Wartsila Oyj Abp

OMXH:WRT1V

Earnings Call Analysis

Strong Order Intake and Improved Operating Margins

Wärtsilä reported a robust quarter with an 11% increase in order intake, supported by a 23% growth in marine orders. The order book reached an all-time high of EUR 7.3 billion. Despite a 10% drop in net sales due to periodization effects, comparable operating results surged by 50%, reaching a 10% margin. Service order intake rose by 7%, and cash flow from operating activities remained strong at EUR 258 million. The company continues to focus on its decarbonization strategy, highlighting initiatives like autonomous power plants and a high-capacity battery system for energy storage.

Strong Order Intake and Financial Performance

Wartsila's Q1 2024 results demonstrated a robust performance with a double-digit comparable operating margin and a continued strong order intake. The company reported an 11% overall increase in order intake, with a notable 17% organic increase. Marine order intake was particularly impressive, growing by 23%, contributing to an all-time high order book of EUR 7.3 billion. Comparable operating results improved by 50%, now representing a 10% margin. Service order intake rose by 7%, and net sales grew by 13%, reflecting the importance of services to Wartsila's business model. Despite a 10% drop in net sales to EUR 1.3 billion primarily due to periodization effects in the project business, the overall message is positive, underlined by a strong operating cash flow of EUR 258 million.

Market Outlook and Segment Performance

The marine market sentiment turned positive with an increase in the appetite for new ships, and the marine order book included 29% alternative fuel vessels. Notable progress in environmental regulations, such as the EU's inclusion of the marine industry in its emission trading system, incentivized decarbonization efforts. The cruise segment also showed increased demand, with new orders for large cruise ships on the horizon. The energy segment faced an uncertain short-term market environment, but mid-to-long-term opportunities remained solid. Global natural gas prices declined, and renewable energy generation increased, supporting Wartsila’s energy storage and balancing solutions. Record high investments in clean technology and strong market activities, especially in regions like the U.S. and Australia, underpin a positive outlook.

Technology and Partnerships for Decarbonization

Wartsila's commitment to decarbonization is evident through its strategic partnerships and technological advancements. The company leads a EUR 200 million collaboration to develop autonomous and zero-emission power plants, involving over 200 Finnish companies and research institutions. Innovations like the Quantum 2 battery energy storage system optimize large-scale energy storage deployment, offering clients improved transportation speed and safety. These efforts align with Wartsila's strategy to become a leader in flexible, autonomous power plant solutions by 2028.

Detailed Financial Insights

Wartsila's financial performance in Q1 2024 underscored its operational efficiency and strategic focus. Organic order intake increased by 17%, and net sales in the service division rose by 13%. Equipment sales, however, dropped by 33%, attributed to periodization effects. The overall profitability improved, with a 50% increase in comparable operating results. Services accounted for 63% of Q1 sales, positively impacting profitability. Wartsila's journey towards higher financial targets remains steady, supported by a favorable sales mix and dedicated efforts in cost management.

Navigating Challenges and Periodization Effects

Despite the overall positive outlook, Wartsila did face challenges related to periodization within their project business, leading to fluctuations in quarterly sales. However, the company's leadership assured that this is a temporary phenomenon, not indicative of any resource or supply chain constraints. The strategic review of the energy storage segment continues, with low sales in storage primarily due to the timing of project deliveries. Nonetheless, Wartsila maintains a solid project portfolio with improving profitability.

Positive Trajectory and Strategic Focus

Looking ahead, Wartsila expects the demand environment for both the Marine and Energy segments to improve over the next 12 months compared to the previous period. The company's strategy of focusing on high-value service agreements and maintaining a balanced mix of service and equipment sales positions it well for sustained growth and profitability. Continuous investments in innovation and strategic partnerships are expected to drive Wartsila's decarbonization goals and strengthen its market leadership.

Earnings Call Transcript 2024-Q1

[Hanna-Maria Heikkinen, executive]

Good morning, everybody, and welcome to this news conference for Wartsila Q1 2024 Results. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations, and he will also go through the business performance. After that, our CFO, Arjen Berends, will continue with key financials. After the presentation, there is a possibility to ask questions. Please, Hakan.

