Hi, everybody, and welcome to this news conference for Wärtsilä Q1 results. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Håkan Agnevall, will start with the group highlights, followed by business area development, and after that, our CFO, Arjen Berends, will go through the key financials. After the presentation, there is a possibility to ask questions. Time to start. Please, Håkan.
Thank you, Hanna-Maria, and a warm welcome to everybody. The interim report for 1st quarter, what are the highlights? I mean, order intake increased, but of course, the major topic for the 1st quarter is the write-down of EUR 200 million that is burdening the operating result. Looking at order intake, it increased by 11%, on the equipment side with 17% and on the service side with 6%. Net sales increased by 30% following a strong sales last year, a strong order intake last year. Service net sales increased by 17%. The Russian-Ukrainian war has intensified the overall uncertainty and amplified the concerns related both to cost inflation and to the global economic environment.
I will also say that the pandemic situation, especially in China, also triggers additional challenges on logistics and cost inflation. The war between Russia and Ukraine certainly has an impact on Wärtsilä. I mean, 1st of all, we condemn the war in Ukraine. We have suspended all deliveries, sales orders, bidding to Russia, and we comply with all the sanctions applicable for our operation. In the current environment, it's not viable for Wärtsilä to maintain activities in Russia, and therefore, we have decided to further downscale our Russian operations.
Wärtsilä, we have now included in the 1st quarter a write-down of approximately EUR 200 million, and these EUR 200 million includes approximately EUR 75 million related to impairment of Voyage, goodwill, and intangible assets, approximately EUR 50 million of impairment related to assets in Russia, and then approximately EUR 75 million related to write-downs in trade sanctions, projects, and receivables. Also to give the magnitude, Russia related activities accounted for about 5% of our net sales in 2021, and out of that, about EUR 40 million was services. The key figures in a short summary, we will go through the details. Let's jump into the details.
If we look at the net sales, up 17% on the services sales, or up 11%. Sorry. The net sales up 30% in general, 17% in services sales. The comparable operating results, we reached EUR 65 million, 5.3%. That's a 61% growth quarter-on-quarter, but we should acknowledge that 1st quarter 2021, we had some net provision related to distressed projects, but we are moving in the right direction. Basically, overall, you can say that we are supported by higher sales volumes. The marine market activity varies by segment. New build investments soften, mostly due to the increased prices and also challenges with slot availability at key shipyards.
If we look at the number of vessels ordered, they decreased compared to previous quarter, 274 compared to 376. The contracting was largely driven by container ships. Cruise new build activity remain limited. The transitions to cleaner fuels has already started, and we had 107 orders in the market placed globally for alternative fuel-capable vessels in the 1st quarter. At the end of March, around 70% of the cruise fleet capacity was active, and that was flat compared to end of December. However, I would say when I talk to some of our customer, they have a optimistic view of the way forward here to the summer. On the energy market situation, the whole Russia-Ukraine creates turbulence and price volatility.
It has created an unforeseen turbulence and it has a negative impact on global supply chains, increasing prices and also delaying customer decision-making overall. The pandemic has somewhat stabilized, but full recovery will most likely take time. Thus, we have additional uncertainty within the investment environment. Especially in China, we all know the impact of COVID there and its impact on supply chains. Increasing amount of intermittent renewable energy is definitely a theme going forward. It will require flexible power, where we have some of the key technologies for the balancing power. We see that as a mid to long-term trend that probably we even accelerated by the current challenges in the energy market.
Our market share in gas and liquid fueled power plants increased to 8% from 5%. Order intake increased by 11%. On the equipment side, it increased by 17% and on services it increased by 6%. We look at the order book, we see it's increasing. Book-to-bill decreased a bit, but that's because we are ramping up sales and delivering. We also see that the order book develops in a positive way both for this year and for the two coming years.
Net sales increased by 30%, equipment by 48%, services went up with 17%, and also reiterating one of the key messages that we will have a mix, sales mix with a relatively high share of equipment sales compared to services sales for the full year. We know that services has somewhat higher profitability than equipment sales. Now, technology and partnership highlights. A lot of interesting things going on in Wärtsilä and in the world to enable decarbonization. A couple of proof points from our side. In the quarter, we had our 1st order for new build methanol-fueled engines. It's the next generation of methanol-fueled engines.
