Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Hi, everybody, and welcome to this pre-silent call organized by Wärtsilä Investor Relations. As you have recognized, we are organizing more larger calls, including these pre-silent calls. Always before the pre-silent period is starting and then also the CEO mid-quarter calls. My name is Hanna-Maria Heikkinen. I'm in charge of Investor Relations, and I have here our CFO, Arjen Berends, as well. And we will start the call by a short summary of recent development. And it has been very unfortunate to see the development in Europe during last month when the crisis in Ukraine started. But, Arjen, please, I start with a brief summary.

Yes. Thank you, Hanna-Maria. And yes, I think your point was right, it's quite a very unfortunate geopolitical situation in Europe and the Ukraine crisis is something that nobody, let's say, wishes for, human safety and prosperity are, yes, high importance to Wärtsilä, and of course, a peaceful business environment is, of course, the best way to operate or the best environment to operate in. So Wärtsilä has also clearly condemned the war and clearly also committed to, let's say, sanctions, which is on the continuous development. I would almost say it's changing by the day, if not by the hour. We will comply to all sanctions that are already enforced and will come. We have, as a consequence, also limited our -- or restricted or suspended all the exports, deliveries, sales, et cetera to Russia as well as Belarus. Sanctions direct impact on the supply chain, not much. We don't have a lot of suppliers, neither in Ukraine, Russia Belarus. So that's quite insignificant. But of course, indirect, let's say, through, let's say, energy prices, oil and gas, metals, et cetera, that is clearly something that we -- can you please mute if you don't speak?

Yes, I think everybody should be now muted.

Okay. So cost inflation and supply chain bottlenecks are clearly issues that they're seeing. And actually, we see accelerating more and more suppliers also come to us. And yes, I want to discuss, let's say, prices, not only for renewal of agreements, but also during, of course, we are pushing back as much as we can, but the pressure is definitely building up. Let's say, metal prices gone up the last month at 20%, 30%. Certain metals like nickel, et cetera, even 100%. It was a full stop on the LME in early March, but also, let's say, semiconductor. So escalation in cost inflation came already through, let's say, with COVID in the last part of COVID, but definitely have accelerated now in -- with the Russia-Ukraine prices. Looking at the positive side of it, of course -- okay, there is no positive side to the war. But let's say, the increased oil and gas price is also -- yes, give certain opportunities. Let's say, fuel saving devices on the marine side, clearly, let's say, more interest, but also, let's say, the longer term or I would say, mid- to longer term, let's say, the wish from Europe to become less dependent on Russia, oil and gas is, of course, also supporting, for example, transport of LNG, but also, let's say, the push for more renewable power generation in Europe, which also requires storage and balancing power solutions. So there are clearly also opportunities. But I think short term, it's -- yes, I would say it's more challenging than offering opportunities, to be very frank. Marine side, let's say, containership business still, let's say, doing very well, let's say, high freight rates. I think they make good business demand for LNG carriers, as I just mentioned, may increase as a consequence of the Russian crises, Russia-Ukraine crises. But let's say, buying more LNG carriers and getting them to the market will be challenging because the order books at yards in Asia are pretty full already for LNG carriers. I recently heard it that if you want to buy an LNG carrier, delivery times are more in the range of 25, 26. So it's pretty far away. Increasing oil price, of course, will support likely, let's say, the tanker business also in the long term, offshore oil and gas may also have some positive effect, but there are still a lot of vessels out there. So it will not be, let's say, in the short time. Cruise fleet activity also -- and that's not purely due to the crisis, but let's say, also with the Omicron variant, in the beginning of the year, we saw a little bit, let's say, a slowdown in the, call it, a recovery to the active cruise fleet today is approximately, let's say, 70%, which it was also more or less at the end of last year. So it has a bit, let's say, flattened out. But basically, when we talk to our cruise operators, they basically all say that before the summer, they are intending to have, let's say, their full fleet back into operations. Of course, many, and I would say, almost all have said that, of course, like St. Petersburg, we will not, let's say, talk there anymore. That's in short as an introduction, and I would like to open up for questions.

Thank you, Arjen. Good summary. So I hope that there are lots of good questions. So if you have a question, please just Raise Your Hand function. The first question is coming from Max Yates.

Just my first question would be around energy storage. And if I just look at kind of what you have announced this quarter, it does look a bit lower. And I guess, I'm not so much sort of obsessing about market shares, but we've seen kind of this business running anywhere between sort of EUR 100 million to EUR 150 million per quarter. So I just wanted to say -- am I right that this does look like sort of lower quarter of storage orders? Or is there anything kind of going on, I guess, in unannounced orders that we should be aware of?

