Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

So good afternoon, everybody, and welcome to Wärtsilä Pre-silent call. I'm Hanna-Maria Heikkinen, in-charge of Investor Relations, and I have our CFO, Arjen Berends here as well. And luckily, we have a lot of interest for these calls, so almost 70 participants are joining. We will start with a call with some [indiscernible] from Arjen and describe the recent development on the market. So I will share some slides for you now, and you can find these slides after the event on our Investor Relations website. Or can see the presentation now?

I can see it at least on my screen. So I guess it's then visible to everyone.

You can see it?

I can see it, yes. [indiscernible] put it in presentation.

Yes. All right.

All right. If we -- thanks for joining this pre-silent call. As said by Hanna-Maria, I will run a few slides through. I will talk a little bit about, say, the market and how it looks like today and how we are doing. And then, let's say, we open up for questions and answers at the end. So if we move to the next slide, I would like to start with, let's say, sharing, let's say, the -- a great margin that we did achieve in quarter 2, let's say, we opened our Sustainable Technology Hub in Vaasa, which is, of course, a great milestone for us, really showing that we are moving into the world of decarbonization for both energy and marine. This facility will help us a lot to make that journey a lot faster than what we could do, let's say, with other facilities. One thing that I definitely want to highlight here is also our great opportunity that we have our [indiscernible] basically a floating R&D platform. Some of you have been visiting, let's say, the inauguration. So thanks for joining us there. I hope you enjoyed the trip there and that it was worth it. We're now ramping up, let's say, the activity. We are still, let's say, 2 facilities in Vaasa at the moment. So the work is ongoing to move, let's say, from A to B, so to say. But we will ramp this up as fast as we possibly can, hopefully, pretty much or at least to a large extent on by the end of the year. If we move to the next slide, of course, the STH supports our, let's say, decarbonization journey significantly. The fact that we have all our R&D in 1 location where earlier, let's say, the different R&D labs being at the fuel lab or other labs, they were a bit separated from each other. It's now all concentrated in 1 place, and it will help the efficiency and the effectiveness from our development work as well. Great proof of there is also, let's say, recently launched new products on the engine side, the Wärtsilä 32 methanol, which we already launched and announced in quarter 1 and then also the Wärtsilä 46 2-stage DF, which was recently launched in Q2. The fuel development is also, let's say, some key milestones stated on the left side of this slide, moving very well according to plan. We are making good progress in testing, getting also, let's say, good results out of it from which we, of course, will learn and develop going forward. But the time lines that we have reflected here we are still believing that they are very well doable. And the good thing is that, let's say, we are with STH and then also these developments not only, let's say, talking about decarbonization, but actually doing it as well. If we move to the next slide. This is nothing new. I think you have seen this slide also in the CMD material, but I definitely want to highlight, let's say, the third bullet point on the left, let's say, being #1 in Marine hybrid power systems is something we are really proud of. And the future of decarbonization is really happening. Let's say, there is no customer discussion anymore where decarbonization is not a topic. And so it's good to have a lot of solutions in place, hybrid being one that can support customers in that journey. The fuel, call it, the fully carbon-neutral fuels that will still take a bit of time, but there is also a lot of improvements you can make already with the technology of today. If we move to the next slide, in Marine, it's not about, let's say, blending in the future. There is no, let's say, silver bullet on any, let's say, way of operation, let's say, what kind of fuel will it be? There will be plenty of different fuels. So we say, products are, let's say, suitable to run any and all fuel of the future and that's what we are working on with our fuel development project as well. Moving to the next, Energy also moving well forward. The market development is really picking up. Coal, in general, is being closed, although, let's say, now with the challenges with the Russia gas pipeline in certain places, we say coal is being ramped up, but we believe that's temporary. Over a longer -- not even longer, I would say, midterm, coal will be phased out, and it will be replaced by, let's say, renewables, basically sun and wind and then, let's say, supported with flexibility through, for example, our thermal engine solutions for storage. Can we move to the next? Service, very significant and very important for us. As shown already in earlier events, let's say, we are really focused on getting agreements, life cycle agreements with customers because the potential having a life cycle agreement with the customer is so significantly more than just doing transactional business with customers, but this is really one of our core priorities, get more agreements, get deeper insight with customers, enable, let's say the multitude of, let's say, business activity with the customer compared to a transaction. But transactional is 1 as a factor, if you have an agreement is 2 to 5. You can really upsell. If we move to the next one, very important. This links also to agreements that, let's say, we can do a lot of, let's say, efficiency improvements also on our own end, let's say, also serving customers. We have about -- this is a Marine example. We have about 700 vessels globally supported with life cycle agreements. And let's say, when there are issues in the field, 90% of the cases we can solve without sending anybody over. And that's, I think, really a benefit to both Wärtsilä as well as, let's say, our customers. Moving