[Håkan Agnevall, executive]

Thank you, Hanna-Maria, and a warm welcome. First, I'm going to go and get my clicker. I'll be back. Sorry, I forgot that one. So welcome to a really good quarter -- summing up a really good quarter. We have made progress, and we continue to make progress in a very good way, evolving in the decarbonization transformation of our 2 industries, positioning ourselves and also improving our financial results. So if we look at Q1, we came out with double-digit comparable operating margin and continued strong order intake. So order intake is up 11%, organically, it's actually up 17%. And it's especially supported by good development in the marine order intake, up 23%. It leaves us with the order book at all-time high at EUR 7.3 billion, and I think one of the highlights is that the comparable operating results increased by 50% so we are now at 10% comparable operating margin. And the continuous journey of improvement is evolving, so to say. Good progress in services also continued as you know, it's a very important part of the Wartsila business. Service order intake increased by 7%, and the net sales increased by 13%. Cash flow, also very strong, which is a very strong signal considering that Q4 also was exceptionally strong. So strong cash flow from operating activities to EUR 258 million. And as a group, we are becoming a more focused and more profitable company, and we have now consolidated into 2 reporting segments, Marine and Energy. So if we look at a little bit closer to the numbers, looking at the order intake, so EUR 1.9 billion, up 11% and if you look on the service side, EUR 949 million, up 7% and equipment, which equipment order intake continues to grow in a very good way in both of our businesses, So EUR 975 million, up 15%. And that leaves us with an all-time high order backlog of EUR 7.3 billion. Net sales is down 10% to EUR 1.3 billion. And you can see, net sales continue to grow on the services side, so EUR 833 million. It's really the equipment that is coming down. And I think the major message there is a periodization effect between quarters. So it's not a trend shift, we have a positive outlook, but there is a bit of periodization, especially in our project-related business between the quarters. Book-to-bill at 1.46, 12 consecutive quarter with book-to-bill higher than 1. Operating result up 38% and the comparable operating results up 50% to EUR 132 million and 10% of net sales. So outlook on our 2 markets, the marine market, the sentiment turned positive for Wartsila's key segments. In the first quarter the appetite for new ships increased in general. The number of vessels ordered in Q1, 411million compared to 255 million same period last year. Uptake on alternative fuels remain on a healthy level, 118 orders, 29% of all the vessels, 45% of capacity. And I think here, as of 1st of Jan, a major step in the decarbonization journey for the marine industry certainly in Europe, where the marine industry is now included in the EU's emission trading system, which is adding cost incentives for shipping company that operates in EU or that do port calls in EU to really focus on reducing CO2 emissions, either by, of course, modernizing existing fleets and upgrading existing fleets, but also looking at strategies for new build vessels going forward. Crude segment, increasingly very positive, a lot of cruising activities. And we also see that the high demand for cruise is now filtering through to the first new build orders for large cruise ships, so to say, and all the big players, they are indicating orders to come. And so it's a distinct shift from, I would say, a 4-year period of low rates. Clarksons, also optimistic in their most recent update of the forecast basically taking the overall level of orders for 2024, up 7%. Looking at energy, we continue to see solid mid- to long-term market opportunities. In the first quarter, though, uncertain market environment continued despite some relief. The increase of share of renewables is the primary driver between -- behind the Wartsila's balancing and energy storage solution demand. And we do see a lot of activities and interest. Global natural gas prices continue to decline and towards the pre-2021 levels. So it's made possible by increased renewable generation, warm winter season and also muted demand growth. On the commodity pricing side, it has stabilized, although, I mean, the uncertain geopolitical environment, it presents price and availability risks. The positive thing is that we do see several signs that the energy transition continues to advance. And I mean, it's another year of record high investments in deployment of clean technology last year. Looking at our numbers more in detail. So organic order increase by order intake increased by 17%. Order intake grew 11%, out of that, equipment order intake increased by 15%, service order intake increased by 7%. All-time high on the order book as a result -- and one important thing to highlight and note here is that the 2024 deliveries are tilted towards the second half of the year, especially on the energy side. The rolling book-to-bill continues to trend up. Organic net sales decreased by 6%, so net sales decreased by 10% and equipment was the big driver. So equipment net sales decreased by 33%, whereas service sales continues the positive journey increasing by 13%. And as I mentioned before, the equipment net sales decrease is mostly driven by periodization between quarters in project business. Profitability continues to improve, we are on a journey of continued improved financial performance. So net sales decreased but the comparable operating results increased by 50%. I mean, clearly, this is supported by a more favorable mix between services and new build, we have about 63% of our sales in Q1 was service related so that gives a positive impact on our profitability for Q1. The lower