WRT1V.HE FY2025 Q1 Earnings Call Transcript
Date: 2025-04-25
Source: Financial Modeling Prep

Hanna-Maria Heikkinen: Good morning, and welcome to this news conference for Wartsila Q1 '25 results. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will start with the group highlights, then he will continue with that business performance. And after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, we will continue with a Q&A session. Hakan, it's time to start.
Håkan Agnevall: Yes. Time to get rolling. First quarter, it was a strong quarter. We improved our operating results, and we continue to grow strong on net sales. We have an all-time high order book of about EUR 8.5 billion. Net sales increased by 18% to about EUR 1.6 billion. Operating results increased by 30% to EUR 165 million, which corresponds to 10.6% of net sales. Comparable operating results increased by 29% to EUR 171 million, which corresponds to 11% of net sales. Our journey in services continues, so good progress there. Service order intake increased by 5%, service net sales increased by 6%, and we continue with a book-to-bill well above 1, so at 1.12. Cash flow, we had a solid cash flow from our operating activities of EUR 190 million. And as we announced before, Wartsila, we have concluded our strategic review of Energy Storage. And we also have set new financial targets on March 31 this year. Now let's look a little bit deeper into the numbers. So if you see order intake overall, was down 1%. So it landed around EUR 1.9 billion. You can see that on services, we still continue to grow, 5% growth, EUR 992 million. Equipment looks challenging, down 7%, but that is driven by Energy Storage. And we talked about it before, Energy Storage is a lumpy business. We had a slow Q3, remember that, very strong Q4. And now in Q1, we yet again have a slow order intake in Energy Storage. If you look at -- if you take away Energy Storage, the rest order intake on equipment is actually up with 19%. Order book increased with 17% now at EUR 8.5 billion. And current deliveries, deliveries this year at EUR 4.172 billion. And one thing we will talk about, we see all-time high on order backlog, but we also see longer and longer orders. So the sales will be spread out over more years, but we will come back to that. Net sales up with 18% at EUR 1.6 billion -- close to EUR 1.6 billion. And we see services continue to growing 6% to EUR 884 million, and equipment up significantly 38%, EUR 676 million. And book-to-bill continues well above 1 at 1.22. I think it's the 16th consecutive row that we continued -- 16th consecutive quarter that we continue to grow the book-to-bill above 1. Comparable operating result, up 29% to EUR 171 million, touching 11% of net sales and then operating results up 30% to EUR 165 million, touching 10.6% of net sales. Starting with our outlook on the Marine and our industry view, we see a more mixed market sentiment and demand for new ships was negatively affected by the growing uncertainty. So the number of vessels ordered in the review period decreased to 235 from 368 in Q1 last year, excluding reporting of contract -- excluding late reporting of contracts. A more mixed outlook, the heightened uncertainty and also the caution around the measures suggested by U.S. against Chinese-linked ships slowed down the investment appetite in new ships in some segments. However, in cruise, strong growth and demand has enabled cruise lines to continue newbuild investments and also ordering for new containerships remained relatively strong as liner operators progressed with the fleet renewal plans. The outcome of MEPC83 was also a step forward. I mean the agreed proposal decision will be taken in October, hopefully. For a global carbon fee in the maritime market supports the continued decarbonization journey. So in the first quarter, 85 orders for new alternative fuel capable ships were reported accounting for 36% of all contracted vessels and 65% of the capacity of the contracted vessels. And we also see on the graphs how the vessel contracting trends are panning out. We introduced the new dotted line with the 10-year average. So we clearly 2024 overall was a high or very -- a year of very high orders. We also see in the bottom graph that the Wartsila key segment is trending around a 10-year average, so to say, also in Clarksons' forward-looking outlook. Turning to energy. Strong long-term prospects, but elevated uncertainty in the short term, and high load growth continues to drive new power capacity. Wind and solar are expected to post all-time high additions in capacity in 2025. The main driver of capacity addition for wind and solar continues to be favorable economics. Tariffs implemented by the U.S. administration have impacted decision-making regarding new orders, in particular for battery energy storage. For thermal power plants, we still see customers going ahead. Demand for baseload engine power plants is expected to remain stable. The drivers for balancing engine power plants continue to develop favorably in 2025 and beyond. Data centers is a promising baseload opportunity for us due to delayed grid connections. And according to IEA, additional 45 gigawatts of power capacity is expected to be added for data centers between 2024 and 2027. So once again, looking at order intake, it decreased by 2%, primarily burdened by Energy Storage & Optimization, growth in the other businesses. Equipment order intake decreased by 7%, primarily due to the lower orders in Energy Storage, while Engine Power Plants increased actually with 35%. Service order intake increased by 5%, driven primarily by growth in Marine. All-time high order book. So rolling book-to-bill continues to be well above 1, positive development. And here, you can also see to the right that we have extended the periodization of the order backlog. So clearly, we are seeing orders that will be delivered further in the future, so to say. And that is reflected in these numbers. Organic net sales increased by 18%, supported by growth in Marine and in Energy. Equipment net sales increased by 38%, supported by Marine and Energy as well. Service