to the next, Voyage optimizing very much in focus. Let's say this is one of the solutions you can implement today. Let's say, well, the fuel is still, let's say, a journey to take. There are a lot of solutions hybrids, I mentioned already, but also, let's say, Voyage optimization, clearly supporting that effort. And a lot of things can be done already today. Last week, we announced, let's say, the PortLink acquisition, which is really about, let's say, port efficiency solutions, also enabling, let's say, just-in-time arrival of ships in ports. And this is a great add on to, let's say, our existing portfolio already. We were already in a deep partnership with this company, but now last week, we acquired it as well. If we look at the market and now I will, first of all, comment a little bit on Energy side. The Energy market in general is still quite volatile. There is still a lot of uncertainty when it comes to, let's say, customer decision-making and inflation, et cetera. But we feel that, let's say, this cost inflation, which has really been accelerating in the first part of the year is now somewhat stabilizing, stabilizing at a high level. But let's say, it's not accelerating upward any further, at least not to the extent that we can have seen it so far, at least. Thermal power plants, a lot of activity, good pipeline, but it is a lumpy business. It has been and it will be. So let's say, really timing, okay, when will things fall in place to, let's say, book an order, that's always a little bit questionable, but good things moving there. In Storage, it has been sluggish, you could say, or a bit on a standstill in quarter 1. You remember, we had about EUR 70 million of order intake on the storage side in quarter 1. There was a reset happening in the storage market, let's say, lithium prices went through the roof. We also, let's say, went back to our customers, wanted higher prices. Everybody is recalculating the business cases. We believe that now, let's say, the market has understood that this is something that is not temporary, and it's probably here to stay for a longer time and that this price level is probably, let's say, the new price level in the market. I think customers get more used to it. I think they've also been looking around and say, okay, if one increased the price does the other do the same. I think all the suppliers have done the same. So it's not that, let's say, we are exceptional in that. Things have been stabilizing there, and we also see activity picking up again on the storage and also their order intake is likely to pick up again. Energy market service is doing very well. Let's say, a lot of plants are running, also, let's say, good activity in field service and overhauls, conversions as well, let's say, from diesel to gas. So I would say in service on energy side, it goes really according to plan. Then on the Marine market, also here service is doing well. The newbuild market is also as same for energy impacted by cost inflation, but also, let's say, limited yard activity -- or capacity, sorry. Yards are pretty full, let's say, for certain vessels. If you want to buy a new vessel, probably delivery times are moving already into, let's say, 2025. So it's very difficult to, let's say, get slots. And that, of course, put a little bit less pressure on contracting as well and that was also anticipated. Actually, this is a graph from Clarkson, let's say, 2022 would be significantly lower than 2021. Also if you look at, let's say, yard capacity over the past 15 years, it is almost, let's say, half, you could say or 680, I think, in 2008, and now it's less than 300 yards. So the combination of, let's say, a lot of renewal that needs to take place driven by, let's say, decarbonization and requirements on the regulation side, especially for vessels that were older in 2010, in combination with, let's say, limited yard capacity will put stress on the whole yard environment in particular, but also customers and customers. Looking by segment, Cruise fleet at the end of May, about 90% back on track. So really doing well. And the port calls, let's say, they have also been reaching, let's say, pre-COVID levels again, also a lot of new, let's say, ports, new destinations as well. 30 fleet, active capacity about 90%, still not fully back on pre-COVID levels, so I think then you need to get closer to, let's say, 95%, 95% plus. But let's say, slowly but steadily, let's say, going in that direction. Offshore market, let's say, no, I mean, call it, the offshore, let's say, as it was originally was not offshore wind. But the offshore market is really improving, not so much from a newbuild point of view, but definitely from a service point of view, reactivation of fleet. Now there is much more demand also for rig utilization and that, of course, helps in, let's say, reactivating, let's say, OSVs and PSVs, for example. Offshore wind continues as before, let's say, very positive, a lot of demand for offshore wind farm installation in many places of the world, so that is also supporting this activity. Contracting for LNG carriers also going still very strong. And of course, let's say, now with Europe wanting to be less dependent on Russia, this really supports, let's say, the utilization of LNG carriers. And I would say the demand is likely to pick up again also there even beyond what we have already seen. Container still very strong, not as strong as, let's say, earlier year than it was really, as you can see also from this graph, let's say, 2021 was really booming in particular from a container point of view. It's less than that, but still a very strong market. Tankers, some improvement in the conditions in the month, but tankers is not a huge market for us. Let's say, we do auxiliary equipment for that and motion equipment, but main engine is typically too slow. In the same mode actually for the local market, which operates on a fairly firm level. But again, here, most of the vessels are driven as a main engine by a 2-stroke engine. Last comment actually on our guidance for Q2, we said similar to previous year. And I can comment that I feel confident that we will make that. That's it as an introduction from my slide.

