WRTBF - Wärtsilä Oyj Abp (WRTBF) Q4 2022 Earnings Call Transcript
Wärtsilä Oyj Abp (WRTBF)
Q4 2022 Earnings Conference Call
January 31, 2023 03:00 ET
Company Participants
Hanna-Maria Heikkinen - Investor Relations
Hakan Agnevall - Chief Executive Officer
Arjen Berends - Chief Financial Officer
Conference Call Participants
Daniela Costa - Goldman Sachs
Max Yates - Morgan Stanley
Antti Kansanen - SEB
Vivek Midha - Citi
Sven Weier - UBS
Sebastian Kuenne - RBC
Tomi Railo - DNB
Panu Laitinmaki - Danske Bank
Nancy Ni - Goldman Sachs
John Kim - Deutsche Bank
Sean McLoughlin - HSBC
Erkki Vesola - Inderes
Presentation
Hanna-Maria Heikkinen
Good morning, everybody and welcome to this results briefing for Wärtsilä Financial Statements Bulletin 2022. My name is Hanna-Maria Heikkinen, I am in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will start with the group highlights, continue with the business area performance. And after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Time to start, please, Hakan.
Hakan Agnevall
Thank you, Hanna-Maria and welcome everybody. Let’s dive into it straight away. So if we sum up the full year of 2022, it’s been a challenging year, but on the positive side, with strong annual growth. Order intake increased by 6%. Net sales has increased by 22% and we do see continued good progress on the services side. The service order intake increased by 17% and actually exceeded the equipment order intake in absolute terms and the service net sales also increased by 12%. And on the negative side, the comparable operating result declined by 9%. The result was supported by the higher sales volumes, but it was burdened by cost inflation, less favorable sales mix between equipment and services and the cost provision that we released in Q4 for €40 million related to Olkiluoto nuclear project.
2022 has also been a year of quite a few structural changes. I mean, first, we did orderly exit from the Russian market and we have completed that. Then we announced our plan to centralize our 4-stroke manufacturing to Vaasa, Finland and to scale down manufacturing in Trieste, in Italy. And we have also decided to integrate the Voyage business into Marine Power to strengthen the end-to-end offering and accelerate the Voyage turnaround.
Now if we look at the numbers, and I will focus a little bit on the Q4 side. If we see the order intake, it went down quarter-on-quarter from €2.1 billion to €1.6 billion. It’s a 24% decrease. But we should remember Q4 2021 was an all-time high quarter for Wärtsilä history. And if you look really at the order intake, on the full year, actually 2022 has the second highest order intake in Wärtsilä history. The highest year is still 2018. So from order intake side, I would say a pretty strong year. Services, jumping back to the quarter, is continuing to grow from €747 million to €791 million, 6% growth. Net sales also growing from €1.6 billion to €1.8 billion, 11% growth. Book-to-bill, we have been living now with a number of quarters above 1. Now it’s coming down slightly below 1. The rolling – 12-month rolling is still above 1, but it’s coming down a little bit in this quarter. Operating results clearly coming down 75% from €144 million to €37 million and by that from 9% to 2.1% and similar development on the comparable operating result, down 41% from €158 million to €93 million.
So looking at the fourth quarter highlights. So, net sales close to €1.8 billion and a 4% increase in service sales. The comparable operating results landed at €93 million, which is a 41% decline. If we look at the marine market, I would say that the market sentiment continued to improve despite the growing macroeconomic concerns. Newbuild investments were moderated due to close to full order books at many yards and also higher newbuild prices.
If we look at the number of vessels in Q4, they decreased to 1,538, down from 1,855 year-on-year comparison. Order activity was supported by record high orders for LNG carriers, especially in terms of order value. Fleet utilization on the passenger travel segment has improved and the offshore assets reactivation also continued. 466 orders were placed globally for alternative fuel capable vessels, and that represents about 30% of all contracted ships and 60% of the vessel capacity in the review period. The cruise sector focus shifted towards managing the capacity growth and occupancy levels in a profitable way and mitigating the impact of rising operating costs.
Looking at the energy side, I would say – we would say that the energy transition outlook is very strong. The energy crisis has brought out a clear need and an ambition for a structural change in the energy sector. And the uncertainty caused by the geopolitical situations continues to affect the investment environment for liquid and gas fueled power plants and energy storage. I would say that U.S. is moving very strong. Europe is holding back for the moment a bit. Beyond some of the short-term setbacks, the energy transition outlook is very strong and advancing the renewable energy buildup strengthens the security of supply by reducing dependency on fossil fuels.
Growth in the demand for the energy storage solutions continued. And a really interesting figure, 42% of our full year thermal order intake was related to balancing power. So balancing is really growing as we speak. Service growth continued and customers are showing increasing interest in long-term agreements. And our market share for the gas and liquid fuel power plants increased the notch from 7% to 8%.