I think it will be a bit on the lower end of that in the quarter. Of course, there are a few days to go. And let's say, we have a good pipeline. But the price increases that I was reflecting upon that is coming through the system now. If you take lithium, for example, which is a major part of, let's say, battery business, increased about 500% over a 1-year horizon and more than doubled since November. That, of course, in new orders, we clearly see coming back also, let's say, from our suppliers, which we, of course, push on, and I don't think we are the only one, I think our competitors are doing the same, push on to the supply chain. So even when we have quotes, et cetera, outstanding, we are coming back on those and say, okay, sorry, the quote is not valid anymore, we need a higher price because the price is just escalating beyond what we could expect. And that, of course, is a bit of a shock on the receiving and on the customer side, which then okay, makes them reconsider. Some might step out, let's say, based on that. But as our competition, at least that's what we hear is also thinking about price changes and also communicating that. It slows down the decision-making. So the conversion speed from offers to contracts is slow at the moment in storage. We will have some orders, but it will not be the high end of, you could say, a normal quarter.

Sure. Understood. And maybe just, sorry, secondly, would you just be able to walk us through how much is your sort of direct raw material purchasing. So not components, but just what your absolute raw materials purchasing is? And is there any way to quantify in terms of thinking about kind of how much that could increase year-over-year? And to what extent you're hedged just to try and kind of help us walk through how to maybe quantify the comments you made about costs going up and particularly sort of 20% to 30% higher raw materials costs?

I will not, let's say, break down the cost structure. But of course, batteries are a big portion of the supply that we do. And then...

Sorry, I actually meant for the -- I meant for the whole business, not just storage, right? Just maybe the group a bit more.

For the whole group?

Yes.

But you mean, let's say, the whole -- okay that is...

Maybe just how you -- I mean how you manage -- or how worried we should be about raw materials going up 20% to 30% on projects that are already in your backlog? How does that mechanically work? Are you hedged? Do you renegotiate with the customer? Just how much of an impact could this have in the short term?

Okay. Now, I got your question more clearly. It's different per business type. Let's say, if you think about an EPC contract, where you have civil engineering and then all kind of, let's say, big buckets of costs. Before we sign a contract with the customer, we want to secure, let's say, that cost structure. So we need to get the confirmation from the supply side that this is the price we have to pay to them. If you -- and so -- and let's say, for the big bucket items that's always down. So there, we should be fairly safe. Of course, there is always, let's say, attempts to still later on increase, but I think we manage that pretty well at least so far. If you go, for example, to the build-to-order activities like engines, for example, it's a lot of components going into an engine. And let's say, the way we cover the supply chain here is that we have life -- let's say, long-term agreements with suppliers. And okay, it varies, of course, by supplier, let's say, sometimes it's 2 years, sometimes it's 3 years. But typically, it's a more than 1-year agreement with suppliers. And of course, they are made continuously. So let's say, also the due dates of these contracts are, yes, anytime there is something due. When they are up for renewal, then of course, you will have the pressure at the moment because there is hardly any one that you can squeeze down in price. I think in general, we can say that the tendency is really up. I think all suppliers are increasing prices, you could, more or less, say, and that's -- let's say, so these longer-term agreements is basically that part. But of course, let's say, the longer you get in time and the inflation is, let's say, pushing you, or our cost of inflation is pushing you. Yes, the trend is up, right, let's say, in the average you're still -- or gradually pay up. Of course, for us, it's key to make sure that we are very quickly, let's say, updating our quotation system so that we are not acting as the sponge in between. That's fairly straight and easy or easier, you could say, for a service business. You can switch quite clearly between, let's say, the cost increase and, for example, the global spare part list price. It's a little bit more cumbersome for, let's say, new equipment sales. And here, let's say, if you go 2 years back, we had more or less a routine that we, now every quarter, would review the prices. Now it's more biweekly actually because the changes are so frequent today. So really, let's say, on the radar and we are trying to mitigate as much as possible and not act as a sponge in the middle, but it's different for, let's say, EPC, for example, versus big equipment business.

Next question comes from Daniela Costa.

If I could ask 3, that would be great, but I'll ask them one at a time. I just wondered if you could help us thinking about like higher gas prices in general, when you think about traditional. I'm thinking on the energy side, when you think about your traditional gas plant business. How do you see the dynamics there, I guess, from one side, maybe utilization versus investment in equipment? Sort of like what's the puts and takes there in terms of the implications of a longer-term higher gas prices?