Thank you, Arjen. Then we can continue with the questions. So if you have a question, please raise your hand.

Daniela Costa, please. You are the first one.

Maybe just starting with 2 things. I think one of the things in 1Q that you discussed was sort of some of the cash drags that were coming out from energy, I guess, because of factoring, you seem to be a little bit more constructive on the energy outlook and sort of stability of some of the trends with customers. Does that translate into maybe sort of mitigating those cash drags, can you talk to those dynamics on the factor, which are maybe a bit harder for us to see? That was my first question. And then the second question, I was just wondering Obviously, there's a lot of focus on gas trends in Europe, but for your energy business, actually, Europe is not very big, historically, and emerging markets is very big. Can you tell us a little bit of what's going on in the thinking on emerging market countries, given we have had lots of like FX volatility and in some big regions, political changes as well? Does the situation around commodity prices in any sense, impacts like how the EM countries are ordering for energy? If you could give some highlights on that?

If I start with the last one. Of course, the market is very diverse. And let's say, if you look at the energy market, I would say, storage is hot. It has a bit of a -- had a bit of a standstill due to pricing reset, but let's say it's picking up quite nicely actually in the recent weeks, actually. Dominantly, I would say, U.S., Europe, Australia, those kind of places where we see most of it. Having said that, we see also more and more storage demands actually or request for quotations coming from, let's say, emerging market countries. So let's say, the whole world doesn't really matter where you are, but the cheapest form of generating electricity through renewables. And of course, everybody wants to pick a piece of it. It's, of course, in certain countries easier to make happen than other places, let's say, depending on wind and sun conditions, it's a very different setup. So it's a tailored solution. But the demand for renewables is global, I would say, or getting more and more global even in the, say, emerging markets, which also automatically means that, let's say, the thermal side will follow because storage is only, let's say, good for, let's say, hours back up to a day then you need something else if you go beyond the day of no wind and no sun. But the dominant markets are, let's say, for thermal at the moment. I would say, it's South America, North America or the Americas in general, you could say, Asia, Europe and certain countries in Africa, I would say. This is in fact, it's still a bit of a global activity. But it follows very much, let's say, the whole conversion from, call it, traditional energy generation coal, et cetera, to, let's say, renewables. Now I -- sorry for that slip my attention, what your first question was.

My first question was regarding -- in 1Q, we had a cash drag, I think energy is refactoring and it's always a topic that is hard to follow how to model that going forward, namely with, I guess, a more stable demand profile. Yes, any highlights in there to help us?

Yes. We had not so strong cash flow, I would say, we could even say perhaps a poor cash flow in Q1. Of course, let's say, somehow, let's say, also related to a very strong cash flow in Q4, let's say, last year. Actually, the whole last year was a record on operating cash flow, very strongly supported by also supply chain financing solutions that we have in place also on storage. And of course, if that storage is on a whole for a while, then of course, you feel it in your supply chain finance side but also, let's say, getting quite significant large advanced payments for intermediate payments, in particular, on the energy side. So yes, it has been a bit of a struggle in Q1. I think it will still be a bit of a struggle also in Q2. But in the second half of the year, I expect some improvements there coming as well.

Thank you, Daniela. Next question comes from Sebastian from RBC.

So I have a question. You mentioned that you had to go back to customers when it comes to energy storage. And given that you had, I think, 3 gigawatts hours of order intake last year, what does that mean for the orders that you have received that you have in the book? Do you have to renegotiate pricing on those? Can you just confirm what the case is there? And if you don't renegotiate the pricing, are all the deliveries fully hedged?

Most of the, let's say, the order intake of last year, most of it, I would say, has been secured from a pricing point of view on the cost side. So that should be okay. Not all, let's say, for some part of it, let's say, there is a lag between, let's say, getting the order in and then the purchase order out, so to say. And here, we had faced some, let's say, challenges. Of course, breaking up existing contracts and get a higher price, that's not likely to work. We tried. I would say, the succession rate is neglectable. But let's say, for the new orders, we have definitely -- and actually also the tenders that were outstanding or the request for quotations, all of those have been raised to the new price level, and we are not accepting any orders below that.

Okay. And second question, for the deliveries that you have to do on the energy storage this year, do you have all the raw materials, you have all the components, the battery packs from your suppliers in China? What's the situation there? Or is there a risk of penalty payments later on?