Van Oord placed the order, it's for offshore wind installation vessel, and now we have also included the methanol pack, which is a fuel supply system to the engine itself. Methanol, one of the green fuels going forward. On Solstad, we are cooperating with Solstad on decarbonizing their entire fleet, about 90 vessels, and the target is to achieve 50% reduction in CO2 until 2030. In this agreement, we are working together with the customer to identify and evaluate and implement solutions that will increase fuel efficiency and also reduce the greenhouse emissions from Solstad's offshore vessel.
On another area, on the Energy side, we have just opened our expertise center in Houston, Texas, and this center will deliver support to our U.S. and Canadian Energy customers, enhancing our ability to grow our service business. What we do in the expertise center, we collect and we use all the data analytics to improve customers' uptime reliability to improve the performance, and this is really part of moving up the service value ladder strategy that we have. Now, if we go business by business, we start with Marine Power. Marine Power increased in all figures. Service order intake increased by 15%. You see the order intake overall 34% up, net sales 7% up.
When we look at the comparable operating result, up from EUR 40 million- EUR 44 million. Key drivers, service sales very strong. On the challenging side, we see, you know, increasing cost for fuel testing, increasing transportation costs, also overall increase in cost in our supply chain. Also when it comes to some of our service business, COVID and lockdowns in China has a significant impact also on some of our JVs in China. We also have a cost this year for ramping up our new facilities in Wärtsilä, the Sustainable Technology Hub.
If we look at the service side and the service agreement on Marine Power, it's the installed base net sales from installations is increasing, and we have one interesting example here from Japan for MMS gas carriers. It's an optimized maintenance agreement covering two LNG carrier vessels and operated for MMS. The agreement are designed to deliver maximized engine uptime and long-term cost predictability, optimizing maintenance for highest efficiency and lowest carbon footprint. Central to the OMAs is our predictive maintenance solutions, Expert Insight, where we use artificial intelligence and advanced diagnostics to monitor onboard equipment and systems in real time. If we then move to Marine Systems, also an increase in all figures. Service order intake increased by 41%.
Overall order intake up 29%, net sales up 15%. If we look at the comparable operating results going from EUR 8-EUR 12, and here the key driver is the favorable mix between equipment and services, so services has strong contribution. On the scrubber side, we still see lower deliveries. Although the fuel spread is very high and from that healthy for the business, our customers has a very active business now and therefore Wärtsilä with some of the scrubber retrofits. If we look at Voyage, here we have more of a challenge. Order intake and comparable operating results decreased. Profitability has been burdened by delays and the sanctions of Russia. If we look at the order intake, it's down 23%.
Net sales is up too. You can also see here the comparable operating result. We have a decrease from -EUR 12 to -EUR 14. On the positive side, services is contributing positively. We have challenges in delays in projects, higher material and transportation costs, FX, ruble, and also we have a cost now when we rebuild our capabilities outside of Russia related to Voyage. We are downscaling in a staggered way and building up competence, making sure we have business continuity and serving our customers, but of course, we are incurring cost of this. You could say this whole Russia challenge will delay the turnaround of Voyage.
If we look at how our cloud solutions are developing, I mean, we have a 28% increase in connected vessels. You see a little bit of a downturn in the 1st quarter. There is more of a prioritization, certain cruise not renewing in the quarter, but coming later, et cetera. I think the trend is still very positive for our connected solutions. A very interesting example from Voyage, we are investing in Marindows to support the shipping decarbonization in Japan. This is a consortium in Japan and where Marindows links edge computing on board ships with cloud services and ship-based applications to provide a range of maritime-specific services to seafarers and to vessel operators.
The collaboration, which will include the area of vessel optimization and autonomy, will create significant value for the Japanese market. By reinforcing synergies and leveraging a digital ecosystem of applications that can run on board and ashore, companies will bring to market safer, greener, and more efficient operations. Switching to Energy, we had a significant increase in net sales and profitability. Service order intake decreased by 7%. Overall order intake is up 3%. Net sales is up 86%. You can also see comparable operating result from EUR 4 million-EUR 24 million. Service volume growth has been a key enabler for the increased operating result. Our challenge here, clearly cost inflation and less favorable sales mix.
