Wartsila Oyj Abp

OMXH:WRT1V

Earnings Call Transcript 2020-Q1

[Jaakko Eskola, CEO, President & Member of Board of Management]

Good morning, everyone, and welcome to Wärtsilä Corporation Interim Report January-March 2020.We have a quite unusual setup this morning. I'm almost alone here with some helping people in Wärtsilä Campus Helsinki. But I'm also joined by the whole Board of Management on lines and from Investor Relations, Natalia Valtasaari and Emilia Rantala.As usual, I will go through some slides first, and then you have a possibility to ask questions. And if you look at Wärtsilä's first quarter, our net sales were stable, but the profitability was burdened by the COVID-19 impacts and the mix. And couple of words about the COVID-19 first. And really, the escalation of the coronavirus pandemic and concerns regarding its long-term impact on the global economy has resulted in high degree of uncertainty in our industry and the industries of our customers.We have seen definitely certain disruptions in our operations during the first quarter. Our factories have been running at lower-than-normal capacity. And the utilization of field service engineers has declined due to travel restrictions. Our focus has been to secure the health and safety of our personnel, for instance, of rearranging shifts and production to avoid contamination and strongly encouraging remote working where possible.We have seen also the impact of COVID-19 to our supply chain from country lockdowns. The financial impact of the ongoing health crisis will be material with first effects seen already in our Q1 figures. We have taken actions to adopt our own cost structure in order to mitigate the negative effects of our business to the extent possible. In these uncertain times, we must secure also our ability to capture future growth opportunities. So we are going on and proceeding with our Marine business reorganization into 3 different businesses, which is central to our accelerated -- accelerating strategy improvement. We are also still investing in R&D projects that are critical to our long-term success.If you look at the market environment, the effect of the coronavirus pandemic are increasingly becoming visible in our market environment. And we will talk about the different businesses during the call. If I look at the key figures now in Q1, order intake declined 12%. Very -- and highlight on the order intake is the Marine service order intake growth and also the good development now finally in our Energy order intake. Order book is still almost EUR 5 billion, a small decline. Net sales increased, and the book-to-bill is over 1 still today. Our result was affected, as already mentioned, by the COVID-19 and the mix of -- in our sales. Very positively, looking at our cash flow, that's developing to the right direction, and we had a good increase in the first quarter. So the demand as such in the first quarter was reasonable, considering the market conditions. And not so big changes if you look at the different businesses. And here, first time, you can also start to see the portfolio business effect to our order intake. Net sales increased, and that was -- probably the biggest effect to that one was Marine services and then our exhaust cleaning, the scrubber business growth during the first quarter. And then when you look at the order book distribution, we still have a quite good order book for the delivery this year. And of course, we need to be careful looking at it and understanding if there would be any cancellations going forward. So far, we haven't seen any major movements there.And the operating result was affected by the weaker fixed cost absorption, so our factories were still running, and the sales was declining; the service sales mix of less spare parts and steel, the delivery of some projects, which were affected by the cost overruns, the projects, which we are talking -- we were talking about last year and where the delivery is still this year. Cash flow developed very well and working capital better now than at the end of last year. Gearing, 0.42.And moving on to the Marine different businesses, and I start with Marine business. And here, you can see what's going on in the market. The decline in vessel contracting reflects the market uncertainty. And the first quarter order -- vessel orders, which is a bit over 100, is definitely one of the lowest in many, many years. And of course, that will be seen how it develops going forward and how that will actually affect to the different segments.Order intake in Marine developed reasonably and not so big differences if you look at the different segments. Steel, cruise and ferry order intake in the first quarter was bigger than last year, so a small increase in that sense. And then when you look at the net sales in our Marine business, quite good development so far. We are putting a lot of efforts on developing our agreement business in both industries. And here you can see also the development on the Marine business, where we introduced new kind of solutions, for example, for the offshore sector. We also achieved a quite nice transaction with BC Ferries in Canada, which -- where we will provide dual-fuel engines, LNG plant, electrical propulsion systems, which will definitely support the business in the waters of environmental side in British Columbia.Moving on to Energy Business. Market share dropped, and this is now the market share situation last quarter of last year. And there was a huge increase on some of the steam turbine-based power plants which increased the whole market, and our share in that global market dropped for a while. Order intake development in first quarter was good and definitely highlighted by one of the big deals we got in Latin America. And here you can also see in megawatts the meaning of those different regions. We also signed a nice operations and maintenance agreement with one of our Colombian customers. And also here you can see the development of energy service agreements. A small drop in this quarter, and that was one U.S. customer who wanted to stop the long-term agreement and use us for transactional basis. Net sales development, a bit low. Of course, COVID-19 has affected this one and also the -- some of the postponements of transactions to the second quarter. And a major deal in Latin America. It's a flexible solutions. What, of course, is based on the -- on our strategy to provide efficient integration to the renewable energy system. In addition to the 2 projects, to the 2 power plants, we also got a very good 10-year service agreement with our customer. And then finally, looking at the prospects, and this is something we already highlighted some weeks ago. The coronavirus outbreak and the measures taken to contain the pandemic will materially impact Wärtsilä's net sales and earnings for 2020. The full financial impact cannot be quantified at this stage. And consequently, because of that one, Wärtsilä withdrew its market outlook for 2020, depending on improvement in visibility.So these were the slides. And now I would like to open the lines for questions. And as we have done previously, please 2 questions per person, and then you can go back to the line so that we can get as many people to be able to ask questions. So we are ready for questions, please.