Let's say, from a logistics and delivery point of view, of course, in principle, we are fine. But of course, let's say, what could and what is happening on the logistics side is still a bit of a question mark. If we get, let's say, certain equipment produced, can we ship it on time to the right destination? I think it's -- I am not so concerned about, let's say, not getting the equipment. Do we get the transport on time range between the right places, that is more of a challenge at the moment? But having said that, so far, I feel we are pretty okay. It's a lot of time and effort going into it and it requires a lot of creativity by our transporting and logistics people. But I would say so far, they managed quite well.

Final brief question. The gross margin of your energy storage business, what could we expect, let's say, going into 20 -- second half 2022 or early 2023? What's your run rate in that business?

We are not commenting on margin levels.

Thank you, Sebastian. The next question comes from Panu Laitinmäki.

I actually have 3. So firstly, on China, can you give any indication on kind of the impact from the lockdowns to your service sales in Q2 in China? Secondly, on Russia, I think you mentioned that in the Voyage business, you have this R&D center that you need to...

Can we please take one question a time? It's easier.

Yes. So if I comment, let's say, the service or the impact of the lockdown on the service activity in China, I would say it's -- of course, it has an impact. Let's say, the good thing is that we have a lot of, let's say, local service resources in China that can execute work in China. But of course, many yards on a lockdown, you cannot execute either. Most of the yards have now, let's say, recently opened up again, still with a lot of restrictions. So I would say it's a bit on the, call it, in service you have a lot of different activities. If it's about commissioning or warranty jobs, I would say, at least I'm not aware of any significant difficulties. But of course, utilizing resources in general, especially when you have to fly in specialists from outside China into China, that's really cumbersome and not efficient. Let's say the people are with quarantines and waiting times and rerouting and stuff like that, it's really difficult. So yes, it has an impact. Is it a massive impact, I would not say so?

All right. That's clear. The second question was on Russia. I think you mentioned earlier that you have an R&D center in Russia that you need to relocate and the turnaround in Voyage would be postponed due to these issues. Can you kind of quantify these costs? And when would you expect the turnaround in Voyage to be successful with the current situation?

It's not so easy to answer question. It's a very good question, by the way. What we -- what is ongoing is that we are ramping up resources in other locations than in Russia. Also, let's say, in all honesty, let's say, we are moving certain people from Russia to other locations and have been. We -- I would say we are pretty secure, let's say, unsecured is probably the right word on business continuity. I don't see that as an issue going further. Of course, let's say, all this hassle and, let's say, finding new people because, of course, you cannot move your whole R&D out of Russia just like that and continuous business as usual. And so you also need to, let's say, ramp up, let's say, new resources, getting them up to speed, et cetera, et cetera. That throws a little bit, let's say, send in the wheels when it comes to, let's say, the speed of turning around Voyage. It's too difficult or too early perhaps to say, okay, how long is the delay, I would say, half year to 1 year at least if I have to indicate some time.

Okay. And then I just had a final one on the raw material cost inflation. Just to understand, how do you see the situation like, obviously, the raw material prices have eased, but when do you see it is kind of relief? And how is it for you in Q2 compared to Q1? Did you see more pressure? Is it easing for you in the second half? Can you kind of describe how it develops?

I think Q1 and Q2 are pretty much comparable. As I mentioned in the beginning, let's say, we saw an acceleration of the cost inflation in Q1. And now in Q2, I would say it flattens basically. So it's still high. But let's say, the pace of going up, I think that has halted for many of the raw materials that we need, let's say, in our products. So in that sense, I think that's good. What we have also, let's say, implemented, I would say, almost all of our contracts is indexation. So let's say, also to safeguard ourselves for, let's say, future price changes, should it happen. So I think we are in a good shape, let's say, today at the end of Q2. And inflation, at least seems to not go any further. Of course, there are no guarantees. But let's say, if it happens that it goes up further, let's say, the good thing that we have indexation in most of our contracts. So that should safeguard us from a margin side.

Thank you, Panu. Now actually, I do not see any bumps up there. So please, if you have a question, and I'm sure that there are lots of good questions still. Use raise your hand function. And by the way, some of you are calling in with a phone, you can e-mail the questions for me other than raise thumbs. Okay. Sebastian, please go ahead.

Yes. One more question on the naval and side of the Marine market. Do you already see some increased tender activity from the military side?

Yes. There is definitely more activity.

And the content that you have for these vessels is clearly high, I assume, because you make the [indiscernible] for like the cruiser size ships, is that correct?

No. It depends very much by ship like, let's say, seals and bearings, for example, that's -- that can be in any ship. Bridge systems, I don't think we have that many. Few engines can, of course, be, but let's say that depends very much on, let's say, which Navy is it and, let's say, what do they prefer, but also propulsion equipment, let's say, being it propellers or what yet. So there's lots of different things we can deliver to navy vessels.