net sales increased by 6%, supported by growth in Marine, Energy and Portfolio Business. And profitability continues to improve as well. Net sales were, of course, up 18%. It helped. Comparable operating results increased by 29%. And comparable operating results margin, 12-month rolling, we came in at 10.9%, up from 9.2%. So on the technology and partnership side, a lot of things happening in the decarbonization journey. We will start with our service business. We signed a Lifecycle Agreement to ensure operational reliability for 14 vessels in the CMA Ships fleet. So we signed a Lifecycle Agreement with CMA, which is a subsidiary of the leading French shipping company, CMA CGM. The agreement covers 14 large LNG-fueled container ships already in operation. And under the terms of the agreement, we will provide a full-service package that secures reliable operation at fixed and minimized cost, and the order was booked in the first quarter of '25. Now some exciting news on the Energy side, where we are introducing the next-generation engine to balance renewables and improve power plant performance. So basically, our next-generation 46TS engine is designed to balance renewable energy, provide highly efficient baseload power, and run on sustainable fuels in the future. And the 46TS engine will be available from this year from 2025. And actually, in January, we announced the first order for the next -- for the new 46TS engine. And the first customer is Kazakhstan Caspian Offshore Industries, and it was placed in the fourth quarter in 2024. These engines, they will support the KCOI, new 120-megawatt power plant. And additionally,  it's the first hybrid power project for its kind in Kazakhstan, where you basically integrate engine power plants with wind and solar. So it's very much a balancing application. Going into our businesses, looking a little bit closer. In Marine, we continue the growth, and we continue to improve profitability. So Service net sales increased by 6%, supported by merchant, navy and ferry segments. You see the overall order intake is up 2%, net sales up 17%. We also see the rolling 12 comparable operating results at 11.9%. And the drivers on the positive side improved newbuild margins. Good work there. Higher service volumes clearly supporting a better operation -- operating leverage. Then on the detracting side, we continue to increase our R&D. We continue the strategy of 3% to 4% in R&D of overall sales for the group. And then in Finland, we had national strikes that also impacted the results negatively in the first quarter. Good development on the Marine services side. So book-to-bill well above 1 in all the service revenue streams. And we have introduced this graph that we will follow going forward. So we have the spare parts, we have the field service, the service agreements, retrofit and upgrades, and you see trending well above 1. So we are growing. And if you compare to 2023, 11% CAGR in the Service side. So shifting to Energy. The comparable operating result suddenly increased. And equipment order intake in Engine Power Plants was up 35%, but clearly decreased in Energy Storage & Optimization, so that led to an order intake overall down 15%. Net sales up 20%, rolling comparable operating results at 11.1%. And if you look at the drivers, we had EPP, which is the power plant business. We improved the profitability in our newbuild portfolio. And we also in power plant see higher service volumes. On the negative side, both EPP and storage, battery storage have increased R&D costs. And on storage specifically, we continue the investments that we have talked about before related to selective entry to new markets. Zooming in on Energy Storage, the comparable operating results decreased due to the mix of the project margin, of the projects that were executed and also for the cost related to selective entries into new markets. Energy services, also good development, book-to-bill well above 1 in all the service revenue streams. You see similar kind of development like in the Marine side. Here, we are up compared to Q1 2023 with 9% CAGR.  So if we do the bridge Q-on-Q, so to say, from '24 to '25, what are the drivers? We see Marine improving profitability from 11.4% to 12%. We see Energy coming down a little bit, primarily storage from 11.1% to 10.8%. Portfolio Business really performing very well, improving profitability from 0.6% to 6.9%. This is in line with our what we have said before, we want to turn our companies around and then sell them. And that led to improving the comparable operating result for the group from 10% to 11%. And basically increasing the comparable operating results with 29%. Now -- earlier this quarter, we also communicated that we are separating Energy into two independent segments. And we're also introducing new financial targets. So basically from April 1, we have three reporting segments. We have Wartsila Marine, Wartsila Energy and Wartsila Energy Storage. And Portfolio Business continues to be reported as other business activities. And the change in the reporting structure will be reflected in our financial reporting, starting from the second quarter of this year. The restated financial information for 2024 and for the first quarter of 2025 will be published during the second quarter of '25. And to better reflect the new organizational structure, our Board of Directors has approved that we update our financial targets. So we will have combined financial targets for Marine and Energy, and separate new financial targets for the Energy Storage business. And just to give some kind of reference for the last 12 months, Marine and Energy combined comparable operating results was 12.9%, and order intake increased by 9%. And just to recap the new financial targets. So Marine and Energy combined, 5% annual organic growth, 14% operating margin. And then the specific targets for Energy Storage, low double-digit annual organic growth, 3% to 5% operating margin. And then on group level, we keep the gearing and dividend targets of less than 0.5% in gearing and more than 50% in dividends of earnings. So Arjen, over to you.