Looking at order increase overall, the order intake decreased by 24%. The equipment order intake decreased by 40%, but it’s from the all-time high quarter last year. Services, on the other side the order intake increased by 6%. We have a strong order book and the rolling book-to-bill is still above 1. And also, if you see where we went out from the last day of 2022, you can see that we are building for deliveries in 2023. Net sales increased by 11% and the equipment net sales increased by 17% and services net sales increased by 4%.
Technology and partnerships, so what are we doing there? What have we done in the last quarter? The decarbonization journey continues and the decarbonization theme continues, I would say, to accelerate. We clearly continue to have a lot of interest from our customers, both on the energy and on the marine side. We really feel the strength in the trend. So a couple of exciting things that we have done in the last quarter, we launched our next generation of grid balancing technology. So this is a solution that is based on three fully integrated key components. It’s first the Wärtsilä 31SG balancing engine, then it’s a concept with prefabricated modules to drive really cost efficiency for plant construction.
And the third element is the Wärtsilä Lifecycle services. So that combined, it’s a very interesting customer proposition. The engines can start and ramp up rapidly, do a lot of ramp up and ramp down – ramp ups and ramp downs and adverse weather condition. It’s a very robust solution to support intermittent renewable generation. Then we have concluded exciting test successfully. It’s a hydrogen blended fuel on an unmodified engine. So we are taking an existing engine. We blend in the hydrogen and we run it in full operation. And this is a testing that we did in Michigan, in the U.S. in collaboration with WEC Energy Group with EPRI and Burns & McDonnell. And throughout the testing period, this 18-megawatt Wärtsilä 50SG engine continued to supply power to the grid. And this is really the largest internal combustion engine ever to operate continuously on hydrogen fuel blend.
So this is world’s first achievement. Then of course, it’s a step to other steps, but we are moving the needle. Marine Power, fantastic picture. Marine Power had very good progress in services. And I think the picture – actually, this fantastic picture also reflects the fantastic performance of Marine Power. Service order intake increased by 23% and service net sales increased by 17%. You can see the order intake is up 2%. Net sales was down a little bit with 5%. And if you look at the comparable operating result, it was up from €75 million to €80 million.
And on the positive side, we do see the good service performance and also favorable mix between equipment and services. On the challenging side, we have the cost inflation affecting materials, especially components, transport and test fuel costs – test fuel cost. Component unavailability has also been a bit of a challenge, and the high energy prices in general is also having an effect, but in net, a positive development.
If we look at our service agreement business in the Marine Power, it’s really developing in a positive way and net sales from installation – from installations under agreement is strongly increasing. And as you can see, we are well above now the pre-COVID levels, so really good development on services. Another example that we want to bring is how we are evolving our hybrid propulsion systems, combining batteries, combustion engines. And now we combine the batteries with our methanol engines. And we just got an order for that, which is really exciting. It’s a hybrid propulsion system to be supplied for 4 new heavy lift vessels. It’s – they’re going to be built at the Wuhu Shipyard in China for SAL Heavy Lift.
And our innovative hybrid system will minimize the ship CO2 emission, thus supporting the Marine sector’s decarbonization. And the system will feature a variable speed, Wärtsilä 32 main engine capable of operating on methanol fuel. And on the hybrid side, we are really in a strong position. We are the market leader with about 25% market share based on installed megawatt hours. It’s a very strong and interesting business going forward.
Marine Systems. Marine Systems net sales were stable and so a comparable operating result. Service order intake increased by 11%, you can see the order intake came down mostly driven by the scrubber business, the net sale, up 6%. And if you look at the comparable operating result, it’s a little bit down, but I would say it’s rather flat. We have a steady development on the services side, but we have also had lower scrubber volumes in the quarter.
Voyage. Voyage had a positive and improving comparable operating results. Service orders were stable. Order intake was down. You can see down 21%. Net sales up a notch, 1%. And if you see the positive development on comparing our operating results from €1 million to €5 million. The key driver was the higher profitability in services, then being able to fully balance the closure of the profitable Russian turnkey business, which is not contributing to Voyage anymore and also the cost inflation. Our cloud solutions in Voyage continue to grow. So 19% increase in connected vessels. And here, we have, I think, a really interesting example what we can achieve. This is from Carisbrooke Shipping that had really proven that they can improve the environmental footprint using our fleet optimization solution. So Carisbrooke Shipping has in 2022 using FOS reported a fuel reduction of 5% to 7%. This is significant. I said over 600 tons of CO2 emissions. And Carisbrooke they are responsible for monitoring vessel position, passage plans and roads, advising on maximizing cargo intake and monitoring vessel safety and performance. And they use real-time data that enable continuous optimization of the fuel consumption across the fleet. And I should also say this was the last time that we reported Voyage in this context. Voyage is now being integrated, as you know, into Marine Power and will be part of the end-to-end offering, combining propulsion, the fleet optimization and Performance Services. And we have also earlier informed that we will present an updated strategy for Voyage in Q1. So that is coming.