But those vessels would use the same shipyard? So if the shipyards are pack until 2024, '25, would we see any incremental business?

I would not say short term. Let's say these tenders are typically, let's say, taking a lot of time and go over many years. So yes, we see more tendering activities, but they are not ordered yet. And you're right, let's say, of course, that is also country by country. Let's say, certain countries have their yards, the navy yards in particular, quite full, so they cannot add anymore.

The next question comes from Tomi Railo.

Tomi here from DNB. Still coming back to the cost inflation and easing, what do you think would be a fair assumption in terms of, let's say, lead times? You are obviously now in a better situation from that input cost perspective, but the prices are still higher, but what you were, let's say, taking orders you are delivering at the moment. So is the margin pressure still there? Is it, let's say, gradually easing still a couple of quarters? When can we start to see, let's say, more beneficial performance in terms of the match of the margin?

I would say the pricing environment is still quite tight. Let's say, the -- I would say, in the Marine side, let's say, when there is very -- let's say, the ship contracting, you saw the graph, it's still fairly low. And let's say there are many more suppliers like us that want to sell equipment. I think we are doing well. I think we are under the circumstances, getting, let's say, good orders with good margins. Also on the cost side, we try to, let's say, safeguard the cost level by -- I mentioned already, let's say, we put indexation in the commercial contracts, but we also have indexation in the supply contracts so that, let's say, we safeguard, let's say, both ways. So let's say, and it's translated one to one. So we are not a sponge in the middle anymore that we used to be for certain critical parts and that's now changed. So I would say I'm pretty okay with the margin levels of today. Of course, it can always be better. But then I think we need to, let's say, more volume in the market. So that is not as much fighting as today.

And if I can have another question, stable demand picture in the second quarter year-on-year. Would you say that this implies both businesses or is it more tilted to Energy or Marine?

No, I would say both are doing quite well. I think Energy does a bit better than Marine.

Next question comes from Tomas Skogman.

Yes. I'm trying to understand or estimate how much sales you can get out this quarter? There are a lot of moving parts. The order book is up 21% even more so than at the end of last year, but still you had, of course, phenomenal sales growth in the first quarter, but historically, Q2 is always much larger than Q1, but now we know that we have problems perhaps with some component sourcing from China, et cetera. So perhaps you can just help us to get the sales estimate to be right as well and not only orders and margins?

It's a good question, Tom. And let's say there are lots of different businesses with different dynamics. And of course, sales is not just dependent on, let's say, getting the deliveries out. It's also, let's say, we have a lot of sales volumes go through percentage of completion. So it's a lot of dimensions into the equation, basically. But overall, I would say we managed quite well to keep, let's say, original delivery times in the order book. Yes, we do face, let's say, delays. But I would say the delays are not -- okay, often, they are also driven by customer actually. So let's say that the customer is -- are not wanting the equipment. I think a good example is, for example, yards in China, they have been themselves in locked down. So they are not as far as they were planned to be, so they also want the equipment later. So these things do happen. And then logistics is, of course, another challenge, let's say, can you get delivery out, which also then enables you to recognize, let's say, sales volumes. Overall, I think with customers, we meet the required delivery times quite well. If it's exactly going to, let's say, how we have our internal forecast on sales, there is often a little bit of difference. But I would say the difference is within acceptable limits, if I answer like that.

Okay. And have your factories being closed in China?

Yes, but they are now back up again. Yes.

How many weeks were they closed?

Well, about it was -- I think it is about 6, 7 weeks.

Do you mean during Q2?

I think it was partly in Q1 and partly in Q2.

But you are not kind of suffering from not getting components to the European factories from China. I mean it's mainly your [ Western ] supply chain to my understanding that. So...

We have suppliers in China, but let's say, the, call it, the most critical supply chain is not in China for engines, for example.

And then finally, about kind of raw material kind of hedging forward. Do you take any bets on this that the inflation will tail off or ease? Or will it just get worse? Or other word, do you -- have you changed any hedging policies yourself in any way?

We don't hedge any raw materials. We used to hedge, let's say, copper, nickel, aluminum because we had our own foundries for propellers, but we are not hedging raw materials at the moment for anything. We buy component, we assemble and put together and test.

Then there's one question by e-mail. Of course, indicators are improving. How quickly do you expect to see a pickup in service in Q2? And how can it strengthen during the second half of the year? Are you seeing any new cruise vessel orders in the pipeline? Or is it too early to tell?