We talked about that before, between equipment and services. A key example here, the flexible thermal balancing journey continues, and here we have yet another order in Italy for balancers, where our fast-starting internal combustion engine technology will be used to balance the power system in Italy and ensure it is stable when the share of renewables is increasing. This order was placed by A2A, and it will be delivered as a full engineering, full EPC contract, in partnership with the Italian engineering group, Cefla. Cefla. The new plant will operate with six of our 50 SG gas engines and will come in operation in 2023. When we have completed this will be the largest power plant in Italy using internal combustion engines.
If we look on the services side, and our service agreements, the install base of long-term service agreements is also increasing. Here we have one interesting example, our guaranteed asset performance agreement, where we are working with our customers in Senegal for a power plant. It's a 10-year contract. It covers 130 MW of power plant in Malicounda, Matelec, and which is scheduled to be commissioned in 2022. The Flexicycle power plant will operate seven 50 engines, and it combines the advantage of flexible simple cycle operation with the outstanding efficiency of a combined cycle plant.
This agreement, the service agreement, will provide operational reliability with scheduled maintenance and spare parts, as well as heat rate and power output guarantees after major overhauls. Now, Arjen, some comments on other key financials.
Yes. Thank you, Håkan. If we start with cash flow from operating activities, -EUR 122 million, negative, and the main negative contributor, you could say, is the working capital. We had to increase our working capital in Q1 in order to, let's say, facilitate the higher delivery volumes in the coming months. That you can also see on the working capital line, it's still negative, -EUR 18 million, coming from, what was it? About -EUR 100 million at the end of last year. Net interest-bearing debt, EUR 276 million, coming from close to zero at the end of last year. This includes, let's say, about EUR 50 million repayment of debt, as well as, let's say, about EUR 60 million-EUR 70 million increasing of lease commitments, and mainly coming from the STH facility ramping up in Vaasa.
Looking at gearing EUR 0.14, solvency 35.3%, and basic earnings per share -EUR 24. If we would exclude the provisioning of the EUR 200 million also addressed earlier by Håkan, gearing would be EUR 0.13, solvency 2% higher at 37.3%, and basic earnings per share EUR 6+ cents. Looking at the bridge from profitability to operating cash, starting with EUR 142 million on the left side, on the right side graph here, adding back, let's say, the depreciation amortization, which is not, let's say, cash. This includes about EUR 85 million of the write-downs related to the EUR 200 million provisioning, assets, in particular.
We have a few blocks on the working capital, EUR 169 million down for the reasons I mentioned earlier, to facilitate deliveries in the coming months, higher deliveries. The other part is also related to the EUR 200 million write-down, because the major part here is the write-downs of WIP in projects as well as receivables on Russia-related matters. If we move on to the prospects then, Håkan.
Thank you, Arjen. If we look at the prospects, we are saying that we expect the demand environment in the 2nd quarter to be similar to that of the corresponding period in the previous year. However, the prevailing market conditions make outlooks uncertain. That was a summary of Q1.
Thank you, Håkan. Thank you, Arjen. Now we are ready to take questions. Handing over to the operator.
First question on the line, Andreas Willi from J.P. Morgan. Please open up your microphone and ask your question.
Hello, Andreas. We can't hear you.
Yeah, I'll try again. Good morning. Can you hear me?
Yes.
Yes.
Now we can hear.
Thank you. My 1st question is on the strong service activity in Marine. If you can comment a little bit on that in terms of underlying trends versus customers buying spare parts, given all the uncertainty, and what should we expect basically here going forward, also given some of the lockdowns in China that may affect that business? That's my 1st question.
If I start, I think 1st of all, it's a broad growth in the service side in different customer segments. I mean, it is driven by higher utilization. We are seeing that, you know, for instance, the cruise customers they are increasing activity levels and preparing for the summer, so to say. It's a broad growth and it seems to be continuing as well.