Arjen Berends: Thank you, Hakan. Let's look at the other key financials for a moment. As Hakan mentioned, let's say, cash flow from operating activities in Q1 was very solid, supported clearly by, let's say, good profitability, but also due to the fact that our working capital stayed on a very low level, actually, negative level, I mean here in this respect. As you can see from the numbers, working capital ended at EUR 770 million for the end of the quarter, which was more or less the same level as we had at the end of last year, then it was EUR 787 million. Good working capital development, good cash flow, net interest-bearing debt, going more negative. So also, let's say, good development in that respect. We have now also introduced, let's say, EBITDA as a KPI. You could say earlier, we had EBITA, which was more relevant in the time that Wartsila did a lot of acquisitions. This EBITDA is what we believe is a more, let's say, used KPI also internally because eventually, this should turn into cash flow in the future. We also introduced another new KPI, return on capital employed, which we also use actually internally a lot, and this we also want to reflect externally. It's on a very good level, clearly driven by, let's say, good operating result as well as, let's say, a negative -- very negative working capital at this point of time. Gearing improved from, let's say, end of last year to end of, let's say, quarter 1. 0.31 negative at the end of last year, now 0.34 negative. And solvency went a little bit worse from 37.4% at the end of last year to 35.2% now, and that is driven by the decision of the AGM to pay dividend, and that has now been accounted for in equity. Earnings per share on, let's say, quarter level, EUR 0.21, clearly, let's say, better than last year, Q1, and I would say, on a very good level for the first quarter. Then if we look at the graphs, 12-month rolling cash flow, very strong despite, let's say, a small, let's say, downturn, I would say from Q4 last year to Q1 now, let's say, on a rolling 12-month basis, but still in a very, very solid and good level. And also, let's say, looking at the working capital, I mentioned it before, EUR 770 million not so different from the situation at the end of last year, about minus 8% of sales ratio, and that compared to, let's say, 5-year average, which is around 2.5%, 3%. So also working capital is very strong. I said it before, I will say it again, this is an extraordinary level. I do believe that, let's say, at the end of this year, we will land with a negative working capital, but not at this level. That is not what we believe. Mid- to long term, I think it will go up a bit. With these words, I'll give it back to you, Hakan, on the prospects.
Håkan Agnevall: Thank you, Arjen. So looking at the prospects, we have similar -- same guidance for Marine and Energy. Basically, we expect that the demand environment for the next 12 months will be better than in the comparison period. That we say both for Marine and for Energy. However, we also underline that the current high external uncertainties make forward-looking statements challenging due to the high geopolitical uncertainty, the changing landscape of global trade, and the lack of clarity related to tariffs. There are risks of postponements in investment decisions and of global economic activity slowing down. So with that, we start the Q&A.
Hanna-Maria Heikkinen: Thank you, Hakan, and thank you, Arjen. We will continue with the Q&A. We will start with the questions from the lines. [Operator Instructions] Handing over to the operator, please.
Operator: [Operator Instructions]  The next question comes from Akash Gupta from JPMorgan.
Akash Gupta: My one question is on this risk of uncertainty that you flagged in your outlook. Clearly, things have changed since you closed the quarter with a lot of tariffs came in from 2nd of April onwards. So maybe if you can comment on, have you seen anything already on ground in April in terms of your discussions with customers? And -- or this is more your anticipation that you have not seen much change, but based on how things have changed since early April, this is something that you may expect. So  any color on what sort of discussions you are having with customers since the close of the quarter would be appreciated.