[Operator]

[Operator Instructions] So our first question is from the line of Max Yates from Crédit Suisse.

[Max Yates, Research Analyst]

Just my first question is on the cost under absorption impact that you've talked about. I just want to understand a little bit of how much this is being driven by restrictions in your own factories in places like Trieste, and how much of this is being driven by customers unable to take deliveries or delaying deliveries, and then also sort of to what extent these are perhaps temporary impacts that can be caught up as you go through the year as production normalizes as some of the impacts from COVID-19. So just first to understand how much of this is due to your own factories versus customers actually slowing deliveries.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Max. And of course, it has -- all our facilities have been impacted by the virus. And let me start with China. Of course, at the beginning of the year, we had a 1-week Chinese New Year holiday, and then the government extended that by another week. And after that one, I think the factories have been ramping up quite well. So as far as I know today, our factories in China are at full capacity. So those are now finally -- they are totally back into the business. And as you know, some of the shipyards are now working quite well in Asia, of course, trying to deliver all the ships which were delayed by the government restrictions. Then we have our 2 big factories here in Europe. And in Trieste, we had a closure for some weeks. And now Trieste is ramping up. It's not full capacity today, but as much as possible, we try to get back to the delivery schedules for our customers. And Italy is still partly closed, but so far, our factories is regarded as a strategic business. And so we can run Trieste quite well. Warsaw is also not full capacity, but it's also now running as much as we can. And we haven't had any delays at the moment in Warsaw. But then there are all the other restrictions, what you can see in the market, which are, of course, the traveling. A lot of countries are locked. You cannot go in those places. And customers cannot send their own people to factory acceptance tests. So we today have a virtual testing. People cannot go to the ship where the engine has been delivered. Logistics change is disturbed because of some of these restrictions. In Energy sector, we have sites which are -- which have demolished, so where there is nothing going on at the moment, and which then we need to ramp up when possible. So the percentages from our own reasons or our own factories and what's coming out from the customer is very difficult to say. And then the question, how long this will last, I mean I don't know. That's why we also say that the prospects are not -- and the visibility is not yet there. So this is where we are today. So trying to find out the ways how to handle the business with our customers locally in different countries has, of course, created some good elements to service them.

[Max Yates, Research Analyst]

Okay. And just my second question is, I just wanted to understand a little bit better how we should think about the evolution of the cruise ship business in terms of orders. Because if I look at sort of backlogs of shipyards, you've got sort of 25 to 30 cruise ships that are expected to be delivered between 2020 and 2022. So just when you speak and hear from customers and based on the contract structures in these shipyards of prepayments, et cetera, how far along we're seeing -- or how far ahead shipyard cruise ships are ordered? At what point would you expect to see an impact on your business? So I guess trying to understand first the 17 cruise ships, which are expected to be delivered in 2023, are prepayments sufficient that most of these guys will take delivery of them? Or at what point do we start seeing kind of either cruise ships start being canceled from that backlog or an impact on your business? How should we think about that playing out?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you. I don't really know whether they would start canceling other than the reason that the business wouldn't be viable anymore. But let -- I mean Roger Holm, the Head of Marine business, you are on the line, and you, of course, talk to the customers daily. So could you elaborate a bit the cruise industry?