Okay. It's -- okay, it doesn't change that quickly. Let's say, of course, immediately, I would not say there is a big impact yet. But of course, if the gas price, over a longer period of time, stays high, it might have a, let's say, impact on the, let's say, on the decision make. Fact remains that, let's say, if you have a renewable power plant and you have storage as backup for 40 hours, you need something beyond that. And what are you going to use for that? Is it then, let's say, gas? Is it diesel? Is it something else? And whether you go for, let's say, engines or if you go for turbines, it's probably gas that you need despite a high gas price. Of course, one should also remember that, let's say, running the balancing power plant with lower running hours from a gas consumption point of view if something totally different than baseload. So I think that's, I would say, for balancing power, I think it will give actually opportunities because longer term, I mean, because there will be more push for renewables because it's the cheapest home of generating electricity, and for that you need storage and balancing power and balancing power with engines, as I mentioned earlier as well, in other calls, is from a flexibility point of view, the most feasible one.

So anything interchangeable what you do in energy. So you see it as a net positive or...

Sorry, can you repeat?

I mean when you said like balancing power. So if you break the portfolio down at the moment now, there's a part of energy, which is storage, there's a part which is balancing power and there's a part that's maybe more traditional stuff. Like can you give us like size-wise of these parts so that we understand? Is it -- do you see overall higher gas prices are net positive or...

I think it's a bit difficult to say because, let's say, the lines between, let's say, what you sell today and also what you sold in the past, actually, between what is, let's say, baseload and balancing power, they are quite vague actually. Because what we sold -- also, we have power plants that we sold historically as baseload, they are now balancing power. So it's changing, it depends -- the environment. Let's say, if the plant is in a place where there was also a lot of coal power generation, renewable has been implemented, now they shut down the coal. We are also places where, let's say, low -- plants with lower running hours before are now higher running hours. So you basically have all variations in the mix so to really say, okay, the net positive is difficult to say. Fact is, balancing part from a service perspective, let's say, our service business correlates with running hours. So let's say, less running ours is also less service business and what we try to offset that then by more balance some -- through agreement.

I'm not sure if it's my line that is breaking up.

Others are muted. So yes, we can hear you well.

Okay. One question regarding sort of like your longer term, and I know the 12% margin, you are not anchoring anything near term on that. But when you draft that margin, what assumption do you have for the storage business over the longer run? Do you think this storage business is going to be as profitable as the rest of energy? And I know you've been clear, it's not at the moment, and it's still loss-making, but just wondering in the makeup of that 12% margin target, what is behind it in terms of assumptions for the different components?

Clearly, let's say, part of that 12% is that the storage business is a profitable business. So by that time, storage need to be a positive contributor and not as today, negative.

But do you see it over the medium term as profitable as the rest of energy?

We have said in a few years, it will be profitable, and I will not further comment on it.

Daniela, we'll move on to Johan Eliason. And let's take one question by one analyst first.

Sure.

Johan, please go ahead. Johan Eliason, please go ahead.

So sorry, I had some technical problems here on my side again. So I was just wondering talking about this LNG, understanding all the shipyards are fully loaded, et cetera. FSRUs have been important sort of orders every now and then for you historically. Is that an opportunity you could see improving? Or are they basically produced at the same shipyards as the LNGs anyhow? So is the outlook is as limited as for the general carriers, would you say?

No. Again, difficult to answer. So straight -- at least I have not heard, let's say, from the internal organization, say, front line sales that FSRU is expected to, let's say, suddenly start to boom. Of course, let's say, it might be now with, let's say, high prices, it's probably more beneficial to explore. In my memory -- and this is now from my memory from a few years back when I was the division controller for Marine business, let's say, the FSRUs are not built at the same, okay, they are also built at the same yards as LNG carriers, but they are also built in China, for example, where it's not so much LNG carriers being built today. So I think there is still probably some -- it is now a bit out of my own speculation, but there is probably some space to do so. But the question is that will it happen short term? I don't think so, frankly speaking, because typically, investments in offshore require a certain, let's say, stability in the oil and gas prices before they really start investing big sums of money into new equipment.

Okay. Just shortly on these higher energy prices. I mean, you do sell your power plants to a lot of emerging markets over the years. Do you think these high energy prices overall will sort of put a lid on that demand? Will it basically become too expensive for a lot of your end markets?