Håkan Agnevall: So I mean you're fully right in the sense, we all know, it's a very dynamic environment. So I would comment it from Marine, from Energy Power Plant and from Energy Storage because it's a little bit different situation. So if we look on the Marine side, you could say that shipyards and owners, et cetera, they are primarily domiciled and operating outside of the U.S. So we see limited direct impact of tariffs. I think now in Section 301 has kind of landed, the expected impact is much less than there were other scenarios where it would have much a bigger impact. So I would say the direct impact on the Marine side is rather limited. The indirect impact will happen if global trades really stop, yes. Of course, there is an uncertainty in that, and there is also a bit of holding back on the decision-making overall in Marine. However, underlining once again, our core segments, cruise, ferries, offshore, et cetera. We still see people going ahead, having fairly optimistic outlook. MEPC was a big step forward. Yes, I know there are mixed views. Was it good enough? Or did one reach what one would have wanted? Probably not. But like many times I say, let's take a step backwards. This was the first time that MEPC actually had a vote. This is actually the first time that we have on the table, a proposal to introduce tariffs for CO2. And I think this is a big, big fundamental step forward. Let's see if the decision is eventually taken in October. But I think this will also continue to support the decarbonization transition. And we said it before, this is a transition not over years, but over decades, so to say. So  that's my perspective on Marine. If you look at Energy Power Plants, we still see customers in the U.S. going ahead. I mean, U.S. is a very important market for our power plant business. It's not the only market, but it's certainly an important market for balancing potentially for data centers, et cetera. So -- but we do see utilities and municipalities, data center -- power provider to data center owners going ahead. So carefully optimistic. There is uncertainty, but we still see them going ahead. Now coming to Energy Storage, our battery business. There we see a concrete impact. I would say in the U.S., the market is at a standstill. Of course, a lot of the material is coming outside of the U.S., certainly batteries coming from China. And here, it's -- let's say, 1 quarter, 2 quarters, there will probably be a standstill. However, I would like to underline our Storage business is very much active also outside of the U.S. I mean, big orders in Australia last year. We do see continued opportunities in that region, in Europe, et cetera. So that's the overall picture.
Arjen Berends: Just to add, let's say, the order intake of EPP in the first quarter was actually a large part was U.S.-based. So that confirms also that things are moving forward there.
Håkan Agnevall: And also, if we talk about the order backlog on Marine, no cancellations, in Energy Power Plants, no cancellations. There is one cancellation in Energy Storage that we have included. That was related to tariffs. But -- so no major kind of cancellations from the U.S. market overall.
Arjen Berends: And that one that we took out was about, what is it, USD 65 million and there were no execution going on yet, so very little cost.
Akash Gupta: And maybe just a follow-up, like if we look at the tariffs that are in place so far, how should we think about impact on your backlog margins?  Do you have ability to pass it on to customers or you may need to absorb some of the extra costs?
Håkan Agnevall: So if we look at the backlog, we have -- normally in our contracts, we are not the ones paying the tariffs. So it's our customers that are paying the tariffs. And in those rare cases, where we are paying the tariffs, we have the contractual provisions to pass it on. So from that perspective, from the order backlog, no major impact. Forward-looking, we will increase prices to compensate for the tariffs.
Operator: The next question comes from Sebastian Kuenne from RBC.
Sebastian Kuenne: I was wondering if you could give some indication on the Marine side. You mentioned that contracting is also down for offshore and specialty vessels, but at a lesser degree than compared to commercial or merchant vessels. What do you expect going forward given that oil prices are coming down, so maybe there's less demand than for vessels supporting offshore oil and gas. And also in the U.S., you will see the risk that offshore wind farms are being stopped. So how do you assess the risk that even in your core markets for Marine that demand is slowing down further?
Håkan Agnevall: So I would say, if I talk about them overall, I think we have a fairly optimistic view. I mean, cruise is very strong. There's a lot of activities in ferries. Offshore, yes, you tell me where the oil price is going, going forward, so to say. There has been high activity. Maybe it's coming down a little bit. I will not give any forecast. I mean you can look at Clarksons. I would say, overall, for Wartsila's core segment, if you put them in a portfolio, we have a rather optimistic outlook. However, we underline, of course, the level of uncertainty is higher than ever.
Sebastian Kuenne: And cancellation risk, you say, is not increasing much?
Håkan Agnevall: So far, no, we haven't had any cancellations, and I don't see that on the horizon, no.
Operator: The next question comes from Vivek Midha from Citi.
Vivek Midha: If I may, another question on the Marine outlook, just looking at the container segment, as you highlighted, if the line is still continue with their fleet renewal plan? And the similar thing to the other question, how much concern do you have about that continuing and the line balancing out their renewal needs versus the uncertainty around trade?
Håkan Agnevall: So I think there was some holding back on the container side related to Section 301. But I think now the clarity is there. And as I said, based on Clarksons, the impact will be very limited. They estimate that, for instance, I think it's about 7% of all the container calls in the U.S. that would be affected by the new. And that means that 93% will not be affected. When I talk to our customers, they will be able to manage that situation by how they allocate the vessels and how they build their networks, so to say. So I would say that after this kind of wait and see, I still see the long-term trend when operators and owners, they will continue to renew and revitalize, so to say.