Now energy. So energy had a challenging quarter. I mean the Olkiluoto cost provisions really burdened the result and also the challenges with cost inflation remained. So the order intake came down from record levels, down 37%, whereas the net sales went up with 28%. And you can really see the significant downturn in comparable operating results from €64 million to actually negative €8 million in the quarter. On the positive side, we have an improved cost leverage on the storage on the battery side due to the high delivery volumes. But the real challenges were the cost provisions of €40 million related to Olkiluoto, the cost inflation in equipment projects and also a less favorable sales mix between equipment and services.
Energy storage net sales continued to grow and profitability has been improving and the full year comparable operating result was approximately 4% in 2022. So this is the figure that I know many have been asking about. And now we are making this public. This is a full year, minus 4% in energy storage.
Some really good examples on the balancing side. Here, we have three different projects – well, three different deliveries. We have first our internal combustion engine technology for two new balancing power plants in the Upper Midwest. And the Wärtsilä engines, they were selected primarily for the grid balancing capabilities as the utility expands its integration of renewable energy in wind and solar basically. And the two plants will operate with Wärtsilä 34DF, the dual fuel engines. First plant will generate 28 megawatts based on 3 engines; second, 47 megawatts of power on 5 engines. And then we have another balancing example this time from Basin Electric in the U.S., 130 megawatt, also balancing, also integrating renewables, enabling the integration of renewables into the power system. And it is really this fast starting and stopping in a very short time that can support the intermittent renewables. That is the key trigger. And it’s also a rugged solution that can really cope with weather of all types and conditions.
If we look at the energy service agreement side, we also continued the good development on the coverage, so to say. And you can see that the trend is continuous and it’s going in the right direction. Another key part of our business development is the power system studies that we do, the power system modeling and we have done quite a few during the recent years. The latest one here is a system modeling that we did for Nigeria, South Africa and Mozambique.
And the modeling found that renewable energy and combined with flexible power can generate enough energy to provide power for close to 100 million people who currently do not have energy access and if it is matched with the required grid infrastructure. The report also demonstrates that replacing coal with renewable energy, combined with flexibility from engines and energy storage is the most effective way to reduce energy cost, increase energy access and improve reliability. And I think we are doing these studies in many parts of the world, and this is a common conclusion that we reach, so to say.
Now, Arjen, other key financials.
Arjen Berends
Yes, I have – one clicker. Thank you, Hakan. If we look at the other key financials, a few points to highlight on this slide. We had a positive cash flow in Q4, €51 million. But unfortunately, let’s say, not enough to take the full year to a profitable – sorry, not to a profitable, but to a positive number. Cash flow has been a bit of a challenge during the year. It started already in the beginning of the year with a negative working capital at the start, which was really driven by big customer payments that came in, in December 2021. And in addition, we also had during the year to raise our inventory levels to facilitate increased spare part business.
There is an echo on my mic. Okay. Now, it’s better. To facilitate increased spare part business and also to, let’s say, smoothen or have a smooth footprint changes on the 4-stroke side, for example, the ramp-up of the sustainable technology in Vaasa.
Net debt increased. We paid back €93 million of long-term debt during the year. But due to a low cash flow as well as, let’s say, increased leases, €69 million also related mainly to the sustainable technology hub in Vaasa. The net debt position went from €4 million to €481 million. And that, of course, also has an impact on the gearing ratio even though the gearing ratio is still at a good level, as you know, we want to be below 0.5.
Solvency improved a bit during the quarter four but has been throughout the year 2022 around 35%. Of course, I’d say the negative profitability having a clear impact on the equity in the equation of solvency calculation.
Looking at cash flow. On the left side graph, you can clearly see the challenging start. So we had two quarters with negative operating cash flow. And then in the second half of the year, we had two quarters with positive operating cash flow, as I said, not enough to take the full year to a positive number. And again, let’s say, the big Q4 give us somewhat of a bad start in the beginning of the year.
If we open up a little bit on the fourth quarter stand-alone, you could say that the operating cash flow generated in Q4 came about 50-50 from one part being the result and the second part being the change in working capital. And in particular, trade payables is a big bar here, and that is mainly related to purchases for near-term deliveries.
Looking at the dividend. As you know, let’s say, our target is to pay at least 50% of EPS as dividend. And if you look at historical years that clearly the case. Now we have a loss-making situation, but the Board still proposes €0.26 as dividend for 2022. Giving back to you, Hakan, on the prospects.
Hakan Agnevall
Thank you, Arjen. So if we look at the prospects, so we go back to giving the prospects for the next 12 months, so we now expect the demand environment for the next 12 months in the Marine business, which includes Marine Power and Marine Systems to be similar to that of last year. And for the energy business, we expect the demand environment to be better than last year.
Okay. So those were the prospects. So let’s move over to the Q&A. And I suggest we do like we normally do, that please raise your hand digitally and state your name, etcetera. And let’s start with one question per person. And then, of course, you can come back. So let’s open the floor.