sales give lower operational leverage, so that goes the other way. But in general, I think we are on a solid path to reach our financial targets. Technology and partnerships. This is really what we are excited about in Wartsila and it's all focused around our strategy for decarbonization. So a couple of examples from Q1. First of all, we are very happy and proud that we are part and we are actually leading a EUR 200 million collaboration in an ecosystem to develop autonomous power plants and also autonomous zero-emission power plants for balance and solutions going forward. So this is a 5-year collaboration program. it involves more than 200 Finnish companies, industrial organizations, research institutes and universities. We call it WISE, and it's really to develop innovative clean energy concepts and autonomous zero-emission balancing solution by using data analytics and artificial intelligence and our goal as an outcome is to offer flexible autonomous power plants concepts by 2028. On the storage side, we continue to invest and continue to launch new products. So Wartsila we have introduced a Quantum 2 to optimize the deployment of large-scale energy storage facilities. So it's a fully integrated, high-capacity battery energy storage system optimized for global large-scale deployment and it enables our customers, project developers to meet capacity requirements with improved transportation and deployment speed and unparalleled safety. As you know, we have the industry-leading safety -- thermal safety track record. It's flexible to include modules from various manufacturers, allowing optimized configuration for each project and for different partners in the supply chain. If we then zoom in on our 2 businesses, starting with Marine, good performance continue. Order intake, net sales, comparable operating results all increased. Order intake up 23%, net sales up 6%. And if we look at the comparable operating result, we see good performance in services supporting the result. And -- but we do have an increase in R&D costs and higher depreciation and amortization. As we talked about, we are investing in new technologies on the marine side, new fuels, hybrid solution, carbon capture, et cetera and we want to position ourselves as a technology leader in the industry, and I think we have a very strong position. If we look on the services side, we have good development in marine service agreements. Marine net sales to agreement installation continues to increase. And we took one example here with many of these, but this is really what the service business is about. So it's a life cycle agreement to support optimized low-emission operations for 2 P&L ferries. So we signed the agreement with P&O, 5-year agreement, 2 vessels, Pioneer and Liberte designed to optimize and ensure minimal impact on operations. So the scope includes parts, maintenance services, maintenance planning, operational support and also Wartsila expert insight for predictive maintenance services, and this order was booked in the first quarter. Now looking at energy. Comparable operating results increased, Equipment net sales decreased due to the periodization of deliveries between quarters as we talked about before. So order intake up 4%, net sales down 30% quarter-on-quarter. If we look at the operating result, it was supported by the good performance in services and also improved profitability in our EPP business. Decreased sales, of course, we have lower operational leverage with the sales coming down and also on the energy side, we are investing for the future, being positioning ourselves as a technology leader. This, I think, it's a great example of balancing of the global trend that we are seeing in balancing, which is very strong, particularly in the U.S. So one of our, you could say, repeat customers has placed another order. It is the Lower Colorado River Authority, LCRA, they provide wholesale power to the Texas power grid. And LCRA actually gave us an order in 2022 for 190 megawatts and now they are returning, which we are very happy, to place an order for another 10 engines, the 50SG engines, so it will basically double their output. And I think the statement here by senior leadership in LCRA, it's -- I think it's spot on with what we are doing in Wartsila on the balancing side, actually, the message that we have been giving. So quoting here, "We really appreciate Wartsila's track record in supplying efficient and reliable engines. The flexibility of the Wartsila engine is particularly important in providing the rapid ramp-up of power needed for our new Pico plant, which will be called upon to quickly come online when other generation is not available to meet the power demand of our growing state". So this is balancing power spot on. And this order was booked in the first quarter. If we look at energy storage, the comparable operating results continue to be positive. We had low net sales due -- also here due to periodization of project deliveries between the quarters. And the strategic review continues. Energy Services is at a good level. I mean, good agreement coverage, 29% of the installed base is under agreement. I mean you see a slight reduction of megawatts under agreement in Q1, but that is also affected by periodization. It's not a general trend, we do see a positive development of our agreement business also in energy. And for us, one of the major metrics continues to be the customer's renewal rate on the agreements, and they are 90%, so a strong testimonial that we are creating value for our customers. To sum it up, looking at how the comparable operating results have improved, the bridge from Q1 last year. And you can see the contributors here Marine Energy portfolio business and I think it's worth to note that Marine and Energy, both are now above 11% EBIT and the comparable operating result increased by 50%. Other the key financials.