Operator: The next question comes from Antti Kansanen from SEB.
Antti Kansanen: It is also on the Marine outlook. And I mean the charts are -- that you're referring to from the Clarksons, I mean, it appears that the newbuild side is fairly flattish. And I mean it has been for some quarters now, still guiding for growth given all of the uncertainties. So how much is this driven by aftermarket versus something that you kind of see that has been already contracted, but maybe the engines haven't been yet awarded or something like that. But mainly kind of should we expect then a positive mix in terms of orders going forward with the aftermarket clearly outpacing the newbuild?
Håkan Agnevall: No. I think we see new build -- appetite for newbuild activities suddenly being there in our core segments. We will continue to grow on services as well. So I think we are expecting growth in both legs or disciplines, I would say.
Operator: The next question comes from Sean McLoughlin from HSBC.
Sean McLoughlin: A question on portfolio. This is another quarter where the results have surprised. Where are we on sale, on separation process? And is this now an increased focus of yours following the end of the strategic review of Energy Storage?
Håkan Agnevall: So basically, portfolio business, ANCS, we signed end of last year, and we're going to close in the second quarter. We are still on plan to do so. And a lot of the positive development in portfolio is related to ANCS, but we also have positive development in the other ones. So we still hold Marine Electrical Systems, Gas Solutions and Water and Waste. And we are in a turnaround situation, preparation situation for divestment. So I would say we are executing as planned, and we said it before, we will exit these businesses, find new owners, realize also shareholder value for Wartsila shareholders over a few years. And if I can complement, I mean, it's not that we have put a portfolio on a back burner while doing the strategic review. I mean, portfolio has been in focus, will continue to be in focus. The process takes time because, as I said before, we wanted to turn around some of these assets before, and then we want to make a wise and have a good divestment process that creates shareholder value.
Arjen Berends: And the turnaround has been very successful. Let's say, a couple of years ago, all these businesses were loss-making. Now they are profit making.
Operator: The next question comes from Panu Laitinmaki from Danske Bank.
Panu Laitinmaki: I have a question on the power plant orders, which were quite strong in Q1 and have been for a while. So can you talk about how much was balancing in Q1? How much -- did you have any data center orders already? And how do you expect this to develop in the balancing and data center segments going forward?
Håkan Agnevall: So I don't have the specific share of...
Arjen Berends: 100% I think.
Håkan Agnevall: 100%. I would have said high, but it's 100% confirmed by Arjen. And as Arjen said earlier also, strong order intake actually from the U.S. on the thermal side. So that continues in a good way. Data center orders, new -- no new orders, so to say. We are working both in Europe. We talked about the [ cooperations ] we have there. But we are also working in the U.S. There is a lot of activity, a lot of interest, as I said before, this is one segment that is suddenly going ahead in the U.S. So as soon as we have income paper and we have something concrete to report, we will suddenly do so.
Operator: The next question comes from Sven Weier from UBS.
Sven Weier: Just a follow-up on the Energy outlook that you've confirmed today. I mean obviously, Q1 was super soft, as we all know on storage. And I guess we could have understood if you lowered the outlook one notch. So obviously, now a few more hedge classes associated to that. But is it keeping the guidance basically to say that you do expect the thermal part to be maybe stronger than you originally thought and that could compensate some of the more lasting weakness on the storage side? Or is it also on storage, the potential that you basically see outside the U.S.?
Håkan Agnevall: So I still think we see a lot of growth opportunities on the storage side. I would say that, that is a major growth. I mean let's -- we have a lot of focus on the U.S. for natural reasons. But don't forget that many of our big markets are outside of the U.S., and we talked about Australia, U.K., Europe, et cetera. So we see -- in the demand outlook, we see certainly growth opportunities on the storage side. And we also see growth opportunities on the power plant.
Sven Weier: And can I just have one follow-up on storage? Because do you also source like 100% of the cells from China and nothing from Korea? What's the exposure there? And also your latest thinking on the assembly in the U.S., actually?
Håkan Agnevall: So we have a diverse sourcing base. Yes, we source from China, but we also source from other countries in Asia as well. The supply -- I mean, manufacturing battery cells in the U.S., the industry is building up. It's taking time. We are engaged in discussions, but it will take time. It's not a quick fix.  And ramping up battery cell production, I think we all know it takes time, so to say.
Sven Weier: Hakan, how does it work? I mean, if you import the cells from China to, say, Finland and then you pass it on to the U.S. I mean, how does the tariff work? Are you then tariff with the European tariff on the overall price? Or are you also having to pay a tariff on the bit that is sourced from China?