Question-and-Answer Session
Operator
Okay. First question on the line is from Daniela Costa from Goldman Sachs. Please open up your microphone. And ask your question.
Daniela Costa
Hi. Good morning. Thanks for taking my question. Do you hear me?
Hakan Agnevall
Welcome.
Daniela Costa
Perfect. So my question is regarding like the statement on your outlook where you talked about – I think you used the words turning around in Voyage and in storage. And I wanted to clarify, is that a comment for 2023? Do you expect those businesses to breakeven already in ‘23? Or is that more of a medium-term comment? And then just related to this, but there is a comment also that you have more EPC within storage now. What does that mean for that comment and for the medium-term margin? Thank you.
Hakan Agnevall
So I would say that our earlier message over a few years, it still holds. And I think we are moving in the right direction. You could see now on the storage, the minus 4%, and we say that we have a positive trend but I still think you should look at this over a few years. And similar on the Voyage side, I think we’ve seen strong Q4, but there is still a turnaround to be made, so to say, and that will take a few years. And as I said, we will come back during Q1 with updated strategy. That I can clearly say.
Daniela Costa
Alright. Thank you.
Arjen Berends
Storage, strong Q4 is very much driven by a good volume actually and also good service business.
Operator
Next up is Max Yates from Morgan Stanley, please.
Max Yates
Thank you. Can you hear me?
Hakan Agnevall
Hello, Max.
Max Yates
Yes. Hi. So I just wanted to ask about how to think about energy margins into next year. Because I think you’ve been quite open in saying that you had some backlog that was impacted by higher component costs, I think you’ve talked about €2.2 billion of lower-margin revenue falling to €1.2 billion this year. So I guess when we look at the energy margin and kind of where you were in 2021, is there any reason that we shouldn’t get a sort of significant natural uplift just by price cost on orders that you’ve taken in the second half being a lot more favorable and potentially going back to those 2020, 2021 levels. So I guess can you confirm that sort of price cost on orders going into the backlog in energy are, I guess, more like 2021 in the thermal business? And how should we think about maybe the business in ‘22 compared to – sorry, in ‘23 compared to what we were doing in ‘21?
Hakan Agnevall
No, thank you, Max. And we don’t give guidance, of course, on profit margins, etcetera. But I mean, to your point, it’s clearly, your observation is right that we are working through an order backlog and €2.2 billion for this year, we have still €1.2 billion approximately to deliver in 2023. But as that transfers through the system, I think we should see more normal levels, so to say. So then I will also say where we have a positive outlook is on the services side.
Max Yates
Okay. And maybe just – sorry, one housekeeping question, just in terms of your energy storage margin, just to help us understand the overall development of the margin through the year. Would you say, without giving the specific numbers, would you say there is significant variability between the storage margin per quarter or is it more stable? Is it as seasonal as this kind of overall energy business or is it – does it tend to be more stable across the quarters?
Hakan Agnevall
No, I would say that it is a fluctuating business. I mean it is a project business. So you can have movements from one quarter to the other. And this is also why we talk about the minus 4% over the full year, but we also see an improving trend.
Max Yates
Okay, that’s fair. Thank you very much.
Arjen Berends
We will continue to provide these numbers every quarter on a rolling 12-month basis. Yes.
Operator
Next up is Antti Kansanen from SEB, please.
Antti Kansanen
Yes. Hello, it’s Antti from SEB. My question is on the services and if you – if we look at the order growth that you had in ‘22. And if we exclude kind of FX and pricing impacts, I guess we are looking maybe a mid-single-digit volume growth. Am I on the right ballpark here? And then could you kind of summarize the headwinds and, let’s say, opportunities and challenges going into ‘23, especially at the marine power and energy side in terms of volume growth in services.
Hakan Agnevall
So I think the major driver here is, as you know, we’re talking about the service value ladder. And where we have different steps, I mean, the first step is the more transactional business. We have different type of agreements. We have retrofits and we have performance based. And what is happening right now is that we are growing each step. And then at the same time, we are transferring customers up through the service. I mean moving – trying to move customers and we do have some progress in that, moving customers to agreements and to more advanced agreements. So yes, there is, of course, a price and inflationary component. But I do think that the fundamentals are there, and we also see a continued, you could say, organic growth avenue.
Antti Kansanen
Would you mind providing any kind of a clarification on pricing and FX on service orders in ‘22?
Arjen Berends
No, we are not giving that number out. Let’s say, what we do in price increases I think, is competitor sensitive. So we don’t provide that. No.
Antti Kansanen
Okay, thank you.
Operator
Next up is Vivek Midha from Citi. Please you can ask your question.
Hakan Agnevall
Sorry, we can’t hear you.
Vivek Midha
Hi, everyone. Thank you very much. Good morning. I wanted to ask a follow-up on the order intake in energy. Would you mind giving us a sense of how you expect the energy storage order intake to develop? And what sort of impact the Inflation Reduction Act might have in this year as opposed to say uplift next year thereafter. Thank you.