It's not only, I think, in cruise. I think it's, as you say, in broad segments. We see also more activities in the offshore driven by the higher oil and gas prices. It's really a wider event happening. Of course, there is an element of, let's say, a bit of pre-stocking. When the market is insecure and volatile, customers also have the tendency to, let's say, pre-stock a little bit more than they normally do. This uncertainty we expect to remain still around and this extra stocking from customer side on the spare parts, it might be a little bit, let's say, temporary upward, but we still believe that it will continue also to a certain extent going forward.
Next question on the line, Max Yates, please, you can ask your question.
Hi. Can you hear me?
Yes. Hi, Max.
Yes. Perfect. Just hi. Just my 1st question is around the guidance, and obviously I appreciate it's very difficult to guide in the current environment, but your implied sort of orders or demand for Q2 implies an order level sort of quite a bit below where we were in Q1. I was just wondering if you could comment whether that was kind of geared towards any particular segment, whether there was kind of anything particularly you were seeing in April on the servicing side that was driving this, or it was just maybe a broader reflection of the uncertainty. Just if there was any sort of color around what was driving that and if anything specifically has weakened in April or it was just a reflection of perhaps tougher backdrop.
I would say it's more of a general reflection. I think we mentioned already services is progressing fairly strong. On the new build side, it's more on the level where we were last year. I mean. On the energy storage side and the battery storage side, you've seen that the 1st quarter the order intake was definitely lower compared to previous periods. If you look in 2021 and here we see still a bit of a market reset on the both on the costing and the pricing. I mean, the cost of lithium has increased with a factor of three the last twelve months. We have and others have increased the battery prices. I think that price increase is still being digested by the market, I would say.
Okay. Just my 2nd question was just around obviously everything we've seen with rising input costs around sort of particularly things like stainless steel. Would you be able to give us any idea of kinda how much your direct raw material purchasing is? Just maybe more broadly, do you think that the margins that we're seeing sort of printed by the business now fairly reflects obviously costs rising versus fixed price contracts in the backlog? Or given we've just seen everything take another leg up in terms of costs, we see some incremental pressure on margins as we go forward? I'm just wondering kind of where we are with that balance of price cost in the backlog, and whether that's fully reflected on what's sort of in the PNL today, or that sort of maybe worse still to come. That'd be helpful.
I would say we see increased inflationary pressure. I mean, certainly since the beginning of this year compared to previous years. We think that inflationary pressure will continue throughout the year. I mean, we have certain possibilities to increase prices directly where for on the services side, but also for some of the new build. We also have a situation, we have an existing order backlog to deliver where there are more limited opportunities. I would say the net impact of this situation will be negative for us.
Okay. Because I mean, the reason I ask is if I look at one of your peers, Alfa Laval, I mean, they showed. I know it's a slightly different business and different products, but they showed a very sharp, sort of sudden sequential drop in their marine margins. I guess I'm just trying to sense whether, when you look at what's in your backlog and costs today, there's a risk that we take a sort of sudden leg down in Q2 margins versus Q1, or is that not what you see when you look at your current marine backlog in particular?
We don't provide particular comments on EBIT guidance, neither for the quarter nor for the full year. My comment would be we do feel an inflationary pressure, and it will have an impact on our profitability.
All right. Okay, perfect. Thank you very much.
Next question on the line is Sven Weier from UBS. Please, you can ask your question.
Yes. Good morning from my side. I had a follow-up question on the service question from Andreas. I mean, you specifically referred to the restock in Marine Power, but when I look at the service order intake in Voyage and in Marine Systems, and even in Energy, I mean, last year you had a very, very high service order intakes on the comparable period. If you adjust for that, I would say the energy service was also good. Is that the same driver as in Marine Power behind it or different ones?
No, I mean, on the energy side, we see a high level of utilization of many of our power plants, quite frankly. That drives the service.
Also, let's say in energy in particular, you have these overall cycles.
Mm.
They happen on a, you know, frequent basis, not every year. Clearly, let's say we are now in a cycle, at the point of the cycle, you could say, where there are a lot of overhauls, actually, and that drives in particular Energy service side.
Also in those divisions, the strength could actually continue in the short term, not just in Marine Power.
Yes, I would say in energy it's still also going strong. Yes.