I think there is definitely talks about, let's say, new cruise vessels and the new cruise vessel ordering. They have not come out of the pipeline, but the discussions are there. When it comes to service, I think it's -- I think I mentioned also earlier calls that our service business correlates with running hours. So the more running hours we have on cruise, let's say, the better for us present. I would say the correlation is quite directly actually one to one. Of course, with some delays here and there, but let's say, typically, it's a pretty good direct correlation between the 2. So yes, we do see also with, let's say, cruise vessels ramping up in activity and our service business is following equally.

The next question comes from Erkki Vesola.

Hanna, can you hear me?

Yes.

Yes, we can.

Just some more specific question regarding gas power because gas prices really haven't taken a rollercoaster ride in Q2 due to the war. Did you see this impacting your gas engine order pipeline, especially on the energy side internal postponements, let alone cancellations? And just wanting to be sure that the impact has been limited?

No, we have not seen much impact, actually. Let's say, if you think baseload, let's say, often baseload power plants at least the discussions that we have, it's anyhow dual fuel engines, so they can run on both. If you think about, let's say, the balancing power, which is also related to, let's say, renewable power plants for backup, it is mostly gas. And to go there for, let's say, anything else is probably not, but you can -- okay, you can, of course, go for diesel, but that's not very likely because if you now buy a gas engine, that's the one you can much easier to convert to, let's say, future fuel carbon-neutral fuels, for example, than a diesel engine. So of course, let's say, what we do see is that existing plants that we see where there is dual fuel capability that due to high gas prices, let's say, people are on HFO, which is not good for the environment.

Next question comes from Vivek Midha.

A couple of follow-ups on cost inflation, if I may. Firstly, on the indexation in contracts that you highlighted earlier, would you be able to quantify for us the proportion of the backlog covered by indexation?

No, I don't think I can quantify that out of my head. Let's say, it's basically, let's say, we -- if you think about newbuild contracts, let's say, indexation did exist, more limited. And it has now, I would say, almost being implemented all over the place. If you think about, let's say, life cycle agreements, I would say, basically, our whole order book of life cycle agreement is based on indexes. So it's a very different per business and per activity.

Understood. The next one, just a quick one to check on wage inflation. We've talked about cost inflation and perhaps that's stabilizing. On the wage inflation side, is that stable? Is that accelerating slightly? Any color would be helpful.

No. The pressure is up. I think we are not the only one. I think that's not only our industry, I think the whole world is from salary inflation pressure going only up, I think, not down. And of course, it varies a lot by country. Yes, I can only say at this point in time, I don't want to quantify it for you, but the pressure is up. That's absolutely clear and contrary to, let's say, material cost inflation, let's say, salary inflation is probably here to stay. So that will drive up the whole cost and price level in our business.

Understood. And just to follow up, with the indexation thing that you mentioned just now. So are wages part of those indexation formulae?

In certain cases, yes. Yes. Not in all cases. It depends a bit on what the contract is about, what's the scope of the contract. But take an agreement, for example, it's a very clear case with a lot of labor, yes, you have also labor indexation.

The next question comes from Erkki Vesola.

Actually, it doesn't. My hand has just been up there. Sorry.

No worries. It happens for everybody. Then Sebastian Kuenne, you have also raised your hand.

Yes. At the beginning of your presentation, you mentioned that Wärtsilä will be the first company to launch an ammonia and hydrogen medium speed engine. First of all, why are you so confident that you will be the first because I think MAN and Wärtsilä, you work on the same type of engine? And number two, in terms of ammonia and hydrogen engines overall, do you -- is MAN faster? Do you think they will be fast in terms of the 2-stroke engine? Will they be in the headlines on their lead in R&D? Or do you think you would be overall the first for any engine?

Not sure. I don't think I said that we will be the first, one of the first perhaps. But let's say the -- but there are not so many players, right? So I'm confident that, let's say, the time line that we have communicated and as you saw on the slide that I showed, I think we will stick to that time line. I'm pretty confident that will work out. So MAN be earlier or later, to be honest, I cannot say. That's also why I'm a bit doubtful. I'm pretty sure I did not make the statement of being first. But because I simply cannot look into their R&D books and time line. So...

But you see them -- you see them on a trade fair. Do you see their results of test, I guess?

No, okay. I don't think there is a common sharing of test results between all the competitors. At least we are not actively doing that. That would really damage our business. I believe we are in the front. And let's say, listening to our technical guys, they believe so too. You only know when you can see into MA and R&D books, then you can see it really, but that's speculative, I don't know.

Yes. And on the -- just last question on the time line, you in fact again that ammonia concept is ready by 2023, hydrogen by 2025. Can you remind us what that means in terms of launching the product for the market?

Then we can -- in those years we can start selling, yes.

Sorry, I didn't catch that. You can sell it?

In those years, we can start selling.