Hakan Agnevall
So if we zoom in on storage, I think we see a continued positive development. I mean the market is really growing. I would say it’s even growing, excluding IRA. I would say that it would – in our view, at least that it IRA creates a positive sentiment clearly a drive for localizing in the U.S. because of the – by Americas side. But I think we have yet to see the very concrete effects of it, so to say, but the market is still growing. And not only in the U.S., it’s growing, I would say, in many places in the world.
Arjen Berends
Clearly, a tailwind for storage.
Hakan Agnevall
It is clearly, a tailwind. But the very concrete effects remains a little bit to be seen.
Arjen Berends
Details to be worked out as well actually on it.
Vivek Midha
That’s great. Thank you.
Operator
Next up is Sven Weier from UBS, please.
Sven Weier
Yes. Good morning. And just to follow-up on the margins. I know you don’t give a quantitative outlook here. But just when I look at your qualitative statements in the report, right, you say we aim to improve profitability. So to me, that means margins. Is that also excluding the €40 million provision you had in Q4?
Hakan Agnevall
I think the €40 million, they were one-time time effects. So I think you should put them aside, quite frankly.
Sven Weier
So you aim to improve margins also if we were adjusting for this in ‘22.
Operator
Next up is Sebastian Kuenne from RBC, please.
Sebastian Kuenne
Thanks. I have a question regarding the capacity utilization in Vaasa and Trieste at the moment. And then what was the risk that the Trieste facilities will have to stay open beyond September 2023. What’s the current update there with the Italian government?
Hakan Agnevall
So basically, we have reached an agreement with all stakeholders, the unions, the regions, the government, on the process and a way forward. And we are working according to that. So right now, during the first quarter, we are making deliveries and – from Trieste and we are also ramping up in Vaasa. Then according to the scheme, which is public, there will be furlough arrangements going forward according to the process. And then we will basically see in September, I think the very important thing here is that there are furlough mechanisms in place. So I think there is – we feel a strong support from the Italian, you could say, ecosystem in making this transition. In parallel with this, and this is also public, we are very active in what is called a reindustrialization process. And that is basically a process where we try to find other stakeholders to take over the manufacturing, so to say, but that is a parallel process.
Sebastian Kuenne
Is there a risk that you will incur further costs there? Or do you think that is now all through the books?
Hakan Agnevall
No. I think we made provisions for €132 million last year. And I think the outlook that we are having.
Arjen Berends
Correct. We announced €130 million, and we booked €90 million last year. So this year, there will be the remaining part.
Hakan Agnevall
Thank you for correcting me. So we announced provisions for €132 million and we still think that we will be able to manage within those boundaries.
Sebastian Kuenne
Okay. And then a follow-up on energy, I mean, we all know that you had this 50% price hike in Q1 last year. And in summer, the input costs were nicely coming down. But now we see copper going up 20% since summer. We have lithium going up 50% since summer. How do you assess the risk of that further price increases are now needed to cover your cost on the energy storage?
Hakan Agnevall
So on the storage side, what has happened also as a consequence of this significant price increases we had in Q2. I mean, the model has now changed. So you have material price indices in the contracts. So that has been made in a major way. So you could say that we are a little bit more covered from that going forward.
Sebastian Kuenne
Understood. Thank you.
Operator
Next up is Tomi Railo from DNB. Please, you can ask your question.
Tomi Railo
Hi, this is Tomi from DNB. A question on the demand outlook, you now give it the full year, as you mentioned, can you comment the first quarter demand outlook and maybe also your view on the services demand for the full year?
Hakan Agnevall
So since we now go to annual according to our policy, we will stick with annual, Tomi. So you will have to live with that now. I understand your question. But now we stick with the full year. But then if you look full year services, which I also understand your question, I think we have a positive outlook. And it’s fueled both by high utilization of our equipment, both on the energy and the storage side and also by our strategy to move up the service value level.
Tomi Railo
Okay. And if I may continue on the voyage strategy update, you have earlier said that it will be moved to Marine Power. Does the strategy update possibly mean something else that it could not necessarily be put on Marine Power, but possibly something else?
Hakan Agnevall
So by – from the 1st of Jan, it has already been moved. Voyage has been moved to Marine Power. So it’s already there. But that is just a starting point of shaping a business that is focused on this end-to-end offering for optimization. And this is something we will come back to how we structure that and how we set this up. This will come back in Q1.
Tomi Railo
Thank you. And the third if I may. Energy orders last year didn’t include any, let’s say, mega orders as the year before. Do you have that kind of large, very large orders in the pipeline?
Hakan Agnevall
Well, there is a lot of things in the pipeline, but I think we have all been following that. So these things can slide in time, etcetera, etcetera. So I’m very careful there. like I would say, there is always prioritization phenomena. You also know the practice for us to recognize order intake. We need down payment, etcetera, etcetera. So you need – you cannot only look on one quarter when you try to assess where we are. I think that on the – if we look on the thermal side, I would say it’s rather stable.