[Roger Holm]

Yes. Good morning also from my side. And a few comments on the cruise part. I think for the existing vessel orders, what we will see is probably a big pressure for delays in certain parts. So there will, for sure, be discussions about when the customers will take deliveries of the vessels and probably targets to develop the deliveries over a longer time period. How much that will happen, we don't know yet. Cancelation-wise, we don't see that at this stage. And our assumption at this stage is it will be more a discussion about when the deliveries will happen. Then talking about new orders, so cruise ships that have not been ordered yet, I think we can expect quite some time now that we will not see new others coming in unless it's for some really specific segments. And we need to see the cruising coming back clearly before we will start to see new orders coming in on new vessels.

[Max Yates, Research Analyst]

But if I look at deliveries in 2024, those 8 ships that are expected to be delivered versus the current level in sort of 2021 of 26, so how far ahead of the delivery do you normally see your equipment ordered for a cruise ship? Is it a couple of years, i.e., will we start seeing the impact today in your business? Or will there be a kind of longer lasting? Will there be a sort of delayed effect and it's only really kind of 2 years ahead of the delivery? So maybe '22 where we really start to see your business coming under pressure. I'm just trying to understand how quickly this will feed through to your specific orders.

[Roger Holm]

Yes, we have seen during the past years when the order book have been building to be longer and longer. We have also seen that it has been fluctuating quite a lot depending on the project and the large when they have ordered our equipment. But in general, the orders have been placed earlier than before to make sure that critical components are clear for the vessels. So from that part, as you know, we have a quite long order book already on the cruise side. And that order book will then be a discussion about when will the vessel then be delivered and how will that impact our delivery schedules. Assuming that the vessels will continue but partly with different schedule, we will still see orders coming in for our equipment and for these vessels for the cruise. But as said, I don't expect for quite some time to see new cruise vessels being ordered and thus us -- and thus getting those orders.

[Operator]

Next question is from the line of Manu Rimpelä from Nordea Markets.

[Manu M. Rimpelä]

My first question would be on the Energy business and more specifically on the margins you delivered in the first quarter. I'm just having a slight trouble reconciliating the low margin for the quarter, for instance, compared to last year in the third quarter, you reported lower sales, but you still managed to do above 10% EBIT margin. I understand that the spare part sales did fall quite significantly some EUR 20 million year-over-year in the quarter, but I still have trouble to kind of getting to such a low EBIT margin. So could you help us to understand the bridge on a year-over-year basis on the Energy margin?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Manu. And I would let Marco Wirén, the Head of Energy Business, to answer that question. Please, Marco.

[Marco Wirén]

Yes. Hello. Good morning from my side as well. If you look, just like you said, we have 25% lower spare parts sales in this year compared to last year. That gives a big impact on the EBIT as we have much better margins on the spares than any other item that we sell. The volume had a negative impact as well, about EUR 8 million. And that's affecting as well. So pretty much close to our major items. And then of course, we had the projects that we announced already last year, the problem projects that now they have taken into a zero margin, and those are continuing here as well. And those will continue actually during this year. We will deliver those throughout the year, those projects.

[Manu M. Rimpelä]

Even if I were to put the EUR 20 million lost spare parts sales at the 100% margin, so I'm still not able to get to the low margin you reported in the first quarter. So was there something beyond those 2 factors that would help to explain the bridge? Or was there something specific in the last year's Q1 strength?

[Marco Wirén]

Okay. Last year, Q1 was very strong because of the very, very good spares sales. But otherwise, I would say that those are the main items that affected the EBIT.