[Arjen Berends, executive]

Thank you. Give me the clicker. All right. Other key financials. If you look at all these, let's say, other key financial parameters or KPIs, however, we want to call them, actually, we can clearly see that it is on all lines improving compared to the same quarter last year. Actually, it's also improving compared to Q4 last year, except for solvency and basic earnings per share. Solvency typically goes down in the first quarter as the AGM decision about dividend is accounted for in equity. And if we look at the basic earnings per share, it's actually only $0.02 down from Q4, which is actually for Q1, a very good level. Our operating cash flow, EUR 258 million, actually, it's an all-time high Q1 record for Wartsila, we have never had such a high cash flow in Q1, clearly supported by customer payments, down payments, very much, I would say, related to the good order intake that Hakan was reflecting upon earlier. Actually, our order intake in Q1 was higher than Q4, which is really a good trend, but also other milestone payments from customers. What also clearly happens to the -- or supports the cash flow is our continuous improvement on transactional services because the transition, let's say, from order to cash on transactional services is a lot shorter, and that can have quite significant impact even on single quarters. Looking at this graph of the slide, actually, the left-hand graph, let's say, cash flow from operating activities actually going really strong. Actually, generates that we are in a net cash position today, very much supported by improved profitability, but also a continued negative working capital. I would still say that negative working capital is exceptional and that relates very much to, let's say, project execution milestones in our order backlog, and that can vary a lot, let's say, quarter-on-quarter, but Q1, extremely good, and the trend is clearly positive. Back to you, Hakan on the prospects.

[Håkan Agnevall, executive]

Thank you, Arjen. So coming to the prospects I think we have a fairly positive outlook, so we expect that the demand environment for the next 12 months on the Marine side and the Energy side to be better than of the comparison period, so the positive journey continues. All right.

[Hanna-Maria Heikkinen, executive]

Thank you, Hakan, and thank you, Arjen. Maybe Arjen, you can join here for the Q&A. So we will continue the Q&A now, but I would like every analyst first ask one question. So one question per analyst first, and then please say the follow-ups until every analyst has had the possibility to ask one question. Thank you. Handing over to the operator.

[Operator]

Our first question comes from Sean McLoughlin. You can unmute your microphone and ask your question.

[Sean McLoughlin, analyst]

One question. Just trying to understand a little bit your comments around periodization projects. Just what is going on here? I mean, are you -- is there any sense that you're capacity constrained? Are there potentially supply chain limits on your ability to deliver? Or what else is causing this, let's say, you're having to decide which projects move forward and which take longer. And I guess, are there any also risks that we see maybe project delayed?

[Håkan Agnevall, executive]

So just to clarify, the word is periodisizing, not prioritizing, periodisizing. So what does that mean? It means that when we deliver projects we invoice our customers and we do revenue recognition for some of the projects based on invoicing. For some of our projects, we use the percentage of completion to recognize sales, so we have a bit of mix of that. But what happens is that if an invoice slips a week from one quarter to the other or you have a certain milestone and a delivery scheme that can slip for 2 weeks, then you can have quite a lot of impact on our quarterly sales. So this is not about lack of resources or supply chain constraints or capabilities, it is about what sometimes happens in project-related business that you have milestones slipping from one quarter to the other. And that's why we are confident this is not a trend shift or anything, this is more of a quarterly phenomenon, so to say. Yes.