Arjen Berends
Yes. It’s a good pipeline.
Tomi Railo
Thank you.
Operator
Next up is Panu Laitinmaki from Danske Bank, please.
Panu Laitinmaki
Thank you. I have two questions related to marine. Firstly, on the demand outlook, you expect it to be at the same level as last year. Just kind of what are your thoughts behind that assumption given the lower ship orders? Is it so that you see kind of your relevant ship types growing, or what is the thinking behind that? And then secondly, how do you see the margins developing in ‘23, I mean should we assume kind of support from kind of mix being a tailwind? And then also, can you comment on kind of the backlog of problem projects? Was it only in energy, or do you still have this in marine?
Hakan Agnevall
So, quite a few questions. We will take them one by one. So, if we talk about the order backlog, as you know, Russia, we made a major exercise during 2022 in correcting and reshaping the order backlog for marine, it has been done. So, I would say we have a robust order backlog on the marine side. And how do we assess the market. I think as you know, we are active in many segments. And we see activities in special vessels, in offshore, in ferries. Cruise is a little bit muted still. It’s – we see a little bit of activities also on auxiliaries for merchant. So, we – yes, the overall figures for the whole markets are coming down, but we see activities and interest also partially driven – you could see this methanol example earlier today with heavy lift. I mean there are many of these applications and our green offering is feeding in very well to many of these type of customer needs. So, it’s – I cannot point at one segment. It’s a little bit everywhere.
Arjen Berends
And it’s good to remember that, let’s say, in the marine industry have also, let’s say, quite stable segments like tug boats and fishing in these. So, there is a quite good stable base of orders basically every year. And then if you take a ship segment like cruise, if you look at the Clarkson forecast, clearly let’s say, 2023, I think it was 20 vessels is clearly higher than what we have seen in 2022, I think it was six or seven. So, things are happening. And I would say the segments that we are typically strong in, we have a pretty okay outlook actually.
Panu Laitinmaki
Thanks. That’s clear. Can I just kind of clarify on the backlog? I think you gave a number of €1.2 billion continuing into ‘23, which is these projects taken before the inflation accelerate. So, is this like fully in energy this number?
Hakan Agnevall
I would say it’s a bit of a mix, but the gravities in energy.
Arjen Berends
The majority is there.
Panu Laitinmaki
Okay. Thank you.
Operator
Next up is Nancy Ni from Goldman Sachs, please. You can ask your question.
Nancy Ni
Hi. Great. Thank you very much. I just wanted to touch on your cash flow. And I was just wondering, do you see a quick reversal of your kind of current cash levels given the working capital impacts and sort of what more can be done there?
Hakan Agnevall
I missed the beginning of your question. Can you repeat?
Nancy Ni
Yes. Just wondering on your cash and cash flow, do you see a quick reversal and given it’s been hit by sort of working capital and what else can be done there?
Hakan Agnevall
Yes. No, let’s say, clearly, we do anticipate, let’s say, better cash flow in 2023, let’s say, a negative cash flow is of course, not something that we would celebrate on. And okay, I explained, let’s say, what are the main drivers behind that. And clearly let’s say, we expect that to reverse in 2023. Exact timing is difficult to say. There are a lot of moving parts in the working capital. But clearly, we anticipate an improvement in this year.
Nancy Ni
Okay. Thank you.
Operator
Next up is John Kim from Deutsche Bank, please.
John Kim
Hi. Thanks for the opportunity everyone. I wanted to go back to storage if we could. Can you give us some color on the match or mismatch between the actual lithium price moves and the indexation? And is there a difference between the quarters, or is that the trend or the relationship early study? Thanks.
Hakan Agnevall
So sorry, I hear you a little bit badly. I don’t know if it’s a bad connection, but can I please ask you to reiterate your question?
John Kim
Sure. I was wondering if we could go back to storage. Could you give us some color or context between how the new indexation, the new contracts are matching, not matching the actual price moves in the lithium or the underlying battery costs. And is that relationship noticeably different in the quarters. One follow-up question, please.
Hakan Agnevall
Yes. So, I mean basically, you have a material price clause when you sell something where you have a kind of pass-through mechanism based on lithium prices and some other raw material prices. So, it’s a fairly straightforward pass-through. And this type of pricing mechanism they became more and more used after the hike of pricing in Q2 last year.
Arjen Berends
You could more or less say it’s back to back, right?
Hakan Agnevall
Yes. You could say it’s back to back.
John Kim
Okay. Great. And is the lead time or fulfillment time on the storage unit similar to last year, or is it getting materially better? Thank you.
Hakan Agnevall
You mean the delivery lead time?
John Kim
Yes.