So engine concept is the same year as selling with engine?

Yes, we can start, let's say, the first sales. Yes.

Then Georg von Wyss, please go ahead.

What on the gas engines, you expressed optimism that things were going well? Now we haven't seen that many orders yet. Does that mean you're getting orders that you don't necessarily announce that are too small? Or are you hoping that you'll be able to announce something in the -- before the end of the year?

No. I think -- let's say, when we book orders in many -- or basically in all cases, we need, let's say, also the approval of the customer to announce the order then many customers are very reluctant to do so for whatever reason, and those reasons vary by customer. But in principle, we want to, let's say, we are not going to announce, let's say, orders of, let's say, EUR 0.5 million or EUR 1 million. But let's say, orders that are, let's say, over EUR 10 million, EUR 15 million. Let's say, intent, we want to announce them. But let's say, we cannot always announce it. So not -- when we have not announced, we don't have the permission to do so.

Okay. But that doesn't mean they're not going to be in the Q2 results?

Yes, they are, no. Let's say, we will have order intake in Q2.

Okay. And then a second question, does this all mean that you're going to be gaining back share in the gas market? The numbers you've been reporting have pointed down. That means everybody is ordering lots of turbines or what's going on?

I'm not going to comment yet on Q2 outcome in this respect.

Okay. But how do you see the trend going? Do you start regaining share again or?

Let me answer by -- I think we are doing well on the thermal side in energy.

Sebastian, you have raised your hand.

No, sorry. I just didn't [indiscernible]

And Georg von Wyss, you still have your thumps up. Is it old thumb or do you have further questions?

Apologies, I'll take it down.

No worries, it happens for everybody every now and then. Then actually, we do not have any additional questions. So please, if you have a question, use raise your hand function. We have still plenty of time to discuss. Okay. Then Johan Eliason. Please go ahead.

Yes. I hope you can hear me. Sorry, I missed the first part of your presentation and discussion here, but I was just a bit curious about the LNG carrier segment, we are hearing that there are more orders coming but sort of the time line is pretty far out in terms of delivery. But there are discussions going on that some capacity could be added to the shipyards. Is that something you see that it might imply that some of these carrier orders could actually hit the water a bit earlier than what one could imagine right now?

The latest that I've heard is that, let's say, the order in LNG carrier today, you probably end up in 2025 or somewhere around that. And most of it is, let's say, Korea. And yes, that's the latest, what I know. But I don't see really, let's say, a lot of possibilities to accelerate it because, of course, one thing is yard capacity, but then it also needs to be -- the yard needs to be capable of building such a vessel, which is quite technical. So capacity might be there, but then the capability is missing. So I don't think it will be faster than that.

Okay. 2025 wasn't -- I have heard numbers up to 2027, if you order some from the most advanced Korea, [ what are the odds? ]

It depends a bit where you go. But yes, I think that's what I said, the fastest as far as I heard is 2025. But it feels up quite quickly as well, I think.

Yes. But -- and you had this chart about ship orders expected to fall now. Do you see that in the LNG carrier segment as well because of this long delivery times now and the high cost inflation that people might be sitting around and waiting for prices for newbuilds to come off again and anyhow they won't be able to get the ship until 2025 or even later?

Let's say, high ships are today not the most cheapest. So for sure, let's say, customers that sit on their hands and wait until prices come down. And also given by the fact that, let's say, the yards are pretty full. But it's still driving a lot of, let's say, renewal is, let's say, there are many old vessels and there's a lot of new regulation coming with CII, et cetera, that is driving renewals. So for some vessel types, I'm pretty sure, let's say, certain customers are just waiting until prices come down. They might have, let's say, quite a lot of ships already in the pipeline at yards and not ordering any new ones. For other ones, let's say, it's a bit different, driven by regulation, they might want to go faster.

Then I have a question by email. Given so much port congestion, is there a possibility that [ ship ] owners are they shipped into service whilst waiting. So there is some pull forward of servicing?

That depends very much on, let's say, what kind of service. I wouldn't say it's a general trend or at least I've not heard of that being a general trend. Most of the service work is typically done, let's say, when the vessel is at the K or at the dock, and depends also on the service activity. But there might be some, but I don't think it's big scale. At least I've not heard of it.

Thank you. The next question comes from Panu Laitinmäki.

I'm still going back to the cost inflation to fully understand it. So when you speak about indexation and you said the margin levels today are pretty okay, are you referring to the orders that you took during Q2? But what about the orders that you took earlier, I mean, in Q4 last year, you took a record number of or value of equipment orders. So what about those? Have you already fixed the cost level in those and what kind of margin do you see in those projects?