[Arjen Berends, executive]

And in addition to that, I think it also links to, let's say, our order intake pattern of the past. Let's say, if you look at order intake, in particular, let's say, on projects, storage and engine power plants, for example, it has been more in, let's say, the second half of last year when we took the order intake, as we have also earlier commented. And typically, that is then also delivered, let's say, not in the first half of this year, but typically, let's say, the second half of last year and beyond. What we also see as a trend is that the time between, let's say, booking the order and delivery, so sales recognition, you could say, in the marine side is slowly increasing because of, let's say, yard capacities being full. So where we used to say about -- it's 12 to 18 months between that, it's now more to, let's say, 18, 24 months. So that's also a clear change in what happened in the market actually. And It relates to periodization, sorry.

[Håkan Agnevall, executive]

Yes. And also to make a final comment on sales recognition for this year, we clearly also make the statement that if you look on sales in general over the year, we will see a gravity towards the second half of the year, especially on the Energy side, both in storage and power plant.

[Operator]

The next question comes from Vivek Midha from Citi.

[Vivek Midha, analyst]

Thank you very much, everyone. My question is on margins and seasonality for the year. You noted the unusually high, service shares failed, and you commented that the segment is likely to go up in the second half. So how should we think about the phrasing of the margin over the quarters this year? And if I may, when you comment about the solid part of your financial targets, is there any more color you can give at this stage as to when you hope to achieve that 12% margin target for the full year basis?

[Håkan Agnevall, executive]

So we -- I mean, we have a 12-month -- sorry, 12% operating margin target, we have said over a few years, we are not more specific than that. We emphasize our journey of continuous improvement of our profit margin, and I think Q1 is certainly a testimonial to that journey. Then also on -- we do underline that first quarter, the sales mix services versus new build, it was favorable from a margin perspective because with 63% service sales and compared on to new build, of course, that supports a positive margin mix, and we also say that when we look at the sales recognition for the full year, especially -- I mean, then we talk new build will be more -- gravitate more to the second half than the first half. I don't know if you want to comment?

[Arjen Berends, executive]

No, I think that covers it quite well, I would say.

[Operator]

The next question comes from Sven Weier from UBS.

[Sven Weier, analyst]

It's regarding the Marine order intake. And specifically, my question is on offshore, where I think you were more bullish on the offshore segment for 2024, but we haven't seen that coming through in Q1 order intake yet. I was just wondering is that a timing issue? And also specifically, I was wondering in the merchant segment share of Marine order intake the 30%, how big the tanker exposure is in that?

[Håkan Agnevall, executive]

I would say that we still have an optimistic outlook for offshore this year, so to say, so we are still optimistic about the segment. Then tanker impact, I would say it's limited, I would say, because I mean, it's mostly 2-stroke engines and we do deliver some auxiliaries, but maybe not so much into that specific segment.

[Sven Weier, analyst]

Because I remember when you did the Hamburg, the acquisition years ago that they had some, I think, pump exposure also to tankers, but that seems to be a relatively small, right?

[Håkan Agnevall, executive]

No. The pump business in Hanworth, we divested a couple of years back, so we don't have exposure anymore. I mean what we [Indiscernible].

[Sven Weier, analyst]

Yes, that's what I said.

[Håkan Agnevall, executive]

What we see though in Gas Solutions, I mean, the business unit that we have put in portfolio, it has -- I mean the whole -- there is a lot of activities on -- I mean transport, as you know, gas solution is delivering transport systems for different type of gas carriers and there is quite a lot of activities in that particular segment. But as I said, this is nowadays in portfolio.