Håkan Agnevall: No. I mean if you source from China specifically on the battery side, and we wouldn't bring it to Finland. We would bring it directly to the U.S. The latest tariffs are probably like 175% or so. That's why we are saying -- I mean, there are more people than us sourcing from China, and that's why the market in the U.S. right now is very, very slow.
Sven Weier: Because I thought you have some assembly in Finland before you pass it then on to the U.S. So it goes directly. Okay. Understood.
Operator: The next question comes from Vladimir Sergievskii from Barclays.
Vladimir Sergievskiy: I again wanted to follow up on storage and just to understand how it works. I understand that there is limited new ordering activity given uncertainty. But what about the existing backlog in the U.S. If you have like the delivery obligation within the existing backlog, how does it work with, as you mentioned, tariff is 175%, because it's hard to mention that anyone in the value chain, you or your clients will actually agree to pay.
Håkan Agnevall: So first of all, just to point out, again, our biggest market for storage is clearly outside of the U.S. If we look at our U.S. contracts, we actually have provisions that we pass costs and tariffs on to the customer. Then, of course, the customers are hesitating. And if they want to terminate, we have a termination clause, which will compensate us for the cost accumulated. So from that perspective, we have a fairly good contractual situation of the backlog.
Operator: The next question comes from Mikael Doepel from Nordea.
Mikael Doepel: I have a question also on the Marine outlook here, just to be clear. So basically, you are guiding for a better outlook. As I understand it, it is driven by continued growth in the aftermarket business. I also think it's driven by 2024 ship contracting in core segments where engines are likely to be ordered. But do you also expect ship contracting to increase this year compared to '24 for your core segments, is really the question. I mean, you said that you have a fairly optimistic view and so on, but you also expect contracting to actually improve also this year compared to last year for your core segments, which also will drive your, I guess, orders towards the end of the year?
Håkan Agnevall: So we only give guidance as we give -- I will not give you guidance for this year specifically, and you will have to interpret it. But clearly, we have a positive outlook on the demand side as we talk about here for the next 12 months. And it's a correct observation also that we see growth both in newbuild and in services.
Mikael Doepel: Could I just have one clarification before -- I mean, you've kind of talked about Energy Storage in the U.S., it's not your biggest market. Could you just clarify kind of how much of your orders in Energy Storage the U.S. was last year, by what percentage?
Håkan Agnevall: I'm not sure we have disclosed that. Have we?
Arjen Berends: No, I don't think we have disclosed it. But the majority was outside the U.S.
Håkan Agnevall: Yes, the vast majority was outside of the U.S.
Arjen Berends: Yes.
Mikael Doepel: Okay. And just my question is just actually on your Service business, and I guess, more for Marine than Energy, but I guess also for Energy. When we think about sort of spare parts into the U.S., I mean, we all understand kind of a lot of the production of the new engines in Energy happens in Wartsila. But on the spare parts, how does that actually work in practice? If a U.S. customer docks his ship at a port or you've got an installed engine in the U.S., a thermal power plant. When they buy spare parts, where are those spare parts actually being produced? And are those much more local for local? Or will those also be produced in some of your major production hubs in China, in Finland? Just to understand the sort of flows of spare parts, in particular in the Service business.
Håkan Agnevall: So spare parts in general, you could say that we -- with the exception of storage, but if we take the engine business that we are talking about now, you could say that we have a supply chain that is EU denominated, so to say. And we use the same type of equipment and products for our spares as for the newbuild. So it's coming from the same supply base. Now -- so the customers, they can, of course, choose where they do their service. And if they don't want to do them in the U.S., they can do...
Arjen Berends: For Marine.
Håkan Agnevall: Yes, for Marine. Clearly, we start there. So customers can choose where they do, and that will certainly have impact on the tariffs that they will pay. Then on the Energy side, we are providing spare parts to the U.S. market. And of course, the tariffs will apply 10% from Europe, we are increasing prices.
Mikael Doepel: So -- but just not to labor this point because I know some of your competition historically in Marine has been the sort of mom-and-pop service shops that sit in the ports, and they can sell some of the lower-end products. So if you're having to put up prices on your Energy aftermarket and on some of your Marine spare parts by 10% as a result of tariffs. I assume those local service competitors are just sourcing locally. How are you not going to become more uncompetitive in your Service business versus some of those sort of local service providers on some of those more basic spare parts for those customers not in service contracts?