Okay, that's a difficult question. At the end, everybody wants energy, right? So -- and the energy, let's say, need is just going up. So it's more a question, okay, what is available? So let's say, also, the move into more green environmental-friendly solutions, gas solution or gas power plants, for example, there in the future, much easier to convert than, let's say, if you invest in the coal power plant or diesel running power plants. So there are many considerations, I think, on the customer end to make the call that, okay, let's not invest anymore in gas power plants. I think that's too early to conclude. I think it's probably on conclusion action.

The next question comes from Sven Weier.

So my first question was on the navy exposure. I think last year, you had around about 20% of the Marine book e-orders coming from navy. So the first question I had was what was causing this big bump up that we had in Q4? It seems like you had a very big navy order there. And secondly, I mean now that navy is even bigger than gas carriers for you as an order intake, how do you look at the upside potential from rising defense budget? That's something you expect to benefit from?

Yes. Of course, it's a difficult story. Let's say, as you probably have read as well, let's say, there is now a more united Europe and more united NATO than ever before. And let's say, okay, lots of communication has been put out there, I think from Germany in front with the EUR 100 billion investment in defense industry. Will it all go to navy? Will it be, let's say, air carriers or let's say, I mean, airplanes or, let's say, land-based. Okay, I don't know. I think nobody here in the call knows that really. But likely, let's say, that is conscious awareness of, let's say, threat and united NATO, yes, will push, let's say, defense budgets and that might have a positive impact to, let's say, our navy business as well. But I would still -- this will take a bit of time to materialize because building navy vessels, for example, is not something short term. We quickly fixed it.

And could you comment what was causing that huge spike in Q4? Was it a single order? Because it was quite remarkable.

I will not comment on, let's say, single orders. And to be honest, I don't even know it out of my heart now.

Yes. I think normally, we publish all of the releases where we have the permit from the customers. So unfortunately, then it's impossible for us to give additional color on those.

And the follow-up question I had, if I may, was just on the hydrogen readiness of your engines. I think so far, I think you're planning to have it 100% on hydrogen by 2025.

Yes.

Is there any maybe intention to accelerate that? Because I could imagine if a power plant client makes a decision now they want to have the full flexibility to go to hydrogen and -- but there not been incentives to accelerate that?

Of course, let's say, we have this market 2025, and I would say that's really the latest. Of course, if we have opportunities to accelerate, I'm pretty sure we will do so. But I think it's too early to, let's say, commit to that because there are -- in an R&D process, nothing is guaranteed, right? So let's say, there is iteration required, testing required, et cetera. So you can push it, but let's say, by pushing it, you also increase the risk. So we need to find the right balance, latest 2025.

Is that a reason for our clients to be hesitant at the moment to order because they want to wait until that it's ready?

At least we don't hear about it. No.

Thank you, Sven, it was already quite many questions. So let's move on. Next question comes from Andreas Willi.

I would like to ask about the kind of profitability drivers. If you look at Q4 last year versus Q1 this year, is we already had I think a mix in Q4 that was going against you. Should we think generally that the mix is relatively similar now? Or is there another change in the mix in terms of OE versus service? And are there any other specific items we should be aware of that change? Is there a step up, for example, in some logistics or raw material costs or things like that, that just happened because they normally roll over in January 1.

Let's say, to answer your first question, okay, I will not be too specific here, but let's say, like also, let's say, Hakan has mentioned earlier in this call, let's say, this year will be a new build year. So that will be all through the year. That's related to mix. If you ask about cost inflation, as I started in this call, we have seen an acceleration of cost inflation discussions, but also reality coming through actually, I would say, the last 2 months, you could more always say. And that us -- I could also say it's beyond our own expectations. Of course, we are trying to mitigate that as much as possible. And as I said, on the service side, it's more easier. Let's say, on the renewable side, it's more challenging. But that's really a headwind we are facing and that we are facing with, you could say, accelerated pace.

And the second question I had is kind of if we look at indirect Russia exposure, maybe you could elaborate a bit more on that. I heard from another company, for example, that they had Russian ships booked for logistics, and now they don't want to use them anymore and so struggle to find an alternative. Like since that pop up, we may not think about in terms of indirect exposure, either larger suppliers, logistics or something we should be aware of.

As I mentioned we don't have a significant or insignificant, you could say, on supply chain in Russia and Belarus and Ukraine. So in that respect, I don't think we have any risk or indirect impact. Logistics, I think it's a bit too early to say, will it hamper logistics. I think logistics was already quite significant problem before, let's say, this whole Russia-Ukraine prices started with all the port congestions, let's say, the hike, you could say, in the container, shipping prices and basically in all shipping prices. So I think that problem was not new. It's just, let's say, getting more firm, right? Let's say we do not anticipate this on the short term to come down actually. So in that respect, let's say that logistics is a remaining challenge. And I also would say that cost inflation, I don't expect that, that will ease down very soon either.