Okay, thank you. The 2nd question was just following up on Voyage and the, I think the R&D center you have or had in Russia. What's the plan here? Are you rebuilding it somewhere else? How quickly does it go? What about the talent you need in those centers?
Now we are downscaling the business and downscaling our operations in Saint Petersburg. At the same time, we are building up competencies outside of Russia. As part of the transition we do, we keep the business certainly going. We have a lot of exciting opportunities and we have a team that can support our customers. Ensuring the business continuity here is extremely, of course, extremely vital for us. I think the team is taking good steps, but of course it's a challenging effort to downscale in one part of the world and ramp up competencies in another world. We are incurring additional cost to do so.
Next question on the line is Sebastian Kuenne from RBC Capital Markets. Please, you can ask your question. Sebastian, can you hear us?
Can you hear me now?
Yes.
Okay. Sorry. A question in marine on the fuel spreads and what it means for the scrubber demand. If I look at the numbers MGO to high sulfur fossil fuel, the spreads are now, you know, $300-$400 per ton, so incredibly high levels. Wouldn't that mean a strong demand for refitting, and what do you expect for, well, for the rest of the year and for the next year? That would be my 1st question.
No, you're right that, you know, the spread is very favorable for scrubber technology. What is positive for our customers is that they have so much work to do. There is such a buoyant market for transport that they prioritize that and they wait with bringing the vessels in for retrofits. It's also challenging from a COVID perspective because COVID is affecting quite a few Chinese shipyards, so it's hard to get a slot. That's why in Q1, as we highlighted here, we saw a negative impact actually on the scrubber side on Marine Systems.
Understood. You mentioned the downscaling of Russia. Can you just confirm that the EUR 200 million write-down covers your entire Russian business and there's no further potential of write-downs on Russia?
Well, I mean, this is our best assessment right now. It includes all the businesses, I mean, all the four businesses. It's the assessment right now of what cost it will incur.
But it-
Understood. Yeah.
It includes all operations in Russia.
Yeah.
Understood. My last question is on energy. You mentioned, margins will be affected by product mix. Is that comment mainly triggered by the energy storage business where you say, "Okay, we have more deliveries this year," margins in that business are still negative on the EPC level, therefore we have that product mix? Or is there also other reasons or other triggers that would make you think that the energy business sees more, incremental pressure?
Yes.
Thank you.
You're right about the battery storage. We have a lot of sales going on, and yes, the operating margin is still negative. The gross margin is positive. I would say the other element, as you noted, in Q4, we had a very strong order intake on the energy side, key projects in Brazil and Mexico, and we are delivering those projects now. This is also why we come back to this, that 2022 will be a new build year, i.e., relatively speaking, there will be more new build than services, compared to the normal mix so to say. It's those two phenomena together. It's the battery storage and also that we are delivering, you know, an order intake from an all-time high Q4 last year.
Understood. Thank you very much.
Next question on the line is Antti Kansanen from SEB. Please, you can ask your question.
Hello, Håkan and Arjen. Hopefully you can hear me good.
Yes.
Yes.
We hear you, Antti.
Coming back to the question on the equipment business and the cost inflation that you are seeing, so, could you perhaps provide a bit more color on where the challenges in terms of adapting to the inflation are the highest, whether it be on certain divisions or certain type of equipment businesses, long lead time projects and so forth? What are kind of the key elements in the input cost inflation that are biggest concern to you regarding certain materials or certain components? A bit more color on this one, please.
I'll start, and I'll let Arjen then complement. I mean, we see it certainly on raw materials. We see it certainly on logistics cost. We see it certainly on electronics. As I said before, it's escalating compared to previous years, so it's of a different magnitude compared to 2021. We also see increased disturbances in the supply chain. I mean, electronics now, and this is nothing new, but this is, for us, it's hitting us also even harder now compared to last year, and that is also affecting, you know, availability of electric circuits, basically.
Yeah. There's not so much to add. I think you
Yeah.
You said it quite well actually.
I was just thinking, for example, on the large thermal energy projects that you booked late last year, and I guess you are rolling out them this year and start of next one. Are those contracts something that have clauses and things that you can adapt if kind of the input cost level rises throughout that you're executing that projects, or are you totally fixed?
