couple of these megawatts and when you deliver them, we haven't delivered our megawatts, that will make your market share grow, so to say. So -- and our gas turbine colleagues, they have had a couple of home runs in certain markets, and we're going to have some home runs going forward in our market. So the competition is there. What I really like being on the engine side is that we have some of the key characteristics in the flexibility ramping up or up and down quickly, frequently. These are some of the key characteristics of engines. And those will be coming -- and another element, I would say, fuel flexibility. And those key characteristics, they will become even more valuable as we move forward. But of course, the gas turbine guys, they are not standing still either. So they are, of course, trying to improve that technical solution as well. But fundamentally, I have a lot of confidence in our technical and technology for the future, considering what is coming on the balancing side and then also the need for fuel flexibility.

Thank you, and thank you for all of the questions. It looks like that there are no more questions. Please remember that we are hosting another call on Friday this week. It will take place at 1:00 Finnish time. And also for your information, also the recording of this event will be available on our Investor Relations website. Thank you for your participation.

Thank you.