Thank you, Andreas. Next question comes from Antti Kansanen.

Well, a bit clarity on the storage side. And I mean, if we continue to see this high volatility and acceleration on the battery raw material prices and that will lead to continued hesitation on booking new orders. Obviously, it would mean that then you have less projects to be delivered back half of this year and going into next year. So how should we think about then the cost base in the storage side? Are you still kind of preparing for continuous market growth and investing in higher fixed cost base and that could maybe, let's say, postpone the, reaching the breakeven there? Or will you be more flexible on the cost side as well if you see a weaker market?

No, we are very focused on, let's say, building the flexibility into, you could say, the whole system. That's why I think it's a great benefit that's a storage, energy business, you could say the thermal side of -- is very deeply integrated. Let's say, there are many functions and resources like sourcing, logistics, project management, controlling, et cetera. There are a lot of functions that you can use on both ends, depending on the load. And you can also, let's say, maneuver them fairly easy. So let's say definitely considering what's happening out there, we are very careful with increasing the cost beyond what we believe is wise to do and maximize on these, call it, flexibility within energy.

And then can you remind us what's kind of the average delivery time for a storage project that you have? Or how long of a backlog you have there currently?

I would say that the average, okay, around a year, I would say, perhaps a few months more. Depends a bit also on the size of the plants. But I would say, ballpark, a year. If you look at it, I think it's probably easier to say, okay, the EUR 720 million order intake that we booked last year, the majority of it will probably be delivered this year.

The next question comes from Erkki Vesola.

Yes. Stock is specifically about the service business and [ spare ] dynamics. Would you describe this activity now in terms of availability, okay, spare pricing, logistics, access to customer sites, et cetera. I mean, are there any discrepancies that we should take into account? Or how would you kind of wrap this up?

That's a lot of questions in one. And on pricing, as I mentioned earlier, let's say, the fact that we see increased pricing or costing -- sorry, let's say, cost of supply that affects both new build and spare parts, let's say, it's the same component, right? So if you have engine components, let's say, you use on both new build and services. On service, as I mentioned early, we can translate it faster, I think, to global list prices, et cetera. And then we are doing that on a, you could say, weekly basis, more or less, that's one part of your question. The other -- now I lost...

Yes, but just spare where availability to the ones that you have outsourced?

Availability of spares is, of course -- I think availability is still okay. Let's say it's tricky, you could say, on the, call it, more the electrical side of it, let's say, semiconductors that you need for your automation systems, et cetera. That's fairly tricky from an availability point of view. And then, let's say, we are the only one, I think all big industries face issues with semiconductor sensors and electrical components. I would say, so far so good, but you have to go with these kind of components, more and more actually to the broker market and try to find them. And when you go to the broker market, typically, the price is a magnitude of what the normal price is. But yes, you need it still. So that availability, I think, is really, really difficult. Otherwise, I would say it's pretty okay. If you look at the customer side, BC is, of course, also concerns raising among customers. Let's say they don't want to be without spare point. So certain customers are really now ordering spare parts a bit ahead of what they would normally do, which is a good thing. But of course over a longer period of time, it doesn't matter. Let's say it's still within a 1-year horizon probably.

The final part was your personal access to customer sites. Is there any COVID-related problems anymore?

In particular, I would say China is quite restrictive with COVID with regulations and let's say they closed down, let's say, yards in parts of cities or whole cities, yes, just like that. And also quite unannounced. We clearly have challenges with that, let's say, access to customer sites, when, for example, you need to do a commissioning of a vessel but also, for example, a good example is scrubber rate profits or, let's say, commissioning where, let's say, the owner of the vessel that had bought the vessel at the yard cannot participate so then the commissioning is just postponed, which also has an impact to us because you cannot recognize the sales. So there are quite many challenges with access to sites. On the marine side, in particular, I would say, China. Globally, it's very diverse on the energy side. It depends very much on country. But I think the biggest challenge at the moment is, let's say, China, I would say, if I look from a corporate perspective.

Then next question comes from Max Yates.

Sorry, I actually still have my hand up. But maybe if I could ask on -- maybe if I could ask on the marine orders because we've obviously seen -- if I look at the sort of shape of marine orders through last year, we had a very, very strong finish to the year, running on equipment orders, equipment orders running around sort of EUR 615 million versus running at sort of close to EUR 300 million. So I just wanted to maybe think a bit about if we look at where ship orders are today, is there a fairer run rate for this business more like the EUR 300 million that we've seen for sort of the prior quarters? Or is that EUR 600 million a better reflection of kind of where we are? Just trying to understand kind of a little bit more about how those dynamics played out last year and what a better reflection of the underlying business is?