[Arjen Berends, executive]

And also on ammonia actually on that segment.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Could I just ask on the Marine Service business? When I look at your order intake in Marine Services, it looks like sort of what it is up 16%, organically, it's probably up in the 20s. How much of this is sort of underlying activity and how much of this is kind of multiperiod bookings? I'm just trying to get a sort of real sense of kind of what the underlying market is doing and maybe what the sort of uplift from your kind of your own [Indiscernible] is. If you can give [Indiscernible] on that whether that kind of that sort of service level as kind of $568 million in Marine is sustainable?

[Håkan Agnevall, executive]

So I mean the -- so 2 sides of the equation, so to say. I mean, first, there is, of course, a high level of activities in general in the fleet, so to say. And I would say, I mean, with the geopolitical challenges in the Middle East and also the drought around Panama and therefore, the impact on the Panama Canal, that makes people take longer routes, and that has a contribution to the service business. So the high level of activity and considering the very current states, ships are actually going longer, which has a positive impact, so to say. But that's only one piece of the question. The second piece of the equation, and I would say this more important piece of the equation is our strategy around moving up the service value ladder, and we really see that strategy playing out. I mean bringing new customers into agreements and bringing customers that are in agreements to more advanced agreements, et cetera, et cetera. So both are benefiting, but I would say our strategy is really, really delivering, so to say.

[Operator]

The next question comes from Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

I have a question on energy storage and the impact that these project delays or later deliveries have on the margin. Energy storage dropped or deliveries dropped by 80% year-on-year, so first of all, I would assume that the margin increase you have in energy, the 500 bps is really driven by thermal and services and that the storage business is basically absorbing a lot of the SG&A costs into later quarters. So I would like to understand that dynamic and what the normal margin would have be in energy if you had delivered normal storage volumes? I hope that makes sense.

[Håkan Agnevall, executive]

No. So basically, and I'll let Arjen also comment. I mean you could say that I mean sales in storage is very low this quarter. So you could say it's -- the quarter is -- the main contributor is the EPP, the power plant and the service business, I think that's one thing to reflect upon. And just to clarify this with periodization, it doesn't mean necessarily that we have delays in projects, that's not the major driver. It's just that we have a project business and milestones and payments, they are planned in a certain way, and they are not -- unfortunately, they are not planned for our quarterly reporting. So it's not that things are slipping and sliding, it's just that the business has -- projects in the business have a certain cadence, and they -- it leads to sales recognition in certain times. And as I said, if the time is not the last week of the quarter, but maybe 2 weeks into the new quarter, of course, you will see this as a decline in sales in Q1. So just underlining that, there's no major delays, it just happens that a kind of project cycles. And we do have -- in storage, we do have quite some big projects, so planning of distinct milestone can have this impact on our sales recognition. But Arjen, I give over to you.

[Arjen Berends, executive]

Yes, I think you said many things already. Let's say, one thing to add. You are absolutely right, Sebastian, of course, with a low sales in storage, the operating leverage is clearly, let's say, impacted. We will not open up, let's say, what it exactly is, but it's a clear effect and we believe that, let's say, over time, looking more on a full year perspective, this will get back in line basically.

[Sebastian Kuenne, analyst]

But it would basically mean if the low-margin business, which is currently still storage, if that comes back into Q3, it could lead then to lower margins, right? Because you add back all the SG&A costs in these projects.

[Arjen Berends, executive]

No, SG&A costs are already, let's say, hitting, let's say, storage as of today, basically because you cannot put it on the balance sheet, that's not working capital or work in process.

[Håkan Agnevall, executive]

So you could say that you might recognize that if you look at the 12-month rolling as we presented for the EBIT of energy storage, it continues to be positive. And that is still absorbing the S&A, so it's not that we are reallocating the S&A. So I think that also shows the underlying strength of the project execution in storage. I think we have a very solid project portfolio, and we have a good profitability development of that portfolio. So storage keeps on carrying its own S&A [Indiscernible].

[Operator]

The next question comes from Vlad Sergievskii from Barclays.