No, I was mostly referring to, let's say, the margin levels in Q2. And let's say, I'm not going to, let's say, in too much on, let's say, what the margin levels were before. But let's say, my comment was related to the whole adjustment that we have done in our contracting, with indexation, but also -- okay, I did not mention that one, but let's say, also validity times. Let's say, we make a quote now, let's say, in the past, you could have, let's say, quote valid for half a year on renewable side, for example. Nothing is more than 30 days today. So when we now take orders in, in particular now, let's say, after this whole acceleration of cost inflation in Q1, I think we are in a much better shape and the margins we book today are much more stable, you could say.

But how long does it take that kind of backlog turns around and...

Okay. That varies by product. Let's say there are products that can go very fast. Let's say, take service, by a parts, that's very fast, that's within months. Let's say, if you have a big equipment order that can be next year only and everything in between. So that is large and big scale of equipment. So it's a wide variety. If you build a power plant, it comes in stages than is percentage of completion. So you take it in pieces throughout a period of 1.5, 2 years.

Next question comes from Tomi Railo.

A couple of storage-related questions. Firstly, on orders, you clearly signaled that there is a pickup in activity. Would you be able to give any comments in terms of the order levels, EUR 70 million in the first quarter, EUR 720 million last year? Would you think that we see growth year-on-year in the second quarter? And how much would you assume the orders to decline for the full year compared to EUR 720 million?

I will not be that specific, Tomi. Sorry for that. I can say that Q2 will be better than Q1.

But will it be better year-on-year?

That I will not comment on.

Okay. Second question. Do you think that the storage loss will be smaller this year compared to last year?

I will not comment on that one either.

The next question comes from Antti Kansanen.

I'm sorry, I missed a big part of the discussion earlier. So perhaps I'm asking something that has been already mentioned. But referring to the fact that, Arjen, you are flagging that in some areas like in storage, there are a bit of improving activity and you're saying that you have now kind of been pricing up the cost inflation and introducing the indexations and so forth. So is it so that the industry in total is doing the same thing? Are you differing from the competition? And now it's just taking a little bit of time for your clients have kind of adjusted to the new normal have seen how the courts are actually kind of evening out throughout the supply chain? Or how is this new dynamic from a competition perspective looking at?

Thanks, Antti. I think it's exactly as you say. I think all the competition does the same. Because if you look at the lithium prices, what I have said in the past year, x number of 100x factors -- sorry, percent increase. So nobody can handle that, right? So everybody is putting the same indexation in and everybody is raising the prices. That's also why we see a pickup of activity because initially, customers might think, okay, let's go to the competition, but they get similar price levels from the competition but also the same increase then it's all the same, right? So then you can better stick to, let's say, the one you believe can bring you the best value. And that's also why we see a pickup in activity. So I think the reset has been more, let's say, understood in the market and now we move on.

And what about on the thermal side and then on the marine side? Is it kind of a similar change of way to operate with you and your clients that this is kind of an industry level thing that is happening right now?

So, yes.

And then the second follow-up on the question regarding timing of kind of the backlog, how fast it turns. And if you look at our multiyear project that you would have, let's say, on the energy side, that is fully fixed when you take the kind of the margin or that is fully fixed throughout the, let's say, 2-year period when you take the order now you just have to take the pain? Or is there some point in the project that you can renegotiate? Or how does that dynamic work, if it's an extremely long lead time project?

No, I think the scope you sell is pretty much fixed. Let's say, there is no chance to renegotiate. Of course, if you have scope changes, in particular, I would say, on energy, take EPC contracts, for example, for sure, let's say, there is variation orders and variation orders typically are good business activity as is in any construction industry. I think variation orders is what brings a lot of money. But of course, you need to be very sharp in, let's say, describing the scope, technical specifications, et cetera, in the original contract.

Okay. I do not see any thumbs up anymore excluding Antti Kansanen, but I assume that this is old thumb so to say. Are there any further questions? Something coming by e-mail. How much lower our backlog margins than margins on the new orders taken today? And how long until the backlog will be flushed away?

I will not comment on margins in the order book. Sorry.

Are service margins also squeezed today or our margins in services normal during the first half of this year?

I would say they are pretty normal because in service, you can much faster turnaround, let's say, cost inflation to price changes. And in agreements, for example, which are long term, we have already for a long time indexation, so that should be pretty fine.

Thank you. Then it looks like that there are no further questions. So thank you for the active participation to this call. We will publish the recording on our IR website. So for those of you who joined a little bit later, you can see also the presentation there. So I hope that you can enjoy the summer also a little bit. It's getting finally warmer also in Finland. So enjoy the summer.

Finally, yes.

Thank you.

Thank you very much for today.

Bye-bye.

Thank you.

Thank you.