[Manu M. Rimpelä]

Okay. And then the second question would be on the Marine services. So could you talk a bit about how did you see the service evolved during the quarter between the months? Because, obviously, cruise has started to get stranded towards the end of the -- during March. So was there a big difference in terms of the service levels you saw in March and the last months (sic) [ days ] of March and then compared to, for instance, February levels? And also if you could specify between the cruise segments and the other segments.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Manu. And let's get Roger back -- Roger Holm back to the line. Please, Roger.

[Roger Holm]

Thank you. Yes. On the Q1, in general, for the Marine service, we had a bit different mix slightly than last year Q1. We had more projects which was impacting the profitability. So the mix impact was coming from that one. Then commenting a bit on the COVID impact from March on. It was -- March was a bit up and down. We saw certain things going down, specifically on certain parts of field service, clearly in March already. We had a slight peak of spare parts order coming in towards the end of March. And then it's clear that we will see bigger impacts in Q2 than what we saw in Q1. But in general, we have already seen the impacts from the cruise business coming in partly already in Q1, but we will see more of that in Q2 and very much a focus from our cruise customers on cash. So trying to mitigate everything they can on cash spending. And we expect that to continue in Q2.

[Operator]

Next question is from the line of Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

My first question is a follow-up on the earlier discussions around the cruise market. Of the roughly 110 cruise ships that have been ordered with the yards, how many roughly would already have engines chosen? And how many would still potentially result in orders for the engine industry? And maybe some indication of -- for cruises -- cruise ships that were supposed to be delivered in the next 2 to 3 years, what's the coverage there in terms of orders already given to the industry for engines?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you for the specific question. And Roger Holm, do you, Roger, know where the engines are going at the moment?

[Roger Holm]

Yes. And I will not start to specify the orders for vessels in the order book. But as I said before, before the COVID crisis, we have seen major orders coming in. I can only refer to the major cruise order we had late last year where the yards have been looking at bundling up quite many cruise ships in one go. So it's not that everything has been ordered for all cruise ships in the pipeline. We still have a lot of equipment that have not been booked for all of those. But as I said before, we have seen before the crisis that orders have been taken earlier than before. And that's the situation we have today.

[Andreas P. Willi, Head of the European Capital Goods]

But you're not in a position to say whether 1/2 or 1/3 or 2/3 of the cruise ships on order have already ordered engines. I guess a rough estimate.

[Roger Holm]

And no, I will not comment on that one because it's not only on engine side. We need to remember there is quite a lot of other equipment as well that we sell to cruise vessels. And this comes -- we have cruise vessels where we have contracted engines, for example, but we haven't contracted other equipment for the same vessel. So this comes in phases during the development side.

[Andreas P. Willi, Head of the European Capital Goods]

And my second question on the service business in Marine. You mentioned in the release good activity in offshore and LNG overhaul benefit. Are these more kind of one-off events that helped in Q1? Or do you see some underlying positive trends in those markets for service?

[Roger Holm]

No, not specifically. I think what we are seeing now is that the most impacted segment going forward will be cruise and ferry, cruise being the bigger impact than ferry, coming the second one. Then, of course, on the offshore side, we might also see clearly lower activities. But this will be very much segment-related. And we need to remember that the big part of the fleet still need to operate to deliver the goods. And as long as the vessels are running, that's then the generator for our service business.

[Operator]

Next question is from the line of Sebastian Kuenne from RBC Capital Markets.

[Sebastian Kuenne, Analyst]

Main focus is on the capacity adjustments that you are currently executing. You mentioned the EUR 100 million saving that you see, I assume that's for the year. Can you give us an indication of how much you could cut short-term capacity? So let's say, customers don't accept delivery for the rest of the year, and you would have to cut by 30%. Can you do that? And how would you approach that? That would be my first key question.

[Jaakko Eskola, CEO, President & Member of Board of Management]

That's a bit difficult to quantify, I mean how much and so on. As I said, we -- our factories -- the engine factories today are running quite well, delivering, of course, what we have in our order book. And then it depends totally how the order book develops. Luckily, of course, we got a new deal in Energy, which is then helping Italy because those are coming from Italy and so on. So it's a daily exercise how you look at the capacity and what to do. And then you have all kinds of restrictions in different countries what you can do, whether you can have temporary layoffs or whether you need to do something else. So I mean we cannot open it up at this moment.