Hakan Agnevall
No, I would say it’s about the same. I think we have been asked questions about our delivery position and also our capability to deliver. And I would say that this has been one of our focuses. And I think some of our customers would even say it’s one of our strengths that we deliver on our commitments on time, so to say. So – and of course, we have valuable supply partners that we are working with. So, for us, we are keeping the lead time.
John Kim
Okay. Thank you.
Operator
Next up is Sean McLoughlin from HSBC, please. Sean, you are next.
Sean McLoughlin
Can you hear me?
Hakan Agnevall
Now, we can hear, Sean. Welcome.
Sean McLoughlin
Super. Thank you. Firstly, just – you mentioned earlier about different demand dynamics between the U.S. and Europe. If you could just I think, add a little bit of color here, particularly in Europe, I mean are you seeing effectively capital moving, particularly around decarbonization out of Europe towards the U.S.? And my second question, you also made a comment on the shipyard being full. I therefore wonder, is your guidance around similar year-on-year demand around constrained capacity rather than actual underlying demand, particularly for services? Thank you.
Hakan Agnevall
So, if we talk on – we will start on the energy side, and we talk the demand environment, I would say, for balancing both thermal and storage in the U.S. and a little bit contrast with Europe. I mean we can really see balancing demand moving very fast now in the U.S. And you saw the examples that I mentioned earlier of order intake. They were all in the U.S. And we see a very strong market development there, both on the thermal but also on the storage side. And IRA will further support this transition. What is happening now, there is – our view there is – will be a significant growth of renewables. And then you need the balancing power to enable it. So, it’s very strong and happening as we speak. In Europe, I think that we all know the energy crisis. And I think the most current focus is to secure gas deliveries and to set LNG infrastructure, etcetera. Unfortunately, also many are retracting to coal. But we see this as a relatively short-term phenomenon. In parallel, what we do see happening is this strengthening of the focus on moving renewables forward. But I think the major constraint for really accelerating renewables in Europe is permitting. Everybody wants green power, but not in my backyard. And the whole permitting, as you know, EU is working on a context on – framework on this, but this is a political issue. And this is what we see holding back renewables right now and therefore balancing, but it will come. But even in our view, it will take a little bit longer time. Then of course, also with the high gas prices, it creates some commotions and people might wait a little bit. But I also sometimes get the question, the current interest rate, how do they affect you, I would say that our customers, when they do make their investment cases, they have much longer time horizons than just considering the current interest rate. So, we think that Europe will get there, but it will take some time.
Operator
Next up is Erkki Vesola from Inderes, please. You can ask your question.
Erkki Vesola
Hi Hakan, Arjen, can you hear me?
Hakan Agnevall
Yes. Welcome.
Erkki Vesola
Yes. Regarding these low margin or even loss-making projects, this €1.2 billion are – you previously indicated that this pipeline will be fully exhausted or delivered by Q4. Can you still confirm this? And is there any pattern between quarters? I mean is it front loaded, back loaded in Q1, Q3, etcetera?
Arjen Berends
You are talking about the €1.2 billion, Erkki, right?
Erkki Vesola
Yes.
Arjen Berends
I would say the majority is probably in the first three quarters, might be a few bits, let’s say, into Q4. But by the end of this year, we should be done with it.
Hakan Agnevall
And just to clarify, we haven’t seen that they are loss-making. We have said that there are projects that have been heavily impacted by inflation. Yes, just to make sure.
Erkki Vesola
Okay. Thank you so much.
Operator
Next up is a written question from Vlad Sergievsky from BofA. Could you explain the drivers for a very big €250 million increase in trade payables in Q4 in ‘22? Does it have anything to do with higher utilization of supply chain financing facilities? Trade payables to sales now stand at 20%, while historically were around 10%. Do you expect any normalization here given that cost of supply chain financing are rising with higher interest rates?
Hakan Agnevall
Good question. Yes, the supply chain finance is definitely, let’s say, part of it. Let’s say, we have at the end of, what is it now, at the end of 2022, I think we have about 49% of our trade payables is supply chain finance, which was earlier, I think 1 year. Before that, it was 42%, if I remember right. So, yes, supply chain finance is clearly part of it. But it’s related of course, to what you buy and what you need to deliver in the near-term future. Supply chain finance is just giving you extra payment time.
Operator
Yes. And there is another question from Vlad. On Slide 26, you provided a helpful cash flow bridge. Could you comment on €176 million cash outflow related to other working capital. Does this item include contract assets, unbilled receivables? Thank you.
Hakan Agnevall
The whole percentage of completion is part of it, which is, of course, a lot of moving elements. Yes – answer is yes.
Operator
And then there is a question from Sven Weier from UBS, please.
Sven Weier
Yes. Thanks for taking my follow-up questions. The first one is on cruise. I think you mentioned 90% of the fleet is back in service. I was just wondering what your expectations are on China reopening? I mean I guess the China cruise travelers have been absent in the market for a few years now and probably coming back. Do you expect this to give you a further uplift to cruise?