When it comes to our contract, it's a bit of a mix. In some, we have indices, material indices. In some, it's a fixed price versus the customer, and then we factor in an expected inflation to cover ourselves. It's fixed price, but we have baked in inflation. It's a mix of between different contracts. As I said, the inflationary pressure has gone up.
The 2nd one perhaps on the cruise services, and I guess you referred to the 70% utilization rate that the marketplace had in the 1st quarter, and surely this is expected to trend positively going into the summer season. Is 70% a good proxy for where you are, if you think about what you expect, where you expect to be or where you were pre-COVID in terms of the service revenues or orders in that business?
If you talk about cruise at 70%, we are not at pre-COVID. From that perspective, there is more potential. I mean, 100% then we would be back to pre-COVID. As I said, when I talk to our major cruise customer, they have a very optimistic view of the summer season. They think that they will, if nothing unexpected happen, they will get back close to the pre-COVID levels.
Yeah. I was maybe more referring, I mean, we've been previously talking about that it's quite linear, kind of between your service revenues and kind of the cruise traffic, but is there something that you have already seen benefiting, let's say, more than the utilization rate would kind of imply? You mentioned that the customers are preparing for the summer season and so forth, so are you actually running at the higher level than what the utilization would imply?
Here, this is very hard to gauge. I mean, how much is the pre-stock phenomena and where is the balance? My comment would be that we continue. I mean, of course, we trace this every day, and we see, in April, a continued positive development.
Last one from me is regarding the guidance. Should we kind of think about that the recovery after the initial COVID shock has now kind of run its course and the market is stabilizing on a certain level? Or did kind of the renewed macro uncertainties, the war, the Chinese lockdowns, and all of those kind of had a incremental negative impact if you would compare Q1 to Q2 this year?
I would say that, yeah, we came out of COVID, and that was certainly one uncertainty. Now, we still have COVID and we know the impact of China, so there is a lot of uncertainty there remaining. On top of this, we add the geopolitical situation with the Russian-Ukrainian war. We are still moving in an environment of a high level of uncertainty.
All right. Thank you.
Next question on the line is Panu Laitinmäki from Danske Bank. Please, you can ask your question.
Thank you. I had two questions related to Voyage. Basically just to understand how big is the operation in Russia and what do you exactly need to rebuild elsewhere? Secondly, more specifically on the numbers, what is the cost for rebuilding and should we look at the Q1 EBIT as a kind of run rate for the coming quarters for this business?
Overall, we are about 650 colleagues in Russia. I would say that the Voyage, it's about 350-400 colleagues.
On the R&D side, yes.
Yeah.
Yeah.
There you have the magnitudes. When we say downscaling, it's a stage process. We do it observing the local rules and regulation, also making sure that we can do it in a safe way for the employees. We have Russian colleagues that are relocating. We are also upscaling with bringing in new competence to the group and we are incurring cost for that. We don't break out the details at how the costs are. That is also triggered by you could say a certain uncertainty on which pace we can run this. What we do and we have a setup, we...
This is critical at all times that we can support our customers in a stable way and that we can also continue the R&D, development. Because, I mean, if you look at our connected vessels operation, we have a state-of-the-art software platform that is creating a lot of values for our customers, so it's extremely important to secure also the R&D going forward. I would say Voyage is doing a great job, but of course, this is a very special situation with definitely these risk elements.
Okay. Thank you.
The next question on the line is Andreas Willi from J.P. Morgan. Please, you can ask your question.
Yes. Thank you. For a 2nd question, I wanted to ask something about Gas Solutions. You mentioned in the release that you see price pressure there. Is that pressure from rising input costs, or is that price pressure from market price pressure in terms of competition? The 2nd one on Gas Solutions, you announced an interesting order yesterday on the bioLNG. What's the scope that you're prepared to go in these projects? Are we going back to maybe taking some large EPC projects in Gas Solutions like we've seen a few years ago with the LNG projects?
If I start answering the 2nd question, I leave the 1st one to Arjen. Now, I can clearly say no, we are not going back in EPC in LNG terminals. I mean, that is a market that will grow right now. I think we are all following the development in Europe, but we are not gonna go back as an EPC. This particular contract, we are delivering equipment only.