[Sebastian Kuenne, Analyst]

But you know, which -- does Italy offer you paying for temporary layoffs or for short time work? What's the situation there, specifically financially?

[Jaakko Eskola, CEO, President & Member of Board of Management]

It's -- I mean some of the countries -- if the country is itself offering some COVID-19-related benefits. And if you use the benefits and can have those, then it might restrict you to do something else. So it's a country-by-country and location-by-location. But it's -- overall, I mean this, we cannot open at this moment.

[Sebastian Kuenne, Analyst]

So you cannot answer the question at the moment.

[Jaakko Eskola, CEO, President & Member of Board of Management]

No, no.

[Sebastian Kuenne, Analyst]

Okay. Then my second question is on cash availability and liquidity. You have -- you mentioned you have EUR 420 million of cash and the EUR 640 million credit facility. Is this then the liquidity you would currently be able to draw on as of today, the EUR 1.06 billion, I think it is, or the other liquidity?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you. That's a good question. And normally, we don't get so many questions to our CFO, so Arjen Berends, our CFO. Would you, Arjen, open up a little bit the liquidity situation, and that's a quite good moment to do it.

[Arjen Berends]

Yes. Good morning, everybody, also on my behalf. To answer the question, yes, our liquidity preparedness is good. Let's say we have more covenants in jeopardy, and so we can draw basically quite a significant amount. And let's say, we have some maturing loans still this year, but they are not extensive, so small numbers.

[Sebastian Kuenne, Analyst]

So I can use the EUR 1,060,000,000. So cash and cash equivalents, EUR 420 million; and unused committed credit facility, EUR 640 million. That's basically currently available equivalent here.

[Arjen Berends]

Yes.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Yes.

[Sebastian Kuenne, Analyst]

And it would increase the working capital reductions, I assume, for the rest of the year? Would you expect that?

[Arjen Berends]

Yes, we definitely expect working capital reductions. Let's say, we are heavily focused on that already, let's say, last year and also now, in particular, in the current circumstances. Of course, let's say, it's a very challenging environment. When you cannot get the deliveries out, it's also difficult to get your inventories down. But we are having -- made very good progress, I would say, in the past quarter on the receivable side in particular, and we believe we have more opportunities there. So yes, the working capital focus is definitely something we put a lot of emphasis on. And so far, I would say, also in good results.

[Operator]

Next question is from the line of Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I want to ask two things. One, just a clarification back on the Marine margin comment you've given before. Could you precisely help us quantify the cost overrun? And also how shall we think about -- I think you said you should expect them in -- throughout 2020. But is 2020 the end of it or still think less in 2021? So some help on that would be very useful. And then my second question relates to looking forward for the service on the power business. Now that we're seeing power demand falling in a couple of regions, how shall we think about -- sort of what percentage of your contracts and agreements on services depending -- depend on power consumption or sort of the business of your own customers? How should we think about service on power going forward?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Daniela. And let's start with Marine. And Roger, question was regarding the cost overruns.

[Roger Holm]

And I'll -- if I comment on the Marine margins in Q1, we had a few main items impacting that. One was, what I referred to earlier party was, the less favorable service mix, meaning that we had more projects with lower margins than the rest of the service business, normal margins for projects. So no difference compared to history there. Then we had the projects affected by the cost overruns, which we communicated last year, and we have continued to deliver those out of the order book. Gas solution is developing in the right direction. But -- and the number of the bad projects are reducing, but there are still projects with 0 low margin that we delivered in 2020. And then of course, we had the COVID-19 impact on different parts of the business both from production under absorption, field service, capacity utilization, delivery challenges and so on. So those are the ones impacting the marine margin in Q1.

[Jaakko Eskola, CEO, President & Member of Board of Management]

And Marco Wirén, could you comment on the energy service question?