I would say, Q4 in that sense was extraordinary. So I would lean more to, let's say, that the EUR 300 million, perhaps a little bit higher, but not the EUR 600 million. That was an extraordinary in the current market circumstances. Of course, the whole ship contracting is still and it is already for many years on a fairly low level. Of course, if the market goes up, I think we will probably see increase in numbers. But as the market is not yet picking up that significantly, I think the EUR 600 million is more an exception than the rule.

Okay. And I mean just in order to maybe help us, I mean, I know kind of quite a few companies I cover there, they're sort of thinking about the year in terms of there are a couple of years -- there are a couple of quarters where we have higher costs, but prices are yet to compensate. So it means that the year is sort of perhaps more back-end loaded than normal, I can think of plenty of companies that talk about sort of margins down in the first half, up in the second. Do you see a similar sort of dynamic with your business in terms of kind of how the phasing of profitability may look this year? And do you think it's fair to describe your year as more back-end loaded potentially than normal?

I think, let's say, if you look at Wärtsilä history, yes, I think we have back-end loaded as long as I remember, basically. So let's say, Q4 or the second half and in particular, Q4 has always been the peak in Wärtsilä, both from volume and profitability. So yes...

Okay. And just finally, of sort of the pressures that your business is facing. Obviously, it's a difficult operating environment. Have you -- we obviously saw kind of Omicron spreading around the fourth quarter. And I remember actually getting your service engineers on planes to see customers was a challenge. Even kind of disruptions of factories we're hearing about in China because of lockdown. So on the list of kind of concerns that you have, did that kind of resurfacing of Omicron have a sort of fairly large or a kind of was that significant in the context of your operations? Or are you better positioned to deal with COVID now than, obviously, the first outbreak that we had in 2020? How would you maybe sort of list that if you were ranking the challenges that there are for the business?

I would say that Omicron, in a way, you could say that after 2 years of COVID, perhaps it's wrong to say, but somehow you get used to. And used to is here a bit of a wrong statement. But you get used to, let's say, working in an environment with COVID, which is fast changing. Let's say, you can go for commissioning tomorrow to a yard, but let's say then it's suddenly a lock down. So it's a lot of replanning and rescheduling. I think or at least that's the feedback we get from the market that, of course, with Omicron it's more in functions, but let's say, it has less serious symptoms. It somehow eases, let's say, the way -- okay, except for China, I think they are really strict in lockdowns, et cetera. But I think in other places, it's a bit more, okay, yes, if we have a COVID outbreak, that we will take, let's say, restricted measures. But with Omicron I think it was a bit less severe restrictions than what we have seen a bit earlier variants that we're having, let's say, more severe symptoms and then also more life retain. I would still not say that COVID is making our life easy, let's say, COVID is still hampering our business. And in particular, as I mentioned earlier, let's say, cruise, 70% of the fleet is only back but it's 30% to go. Cruise and ferry as well is a big business for us.

Yes. And maybe just very one very final one. Just on your energy service business, particularly the order intake or your energy service business, sorry, as a whole. I mean when I look at your sales in 2021, you were at EUR 891 million versus EUR 800 million pre-COVID. So you saw kind of an uplift versus pre-COVID levels. So what I was really trying to understand is how sustainable do you think that level of sales is? Or was there anything in 2021 when you think about catch-up in demand, maybe some servicing that was done because power plant utilization was lower, people could travel again? Have we created any sort of abnormal levels there do you feel? Or is that something we should maybe think about for our numbers?

Yes, I think 2021, let's say, I think in general, it was a pretty normal year. But let's say, on the energy service side, 2021 at more than normal, I would say, overall business. So let's say, large maintenance projects according to maintenance schedules, let's say, timing-wise, based on, of course, running hours of the past, let's say, the moment fell in 2021. I think that was more than normal.

Okay. I think Hanna-Maria might have dropped off, but I'll put my hand down and maybe hand over to whoever's next.

I'm still here. Thank you.

You are. Sorry, the camera disappeared. Sorry.

Next question comes from Daniela Costa.

So I wanted to follow up just on the thinking around cruises and recovery going forward. Obviously, OE is very depressed. Utilization rates are going up. But we've also hear some of the operators, I think, like Carnival, when they reported, they were talking about a net decrease on the size of the fleet. Going forward of about 8%, I think. How should we think about sort of like the balance of that for your service business over the long run? And then like what's left of those cruises that were ordering prepandemic than are yet to be delivered that doesn't have the engines ordered. So if you could talk about those 2 topics?