On the price pressure question, I think it's a bit of both, let's say. Of course the pressure from, let's say, our suppliers to us, but also, let's say, the price pressure that we face in the market, also from, let's say, competition. It's both actually.
Thank you.
Next question on the line is Daniela Costa. Please, you can ask your question. It seems your mic is muted. Can you open your mic? Okay, next question on the line is Sebastian Kuenne from RBC.
Yeah. Two more questions from my side. On energy storage, I mean, we hear stories that the Chinese battery manufacturers have their own problem sourcing, and I was wondering if there's a risk of actual supplies being cut or delayed to Wärtsilä for the installation of your batteries and what that could mean in terms of penalty risk for the projects that you have currently in the order book. Could there be severe delays that could result in penalties? The other question is relating again to the EUR 200 million write-down or provision. It looks like it's not tax deductible. Would that be correct? Because when I compare pre-tax profit and net profit, the impact seems to be very similar. Could you just elaborate a little bit on that? Thank you.
I start with the 1st, and then Arjen does the ETR. There is a clear price and cost dynamic where the costs of the batteries are going up and this is something that we are working with our supply chain, and that is also leading to that we are increasing prices to our customers. That's triggering, I would say, the reset of the market of battery storage. Now, so far, our team also working with our supply chain in a good way, we have been able to execute on time and secure that we have, you know, batteries available. Of course, the whole pricing, a great dynamic around that.
I understand, but the availability of batteries is fine from currently for you?
With the efforts from our team, our battery storage team, so far we have managed the situation, yes.
Thank you. Mm-hmm.
If I answer your question on ETR, yes, you're fully right. Let's say big part of the EUR 200 million provision is non-tax deductible. I think goodwill is a good example. So yes, that has a severe impact on the ETR. Yeah, immediately you can see it in the numbers already.
Okay. Thank you so much.
Next question on the line is Nancy Nie from Goldman Sachs. Please, you can ask your question.
Hi there. Thanks for taking my question. I just wanted to ask, 1stly, could you clarify on working capital, how much of the drag is storage deliveries? And following on then, shall we expect that to continue for the rest of the year as you still have a lot of storage orders to deliver this year? Or do the price renegotiations at the moment ensure that you can recover that? And just one final one on how many of the storage customers are receptive to price renegotiations currently?
You wanna start?
I can start with the working capital part. Let's say the working capital is really, I would say, largely delivery related. I think there is not so much else in there. Let's say we foresee the coming months really extremely high deliveries compared to, let's say, previous periods and previous years' periods. That's really where it comes from.
On the pricing dynamics, this is a reason why you see a, I would say, relatively lower order intake for energy storage in Q1 because, you know, we need to get to a certain price level to do business. I think that of course it takes some time in the market to settle in and see, you know, how the overall market price is evolving. But it gives a clear indication of our price discipline.
Next question is from Daniela.
Okay, great. Thank you.
Thank you.
Next question is from Daniela Costa. The questions are written here. I will read them out loud. One, can you clarify on WC how much of the drag is the storage deliveries? Two, shall we expect that to continue for rest of the year as you will have a lot of storage orders to still deliver this year? Or do the price renegotiations at the moment ensure you can recover that? And three, how many of the storage customers are receptive to negotiation on price?
In general, I mean, what we deliver now we had as order intake last year and we had locked in most of it with our supply chain. I think the profitability level will continue. I mean, as we discussed before, this is a business that will take a couple of years to turn around. That's one part of the answer. The 2nd part, how many customers are willing to have a discussion around price? I mean, and here we need to look at new orders. I think there is a new price level being established, and as I said before, I think we have a strong price discipline here from our team. Then, on the order backlog, of course, there you have agreed on a certain price, but for the most part we also have secured that with our supply chain.
I think to add, let's say basically there is a whole reset happening in the whole storage market, right?
Yes.