[Marco Wirén]

Yes, if we look at the impact out of the COVID we definitely see already in Q1, that's one main reason as well why we saw a lower net sales. Customers are getting a little bit more concerned about how their business will affect. And just like you said, that we've seen heavy drops on energy consumption. And when they see a heavy drop in their end markets, then of course they will be much more careful to buy spares and maintaining their assets. And each country and each company will have a different and have a different way of coping with that as well. And some of them are closing down some assets and running the other ones. And of course, that depends totally what they need going forward. If we just look -- I mentioned already earlier, we said in the report as well. In Q1, in March, we had 5 sites that were demobilized and 5 other sites that were actually in quarantine. So they were in lockdown, so they couldn't do anything, and people couldn't go out and in. And same goes for in many countries today, where we have service assignment. But because of the quarantine, we cannot send people there. And if we do, in some cases, we actually have done, but what happens is that service technicians, they have to wait 14 days to get to the site. And then when they get back, it's 14 days again. So it's quite long lead times, so this is quite cumbersome exercise both for us and our customers.

[Operator]

Next question is from the line of Sean McLoughlin from HSBC.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Just, I think, firstly, broad question on the impact of the fall in oil price on marine sector demand, in general. What does this change and which segments do you expect to benefit or be impacted the most? And also how does this impact demand for higher margin dual-fuel engine going forward?

[Jaakko Eskola, CEO, President & Member of Board of Management]

That's a good question. And Roger, could you please comment? It has all kinds of effects to different segments.

[Roger Holm]

Yes. Thank you for the question. First of all, I think the fuel pricing as it is today and the low fuel spread have a short-term impact on the scrubber demand, so we will see challenges on the scrubber market until we see how the fuel spread is developing. And of course, the low fuel spread we have at the moment is a challenge for the scrubber market. Still, we have seen some activities continuing on the newbuild side even if it has been very low at this stage. So that's one angle of it. I think then going back to other parts is that, of course, the fuel cost is a big element for our customers. So lower fuel cost is always a positive thing. And we have the side effect now of the oil price that the day rates for tankers have spiked quite a lot. So this has been -- at least for now, has been a good business for the tanker owners. Then on your question on dual fuel, I think that is much more driven by the environmental development, sustainability and the pressure on the marine market to go into more sustainable future. So I don't see an impact due to this one on the dual-fuel engines and the marine moving much more to LNG as a fuel. I think this will continue to develop, and we will see also much more pressure on different kinds of more environmental-friendly fuel, but this is driven then by the target to reduce emissions in the whole shipping industry.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Second question on marine service. Customers have been pushing back on what you call essential maintenance now for some quarters, and I imagine the situation in Q2 and 2020 will get worse. Is there a risk that some -- what you consider essential maintenance, no longer gets considered essential, so effectively, we're looking at a structural dilution of service revenues going forward?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Roger, please.

[Roger Holm]

I -- yes, I would say this is more related to the fact that the vessels are running. As long as the vessels are running, we will see the service business continuing. Of course, what we see over time is we want to have more and more flexible service setups and service when the customers have possibilities to do so in the usage of the vessel, and that's what we are trying to do with the customers as much as we can. But I don't see a big change on the service approach, in general, as long as the vessels keep running, and this will then continue as we go forward. But then, of course, it depends on how the vessels are running and with what speeds and so on. That might have an impact in certain segments. But in general, for us, what we are looking for is more that what are the running hours specifically on the engine. That's the key.

[Operator]

Next question is from the line of Robert Davies from Morgan Stanley.

[Robert John Davies, Equity Analyst]

My first one was just around the -- some of the regional differences you're seeing in the energy business. Maybe if you could give us a little bit more color there. And then my second one was just around -- you mentioned access -- sort of slight your service personnel. Is it possible to lead more of these services personnel at certain sort of bigger sites? Do you do that? Or do they typically all sort of move around customer to customer on an ongoing basis? I just wondered, as you go through the rest of the year, what, from a structural standpoint, are you thinking of changing in the way you operate your aftermarket business?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you. And Marco Wirén, you could actually answer the energy, and that's also the service side, please.