Hakan Agnevall
I would say where we see really the stabilization growth coming back is in the U.S. I think Europe has been a little bit slower, but it’s coming. And Asia will probably come the last. It’s very hard to predict how China and Asia will evolve because it’s like trying to predict COVID. And the interaction there between COVID and cruise in Asia, it’s a very complex environment. So, it’s very hard to make any predictions. And I think that when we look at the future on our outlook, it’s mostly based on North America and Europe.
Arjen Berends
And just to add, so let’s say, of course, our service business, if that’s what you referred to, is correlating with running hours and whether the vessel is, let’s say, fully utilized by passengers, by cruise passengers or not, let’s say, the ship sales and the running hours that what counts for us. So, I am pretty sure that many cruise operators would love to see more occupancy rates on their vessels. So, I think the Chinese are more than welcome.
Hakan Agnevall
Absolutely.
Sven Weier
Okay. And the other question I had was just on the storage margins. Thanks again for providing the margin for last year. I mean what’s your intention from here? Do you intend to report this on an annual basis now, or quarterly basis, or was there is an exception now for 2022?
Hakan Agnevall
No. Our intention is to report on a quarterly basis, rolling 12.
Sven Weier
Okay. Good. And the last question is…
Hakan Agnevall
Sven, we have listened to you and your colleagues.
Sven Weier
Yes. Appreciate it. Thank you. The last question I had, if I may, was just on the storage order intake, which in Q4 was down quite a bit sequentially. Is that just the lumpiness? And as you said, the pipeline is generally good. And so there is nothing to read into that.
Hakan Agnevall
No, this is – as you put a lumpy business, you can have swings quarter-on-quarter. You need to take the rolling 12 as a – look at the longer terms.
Sven Weier
So, the renewed uptick in the prices that we already talked about that didn’t have people now taking a step back like they did a year ago and reevaluate. That’s not what’s happening.
Hakan Agnevall
So far, we haven’t seen that tendency now.
Sven Weier
Okay. Thank you. That’s it.
Operator
Next up is Max Yates from Morgan Stanley, please. You can ask your question.
Max Yates
Hi. I just wanted to ask a little bit around kind of what we are seeing in the service business in energy. And I guess what I was wondering, I mean, now that the storage business is kind of a fairly considerable part of revenues at €774 million for the full year. Are you able to give us a feel for how much service that’s generating? And I guess could you also talk a little bit about – you have talked about thermal balancing orders becoming a much bigger part of the equipment orders. I also wonder kind of how the service business on those thermal – on that thermal business, as you deliver those is comparing to, say, your traditional business. So, kind of two questions. One is the thermal service business? Sort of are you seeing lower revenues when it’s for balancing. And then the second one is just around service, some help around how the service business for storage has evolved within that €775 million? Thanks.
Hakan Agnevall
So, service for thermal balancing, it’s a little bit early to say because we are – the really off-take on the balancing side, it is only a couple of years back. What we have seen, if you look at a little bit older, transitional base load, etcetera, etcetera, the machines are running much more than maybe the customers originally had envisioned. So, we don’t see on those old installations a downturn on the service business so to say. Theoretically, you could – which is perfectly viable if the customers will run their engines 3,000 hours or less, then of course, there will be less maintenance. But – and this is part of our strategy is to move up the service value ladder going for more performance-based arrangement and sharing up and downsize. And as you know, we launched our decarbonization services business last year, and we are evolving that. It’s still relatively small. But we have a fairly optimistic view on the service business in thermal base load balancing going forward. If we talk storage, it’s clearly so that it’s a smaller portion, much smaller portion because there are no moving parts. And there is a power system optimization, digital service, but still I would say, it’s a rather small share of storage. It’s – still today, it’s a significant in equipment business.
Max Yates
That’s helpful. Thank you very much.
Operator
Next up is Erkki Vesola from Inderes, please. You can ask your question.
Erkki Vesola
Yes. Many thanks for that. Regarding the storage profitability in ‘21, have you calculated this what I am of course, after is the delta between ‘21 and ‘22 in terms of storage profitability?
Hakan Agnevall
It’s a good question, but we don’t go into those details. I think we start with a minus 4% now it’s one step forward.
Arjen Berends
We are forward-looking, not backward looking. Backward is to learn from us.
Hakan Agnevall
I mean this is of course, a business – sorry, just to – this is a business that is growing very, very fast. So, yes, let’s focus on the future and the future profitability.
Erkki Vesola
We should. Thanks.
Hanna-Maria Heikkinen
Thank you, Erkki and thank you for – all of you for great questions. Thank you, Hakan and thank you, Arjen, for presentation. Wärtsilä Q1 report will be published on April 25. In the meanwhile, I hope that you can also enjoy the warm winter this year. Thank you.
Hakan Agnevall
Thanks a lot.
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Wärtsilä Oyj Abp (WRTBF) Q4 2022 Earnings Call Transcript