Håkan Agnevall: So basically, I mean, there is a fundamental logic where we also have seen strengthening our spare part business versus the pirates. We have IP, first of all. So that's -- it's not like you go out and buy whatever you buy in the shop. This is [ high ] technology. So we have IP on the spare parts that we provide, not all, but a big chunk. And secondly, if you're a customer,  do you want to take a risk on buying cheap spare parts and then have $1 billion or hundreds of millions dollars vessels standing still because you try to go cheap on spares. Many of our customers will have a very simple answer on that. We go for Wartsila. And that's nothing new. That is the consistent dynamics, including 10% tariffs or not.
Operator: The next question comes from Akash Gupta from JPMorgan.
Akash Gupta: The follow-up is on margins in thermal power plant side. So we have seen from some conventional turbine manufacturers that they have reported improvement in prices this year on top of what was the level last year. And maybe if you can comment on what are you seeing on the pricing side of these power plants? And are you also seeing any incremental pricing this year versus what it was last year?
Håkan Agnevall: I think if you look at the global situation, there is a high demand for power generation machines. Our machines, the gas turbines. And that, of course, drives opportunities for price realization. Then in our particular case, what is also contributing to the shift, and we talked about it before, is you could say the overall shift from EPC to equipment, and that also improves the profitability of the backlog.
Arjen Berends: And it's also good to add that, let's say, every project is negotiated case by case. So there is not a standard, let's say, price for any engine in Wartsila, both for Energy and Marine, that's the same.
Operator: The next question comes from Sebastian Kuenne from RBC.
Sebastian Kuenne: Again, on the U.S. storage business. You say you have contract termination clause that compensate you for the cost incurred. But how does it look on the other side? You are sourcing the batteries in China. You get an order from the U.S. from U.S. customer, you order the battery simultaneously in China.  How do you design those contracts? If the U.S. customer pulls out, you have to pull out from the battery purchase as well. What does that mean for your costs?
Håkan Agnevall: So I would say we have a pass-through, just to make it simple. I will not go into a contract review or detailed [ Ps and Cs ], but I can understand your question from a perspective. Our risks are limited related to U.S. tariffs, in Energy Storage. The biggest impact on tariffs in Energy Storage is the indirect impact because, of course, when our customers see how the costs are going up, they hesitate. That is the major impact. The major impact is not an increased risk for the Wartsila P&L.
Sebastian Kuenne: Okay. So you don't incur major costs because you are withdrawing from contracts with your Chinese battery provider, is that correct?
Håkan Agnevall: Yes, correct.
Operator: The next question comes from Tom Skogman from Carnegie.
Tomas Skogman: This is Tom. I have two questions. First, you have fixed prices in your service contracts. I wonder if this is a risk now with tariffs that when you have to import the spares to the U.S. and if you have agreed on fixed prices? Or do you have clauses for this?
Håkan Agnevall: We have clauses for everything, including that. And that's the short answer. The commercial setup is such that we can compensate for changes of laws and tariffs, et cetera.
Arjen Berends: And indexes as well. So it's not a fixed price.
Tomas Skogman: Okay. Good to hear that. Then I wonder about this new margin target of 14%. And as you said, you had 12.9% last year. Usually, when companies come out with margin targets, they at least initially seem very ambitious, but this is like improving by 1 percentage point. So I would like to hear a bit more the reasoning behind this, I guess, you have a high return on capital employed, but you also have great market shares in what you do and the great service business. But is it simply so that you expect that the sales mix change will be quite negative in the coming years with equipment growing faster, which will hold back the margin progression.
Håkan Agnevall: So we upgraded, you can say, from 12% for the whole group to 14% for Marine and Energy combined. And in our view, that is actually a more aspirational target than what is included in the 12%. Then you might rightfully say that we didn't jump 5%, 6%. But -- and then I commented on that before. I mean, in our view, as a leadership team, and you know it, Wartsila for many years had a 14% margin target and really not reached those targets. Now we said this 14%, and we are committed that we will get there. And then once we get there,  we will then take a second look on can we further improve our target. So that's our view. And this is what's also our view with -- when we were at 5%, 6% and we set the 12%. That once you get a target, then you take the next step, so to say. So what will be the major driver for the continued profitability going forward? We start with services. It's a major driver both for growth, but certainly for our profitability.  Better margin of our Marine, newbuild projects and certainly better margins also on the newbuild in Energy.  Also supported by the shift from EPC to EQ, so to say.
Arjen Berends: And better operating leverage as well.
Operator: The next question comes from Panu Laitinmaki from Danske Bank.
Panu Laitinmaki: I just wanted to ask about the newbuild margins that you said were better in both Energy and Marine year-on-year. So was this due to pricing? Or what was driving that? And then going forward, like are the orders that you are now taking at higher margin than the ones that you are delivering at the moment?