[Marco Wirén]

Yes. I can start with the service side. In energy side, we have people in quite many countries. But as we cover 180 countries, we cannot have people in all countries. And also what comes to different capabilities, we usually try to have some hubs where we have specific technological skills. And those people, we are sending around. And some skills, we have in local. But usually, we always need some people from other parts -- other countries as well. And that's why the mobility that is restricted now is affecting us and also our customers. When comes to different countries where we see that COVID or areas where COVID-19 has been impacted most, I would say that it is basically -- it started in Asia, and Asian countries implemented lockdowns quite fast, and restrictions and mobility as well. And also our customers started to close down and demobilize the sites. And then Europe is the second, and U.S., I would say. These 3 areas are most affected. And then there might be some occasional countries where there's a big impact as well. But I would say, in general, Asia, Europe and the United States are the ones that are most affected.

[Jaakko Eskola, CEO, President & Member of Board of Management]

And when you look at the services, of course, we have remote monitoring, we have virtual engineering. And all that can be nowadays in these kind of situations, utilized more and more. So of course, you create new ways to service your customers.

[Marco Wirén]

Yes, that's a good point. What we actually have done in -- with our customers, the ones that are not remotely connected to our surveillance centers and customer centers, we actually are offering that to our customers now so that we can do much more work remotely.

[Robert John Davies, Equity Analyst]

Sorry, one, just sort follow-up. What sort of percentage of your customer base is "remotely connected"? Are you -- is that going to be a big change in the second quarter? Or is that something that the majority are already there? Is it more marginal from here?

[Marco Wirén]

Yes, I would say that if you're an agreement customer, then the share is quite high. But if you're a nonagreement, then it's basically 0. So for nonagreement customers that we are now approaching and asking them, we can have a connection and then we can help them remotely so that they can do at least some type of surveillance and maintenance work without having people on site.

[Operator]

The next question is from the line of Antti Suttelin from Danske Bank. Hello, Antti, your line is now open. You can now go ahead and ask your question.

[Jaakko Eskola, CEO, President & Member of Board of Management]

We cannot hear you, Antti.

[Operator]

Okay. Since he's not responding, we'll go to our next question. It's from the line of Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

Jaakko, I wondered if you could talk a couple of big-picture questions. On your comment there around customers converting or seeking to convert from contract to time and material ad hoc, can you talk a little bit about the dynamics around that? Is that something that you think will happen in the near term and then they convert back? Is that something that companies just do just from an ad hoc company-specific basis? Or is it a trend that you need to watch? And then second question just on the EPC contracts that you've signed in Lat Am. I wondered if you could talk -- just two parts to it. One, can you talk a little bit about the phasing of when we should build that into numbers? But secondly, are you confident on the framework of that agreement and that you're not going to see a repeat of the issues you've had in terms of cost overruns, deliverability, et cetera, et cetera?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Alexander, and I'll let Marco later on to answer the EPC contract. But I missed somehow, Alexander, the first question. Could you repeat that one, please?

[Alexander Stuart Virgo, Director]

Sure. I just want to understand some of the dynamics around customer relationships and customer conversations you're having with respect to contracted maintenance, contracted spares in the businesses and whether people are changing those or seeking to change those relationships in the current environment, and whether that's something that we need to think about on the long -- from a medium- to longer-term basis. So whether that -- if you think back to the last couple of times, we've been through situations, I mean obviously not comparable to this in any step sense. But the last couple of times, we've been through significant dislocations in the marine industry or in the energy industry in terms of customers' ability to pay. I'm just trying to understand the dynamics of the relationship between you and the customer. I appreciate that the equipment needs to be maintained unless it's switched off. But I'm just trying to understand the dynamics around this sort of long-term service agreement and whether any due change can convert permanently or is it a temporary thing to ad hoc. Just trying to understand the trends there.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you. And really, the situation is quite new. And it's -- of course, it's also totally different than we have ever experienced. And we are at early stages in the pandemic, and you start seeing the effects now going forward. Of course, it's always good to remember that Wärtsilä in the marine sector, we are mission-critical for our customers. So of course, the discussions are extremely important if they want to use the vessels also now going forward. And there, the long-term agreements and the long-term relationship is extremely important. And as Roger earlier said, Wärtsilä is not only delivering one product here or there, but we have several kind of options to offer to our customers. And more and more, of course, what comes to the navigation side and the voyage optimization, which increases the relationship with our customers and where the long-term service capabilities and costs are paying more and more an important role. So today, if you hear something from customer, it might still be very short-term effects, and then the customer is thinking about the future together with us how to -- how the business will evolve. And in energy, we are in niche markets, providing the flexible solution. So again, I mean you -- we have a good relationship with customers. We help them to run their power plants or produce the electricity in different places and in -- mostly also in remote locations. So again, Wärtsilä's ability to be there with these difficult times is, of course, then creating new opportunities. As Marco also said that the more you have agreements, the more you can also do remotely and help the customers in these kind of situations. But then if you look at the second question, the EPC in Latin America, Marco Wirén, could you open up a bit about the deal as much as, of course, you can.