Let's say lithium prices have gone up, let's say 300% in the last year and doubled since November. It's not only us, it's everybody. Let's say on the question, okay, are customers willing to accept? I think it's the whole market that is resetting the price. I think if they don't accept then there is also nowhere else to go, because everybody is raising the price because of the raw material price increases. We don't want to be the sponge, nor do I think any of our competitors want to be the sponge to absorb it.
Next question on the line is Erkki Vesola from Inderes. Please, you can ask your question. Erkki, can you hear us?
Hi.
Yeah.
Yes. Okay. Hi, Håkan and Arjen. Can you hear me?
Yes.
Yes, we hear you perfectly.
Yes. Good. My question is linked to the question already presented. I mean, my question is, how long can the storage products be postponed altogether? I mean, if there's a renewable project like a wind farm being built, as there are so many globally, when will they have to start building the storage capacity no matter what the cost, just to ensure uninterrupted electricity supply in the future?
I mean, this is of course since we are right in a very dynamic situation, it's very hard to be specific, but you know, it in our view, this will pan out relatively quickly, so to say. We are not taking years of delay because, to your point, you know, you need the balancing power in this case in form of battery to have the power system stable and to be able to hook up your wind and solar power. Of course, I think when you have such a big reset in the market, it's the dynamic between suppliers and customers and also for customers to finding out that, you know, there is a certain new market price level, so to say. As Arjen pointed out, I don't think any on the supply side has the capability or the willingness to absorb this significant increase in raw materials, and in batteries, I should say.
If I guess that the postponements would be, say, in the ballpark of 6-12 months, not, we're not talking about several years.
No
... from what you-
No, we are not talking years, for sure.
We are not talking years. That's our view at least.
Okay. Thank you so much.
Okay. We have time for one more question. Max Yates, please, you can ask your question.
Thank you very much. I just quickly wanted to walk through the impact that you're seeing from China lockdowns. Could you maybe sort of just kind of remind me what exactly you produce in China, where the lockdowns are having sort of the greatest effect? I guess kind of whether this is kind of the factories that were locked down have kind of restarted now, or just where we actually are in that process. I guess I'm trying to understand, is this something that kind of affected throughout Q1, or was it very late on in the process? Is it right if everything is locked down currently that the impact might be bigger in Q2 versus Q1? Just a little bit of color exactly how that sort of the production set up and where the biggest impacts are.
I would go through it because it's not only about production. I will talk about that as well, but it impacts many areas of our business. That's one thing. Second thing, we see this continuing, so to say. Where is it affecting us? Let's start on the supply chain. I mean, when you have lockdowns in China, you know, we buy materials, we don't get the material. It also creates logistics challenges. I think we're all aware of the severe challenges on the container trade, so to say. That's one area where we are affected.
Another area affected is in our service business. You know, we don't get into the shipyards to perform service, or our customers cannot bring their vessels to the shipyard to perform dry docks, et cetera, because of the lockdown. It has an impact on our service business. Coming to the manufacturing, I mean, we do have engine manufacturing in JVs in China, and this is completely locked by the moment because we are in the areas that are in complete lockdowns. Yeah. This has a real impact, and it will continue to have a real impact.
Maybe just one quick follow-up. When you talk about your backlog for delivery for the remainder of this year, so you've talked about sort of EUR 3.3 billion order book for delivery, I'm just wondering whether that is based on kind of the, what you would view as a sort of normalized phasing of the backlog, or whether you've actually made an assumption there for some lost revenues and disruption from China, i.e., you've kind of taken a haircut to what would be the normal phasing of the backlog.
If I can answer this. Let's say the order book is based on our latest best estimate of when we can deliver that order book. That's always the case. Whenever you look at Wärtsilä order book, that's how it is. Our best estimate of, let's say, delivery, is reflected in the order book.
Okay. It's fair to assume.
Considering challenges and the discussions with customers, et cetera, all is included.
Okay. Fantastic. Thank you very much.
It seems like that there are no more questions, so thank you, Håkan. Thank you, Arjen.
Thank you.
Thank you for great questions. Q2 report will be published on July 18th, but before that, we are hosting several large IR events, including the CEO mid-quarter call, pre-sale call with Arjen, and then also a site visit to our new technology center in Vaasa. Hope to see you in some of those events. Thank you.
Thank you.
Thank you.