I would say that, of course, let's say, it's a one-to-one correlation between, let's say, running hours and our service business. So if there are less vessels to run, yes, you could say that correlates with our service volume. I would say still there is new vessels coming to the market at the same time. So yes, the vessels are going out, but there are also vessels coming in. And we have not really seen any at this -- I'm not aware of any sizable cancellations on the vessels that were, you could say, in the order book of yards pre-COVID. Some have been a little bit postponed. But if you take in particular, let's say, [ income there ], I don't think we have really postponed a lot. So those orders are still there. What has been, you could say, standing still for a while, okay, discussions are picking up, but it's still not yet into orders but, let's say, ordering new cruise vessels. Because I do believe that, let's say, first of all, cruise operators, they want to get a bit more confident with this, let's say, COVID. They want to get their fleets up and running. If that environment is stable for a while. And it also shows, which I think it still does that there is quite a demand for, let's say, consumers wanting to cruise. I think they will also look at new builds again. And we see already examples of discussions in that direction, but it's very early stage still.

I don't know if can I ask one more on energy?

Please go ahead, Daniela.

Yes, just wondering like on your energy fleet on the existing business, what's kind of like the fleet utilization rate at the moment? Is it like running at full speed? Are there still some plants maybe multiples? Just indication of running levels of the fleet?

I would say that it's quite stable actually, but it's a mix of everything that we have plants that have been installed many years ago, quite old plans actually where in that particular place, let's say, the coal power plant has been switched off and our baseload power plants sold, let's say, 10 years ago, for example, is now used as a balancing power. So I would say we have all the variations. But in total, I would say, the running hours in total on the installed base now versus, let's say, say, 5 years ago, I think it's still -- compared to 5 years, I would still believe it's trending up. I don't have the exact numbers in my head. It's not going down at least that I'm pretty sure of.

Next question comes from Tomi Railo.

Yes. Just a question, you mentioned the slowed decision in terms of the storage. How is it in other businesses? Maybe in particularly thermal power plants as well as maybe services. Have you seen any change in the customers' decision-making, is the market sort of developing as you expected in the fourth quarter report?

I would say the slow decision-making, I would say, is in all businesses, frankly speaking, whether you go to storage, or whether you go to, for example, Marine Electrical Systems or Gas Solutions. And it's driven by also what I mentioned in the beginning that we don't want to be the sponsor of cost inflation, and there are big cost ticket items in this, call it, system integration projects that we pass on to customers when we are still in the process of negotiation. There is no contract yet. And that, of course is not nicely perceived or easily perceived on the customer end and that delays. But I would say it's not just for storage, it's basically in all businesses we have these occasions.

Have you seen any cancellations of orders or talk about cancellations?

I would say, okay, cancellations not of existing order book, but let's say the -- let's say, where we had, for example, tenders out of quotes out and we now come with a price increase. Customers have said, yes, sorry, yes, Wärtsilä, but now you're way too expensive, you're out. Yes, we are seeing that as well.

Next question comes from Antti Kansanen.

And hopefully, I'm not trying to simplify too much, and there's been a lot of headwinds discussed during the call. So maybe in order of magnitude or what is the biggest concern, I'm just thinking, is it more about the volumes that you have certain restrictions and the backlog is not getting out there as fast as you can, and you have a poor fixed cost absorption. Is that one of issue? Or is it more on the gross margin that the prices that you are taking in from the suppliers are increasing on a rapid pace and that's kind of negative for the margins that you are delivering. So how -- from a modeling perspective, how should we think about that?

I would say, cost inflation and high logistic costs, I think, are the biggest concern at the moment.

And that's also eating into orders as you are kind of raising prices on a level that your customers are not happy with it?

Oddly, that's yes.

Next question comes from Tom Skogman.

So I don't remember exactly the wording of your outlook statement in the Q4 report, but it kind of indicated clearly that orders will grow in the first quarter of this year. Do you still stand behind that message?

Yes, with the knowledge of today, yes.

Okay. And then I wonder about the situation with subsuppliers buying steel and they have commitments to you, and they are probably not as professionally managed as a large company like you. So I mean, of course, they can come and beg and you can -- for price increases, and you can be hard against them. But on the other hand, you need to keep your supply chain alive as well. And I mean are there already signs that they are like panicking and that they could go bankrupt and that there will be kind of damage to your supply chain? And in these cases, do you have any chance to pass that to already agreed customer prices because of force majeure regulations? Or is it just you that will take the hit then?