[Marco Wirén]

Yes. Thank you. I would say that these deals are very much bread and butter deals for us, these -- the standard delivery what we have been doing in many, many years in most of the countries in the world. The issue is that we have had a couple of years ago when we were a little bit too eager to take volumes and went outside of our expertise area, and that's where those cost overruns happened as well. But these are definitely our bread and butter and also in the environment where we have been before and know that environment and customer well.

[Jaakko Eskola, CEO, President & Member of Board of Management]

So it was a quite typical EPC contract.

[Marco Wirén]

Yes.

[Operator]

Next question is from the line of [ Laura Kaikkonen ] from [ Sanoma ].

[Unknown Analyst]

Can you tell more concretely about the delivery challenges? The pandemic has impacted the delivery and supply chain worldwide, and where have you seen effects?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Yes. Of course, as I started, there are, of course, the delivery challenges, what comes to even looking at the factory acceptance test at factories. So nowadays, we are doing them remotely. Normally, a customer comes to the -- in marine sector, comes to the factory and looks at it. And then of course, you have travel restrictions. You have new challenges when it comes to the logistics. We, of course, are looking at the supply chain. We have huge amount of suppliers and subsuppliers, and we have been quite well with our purchasing teams to monitoring the material flow. So on a daily basis, what the factories need and how we can leverage our stock, different kind of multiple sources, and of course, a very long-lasting relationship with our suppliers. So all kinds of challenges, almost everywhere. But so far, we have been managing and being able to manage it quite well.

[Unknown Analyst]

So has there been already delays on deliveries on parts or materials?

[Jaakko Eskola, CEO, President & Member of Board of Management]

Of course, there has been some delays here and there, and it's difficult to quantify what and where. But of course, you have seen. But we are doing a lot of work on that one. Of course, you need to remember that it's -- if this lasts longer and longer and longer, then of course, you start probably -- you start seeing a bigger effect on the supply chain.

[Operator]

The last question is coming from the line of Sven Weier from UBS.

[Sven Weier, Executive Director and Analyst]

Just a quick one on the study that you've published lately with regard to power production in Europe that the renewable share was going up quite massively, which for now might be just a short-term effect. But anyhow, I was just wondering how you see that shaping your client discussions on the energy side? Or is it shaping it already? Or just your evaluation on that end, please.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Sven, and that was a good question and, of course, gives some opportunity for Marco Wirén to open up a bit that study. Please, Marco.

[Marco Wirén]

Yes, definitely. I'm happy here, Sven, that you have been investigating that as well. This is actually something that shows extremely well what we have been saying that in 2030, countries will encounter those challenges that they are encountering now. If you take Germany last week, they actually had over 10 gigawatt of excess energy production because they feel we are running the coal power plant and inflexible combined cycles, so they were actually selling 10 gigawatts to neighboring countries for free, and this is because of the system is not flexible enough. And this is something that is extremely interesting to see because this is like a laboratory right now. So we can see what will come in the future, and they can see exactly the impact on FX over it today. So I definitely believe that this will give us new thoughts among lot of energy heads and decision makers, and they might speed up their transition process as well.

[Jaakko Eskola, CEO, President & Member of Board of Management]

Thank you, Marco, and thank you, Sven, for the question. And thank you all for good questions today. Let's meet next time in July. Be safe, and stay well. Thank you very much.