Håkan Agnevall: So the drivers are pricing, but it's only in the operational side as well. Working with the good levers of cost, working with risk management in Energy, moving away from rebalancing from EPC to EQ, I would say those are the major drivers.
Arjen Berends: But also our value proposition. I think our value proposition compared to competitors is really appealing to customers. And yes, they are willing to pay for that as well.
Panu Laitinmaki: Okay. And then if we think about the order book kind of margin, is it better going forward than what you have delivered in Q1?
Arjen Berends: We are not guiding on margin. Sorry.
Operator: The next question comes from Mikael Doepel from Nordea.
Mikael Doepel: Just a quick follow-up on storage and also talking about profitability here based on my calculations, it seems as if the business was loss-making in the quarter. And I'm wondering, is this -- how should we think about this going forward? Is this just a function of the revenues being fairly low? Or is there something else also burdening profitability that we should take into consideration going ahead? How do you think about profitability?
Håkan Agnevall: So I mean you're fully right in your assessment, where we were loss-making in storage in Q1. And that's why also the LTM is coming down. This is also -- I mean, you remember, in our new financial targets, we guided for operating margin between 3% to 5%. I think you start to see the logic. What's the driver for Q1? It's a mix. It's a project mix. We have certain projects with higher margins, certain projects with lower margins. It is, of course, also this lumpiness going forward. And we will continue to see such lumpiness going forward.
Arjen Berends: And relatively low sales levels in Q1, actually, which, of course, from an operating leverage point of view doesn't help.
Operator: The next question comes from Vladimir Sergievskii from Barclays.
Vladimir Sergievskiy: Yes. Stepping away from Energy Storage this time. Working capital contributed positively to free cash flow in Q1 once again. Would you be able to disclose what part of working capital actually played favorably for you? Is it the asset side? Is it the liability side?
Arjen Berends: Yes, I can open up that a little bit. Let's say, as I said already earlier when presenting the numbers, our negative working capital stayed more or less on the same level, let's say, EUR 787 million at the end of last year, EUR 770 million now. I would say the main positive contributor in Q1 was actually advances received. When sizes of orders get, let's say, more lumpy and bigger, also, of course, down payments get bigger. And that in combination with an order book that gets longer, Hakan introduced, let's say, the new graph that we have now for order book extra year. That, of course, helps very much the cash flow, and in particular, now we saw that in Q1 that the down payment comes now when the cash out, you could say, on those same projects is coming more and more into the future. So advances received was the main highlight, I would say.
Hanna-Maria Heikkinen: Thank you. Now I would like to take 1 question from the chat. So what will be the drivers of higher demand in the next period? So what is the background for our prospects?
Håkan Agnevall: In Marine and in Energy?
Hanna-Maria Heikkinen: In both.
Håkan Agnevall: Okay. So okay. On the Marine side, we do see continued growth in our core segments, cruise, ferries, offshore, special vessels. That's a major driver. We do see continued focus in the decarbonization journey. Yes, MEPC83 didn't go all the way, but it's still a milestone in the marine industry. If the decision is taken in October,  we do see continued focus from owners on how am I going to decarbonize over the lifetime of a vessel, which is 25 years. So people have longer horizon than just this year, so to say.
Arjen Berends: And just to add to that, let's say, there is more regulation than just what is now coming out of the MEPC83 that is already existing regulation that drives decision-making as well.
Håkan Agnevall: Yes. And then the third element on the Marine, services. Services continue to grow our strategy of moving up the service value ladder is playing out. On the Energy side, what will support the growth, Storage, yes, a lot of focus now on the U.S. where the market is a standstill. But please remember, our major markets are outside of the U.S., so to say. And there, we do still see ample opportunities to grow. On the thermal power plant side, the balancing narrative continues to be strong in the U.S. Customers are going ahead so far. We also see interest for data centers, both in the U.S. and in Europe continuing. And also on the Energy side, services continue to grow. So those are the major drivers. But having said that, there is an uncertain environment. And the levels of uncertainty, both when it comes to tariffs, geopolitics in general and also, you could say, the global economy is very high right now. So that's why it's difficult to make forward-looking statements, but we have a positive outlook.
Hanna-Maria Heikkinen: Thank you, Hakan. Thank you, Arjen, and thank you for all of the good questions. Wartsila Q2 report will be published on July 18. Before that we have exciting events coming up, including the site visit to Sustainable Technology Hub here in Finland, it's in Vaasa. And then we will also host a CEO strategy call in June and pre-silent call also later in June. So please follow our IR calendar. Thank you.
Håkan Agnevall: Thank you for today.
Arjen Berends: Thank you very much.