Let's say, force majeure on price increases from suppliers to customers, I think, will be a difficult one, also legally. But yes, you're right, let's say, the -- there are supply, not too many fortunately, but let's say there are suppliers that are really, let's say, screening. And in that respect, it is, as we have always had in our strategies, is not wise to have a single source for any supply. So we need to secure, let's say, dual sourcing at least, but preferably a little bit more. There are, of course, always the counter side of that one as well because if you distribute, let's say, your volume over too many suppliers, that has, of course, an impact on the price as well. So you cannot get the volume benefit. But that's a continued balancing act. But we should avoid, let's say, clearly, let's say, single-source supplier and then have a possibility to go somewhere else. Short-term switching is not easy that I must also say that if you have, let's say, a need for a certain component, then you buy 40% from one and 60% from another, then the 40% one is screaming like crazy, and says, okay, I will not deliver to you anymore if you're not accepting a higher price, to lift it over to the one that delivers 60% of your volume, okay, you can do it probably, but it will take a bit of time. And that time is also a bit of an enemy in the deliveries, right? So it's a continuous balancing act. I would say so far, we are managing quite well. I have great respect for our supply management and logistics teams that are, on a daily basis, let's say, working with this and really solving, I would say, in a very good way, most of the challenges, but it's not easy. And it's not getting easier either.

Okay. And then I finally wonder about these bad power plant projects that are not fully delivered and booked some years back. And you have taken some provisions before that. Do we still have margin risk this year from these old projects? Or I mean, where do we stand with these ones?

Not that I'm aware of. So let's say, we have provided to what we know already, let's say, time back, and we are continuously reviewing and updating. So I think we are sufficiently provided for those projects.

Next question comes from Andreas Willi.

Thank you very much. I just had a follow-up on the earlier discussion we had on the installed base in energy in terms of the engines. Do you have an approximate number? What part of your service business today is basically related to engines that mostly run for baseload or where basically they are like in emerging markets as a main power source on an island or something like that, where it's pretty clear that they're mostly baseload?

No, we don't have that information because like I said, it's also switching over time. So -- and our customers not going to always tell you that, okay, now I'm going to baseload, now I'm going to balancing power. So no, as a total, I cannot say. We don't even know it, I think.

Next question comes from Manu Rimpelä.

Just a very short and simple question. Do you think that the energy storage losses will be bigger or smaller this year compared to last year. And obviously, that is a very big swing factor given the big step, obviously, in your sales. And it makes the modeling of the group profitability very difficult when we have no idea what the profitability is. So I mean, that would be extremely helpful to understand.

Yes. But you probably can anticipate my answer. I will not comment on that, sorry.

Okay. But can you even help us to kind of think about how should we think about that margin progression as the sales probably more than double or at least double this year? Should it be...

I will not comment on margin development. No, sorry.

The next question comes from Daniela Costa.

Maybe switching actually gears a little bit to just the balance sheet and capital allocation. I wonder like -- what do you think is like the ideal balance sheet? And it sounds like -- I mean, if you were net cash, would you consider doing a special or a buyback? Has it been part of the discussion over the near term?

No, it has not been part of the discussion and consideration so far. I think we are in a very challenging environment, okay, first of all, with COVID, and I would say, cash flow wise, I think we did extremely well in COVID. I think it was 2 years in a row with a record operating cash flow. And I think it's good to be careful in, let's say, very uncertain circumstances. And now we have, let's say, the geopolitical situation. No, we have not really, let's say, so far, discussed share buyback.

Next question comes from Tomi Railo.

Classic. My question was already placed. I removed the hand.

No problem. Next question comes then from Tom Skogman.

Yes, I could just ask about this power plant orders because I don't really see many announcements. I mean you state that you expect orders to grow in Q1 year-over-year. I mean does that implicate that you have booked several larger orders that are not announced?

We -- of course, when we announce orders, we need to get that approval also, let's say, from customer side. So if we can, we communicate, but if we cannot, we will not communicate, let's say, single separate orders. But we have orders, yes.

The next question comes from Manu Rimpelä.

Another classic, left my hand up.

Okay. So then it seems like that there are no further questions. Just double checking whether somebody wants to still ask a question. So please use the Raise Your Hand function. It seems like that there are no other further questions. So thank you, Arjen.

Thanks for the good questions as well.

Yes. So stay safe and healthy, everybody. Thank you.

Thank you.

Bye-bye.