[Vladimir Sergievskiy, analyst]

Thank you very much for the opportunity. I was just trying to understand the 75% drop in storage sales. I assume significant part of sales recognized here a cost-to-cost method and therefore, shouldn't be impacted by delivery milestones or invoice. While if indeed, the revenue is recognized on delivery then I would expect inventories to go up if you have been building those projects, and I don't really see that happening. So if you can help you to understand the drop that will be very much appreciated.

[Arjen Berends, executive]

I'm not sure if I fully understand your question, but I think you referred to, let's say, the percentage of completion application, which is, of course, what we apply in storage largely. But I think the answer to your question because you -- at least what I understood through the line is that you think that it should be more, let's say, gradual coming over time. That depends very much on, let's say, when are we buying, for example, the batteries in the storage project. And as you can see from our order intake last year, let's say, the majority of the order intake was actually in the second half of the year, which means that, let's say, okay, we buy the batteries later. So that also brings the, let's say, the percentage of completion to a later moment. You cannot buy the batteries earlier because then, let's say, would you get the batteries too early, they will deplete, so they will not deliver the performance as you have promised to your customers. So related to my earlier comment that, okay, the order intake last year was rather late in the year, then you could basically say, okay, it tilts more to the second half of this year when it comes to the deliveries and even on the percentage of completion. Hopefully, that answers your question, if I got it right, what you meant?

[Vladimir Sergievskiy, analyst]

It does. Thank you very much.

[Operator]

The next question comes from [Chetrite Sina] from JP Morgan.

[Unknown Analyst]

So in your income statement, your revenues are down about 10%, but your expenses are down by about 14%. So I would imagine lower equipment sales would imply lower production costs. But could you please comment on SG&A in the quarter and whether it was up or down versus last year? And can you also tell us like how -- what level of inflation you saw in your cost base versus revenues in Q1?

[Arjen Berends, executive]

I would say that the cost inflation, of course, has impacted us. Let's say, we are clearly seeing, in particular, on salary inflation, let's say, clear impact in this year. And I think we are not the only one. I think many companies face the same. Material cost inflation, I would say, or in the services, I would say that has been stabilizing pretty much so there is not much from there. It's also good to know that, let's say, okay, when you think about let's say, orders being down and costs being down on a, let's say, just quarterly basis, I think it's a bit on a stand-alone quarter, a bit wrong to compare like that because, let's say, you're still producing for all the quarters to come you need the resources to sell in the market. We are clearly, let's say, ramping up, let's say, resources on the service side in order to facilitate our service growth. So it's not, let's say, an exactly 1:1. So if your sales goes down, your cost goes down, that doesn't work on a quarterly basis. Of course, if the long-term trend is that, let's say, sales is going down we need to take, let's say, more radical measures. But actually, at the moment, we are in certain particular points, in particular, on the service side more ramping up and ramping down.

[Operator]

The next question comes from John Kim from Deutsche Bank.

[John-B Kim, analyst]

If we could stay in the Energy segment and talk a bit about the sequencing of revenues perhaps through the year. I've heard you clearly that the division is likely to get weighted. But given the impact of periodization on your accounting, do you expect Q2 to be up sequentially without getting into great details? Or put slightly differently, is the storage revenue is sort of the new normal in the short term?

[Arjen Berends, executive]

No. Storage sales is not -- that's not the new normal, let's say, EUR 62 million, let's say, sales for Q1 is not a normal. Let's say, you can look at the order book and also the order intake of the past, I think that substantiates, let's say, a clear improvement from Q1 levels to the next quarters. But as I said, let's say, the delivery volumes are tilted to the second half. So I would say, I will not guide you exactly, but second quarter will be better, but the most is tilted to the second half of the year.

[John-B Kim, analyst]

Okay. So just to be clear, you're not seeing order pushouts of any real magnitude?

[Arjen Berends, executive]

No. Let's say, it's just related very much to what I earlier explained, let's say, the order intake patterns of the past that make that the delivery patterns of this year are what they are. There is no delays from our side, there is no delays on customer requests either.

[Operator]

The next question comes from Panu Laitinmaki from Danske Bank.

[Panu Laitinmaki, analyst]

I have a question on the energy market outlook. I mean, storage orders were down, and you mentioned some slower decision making in the commentary but the energy outlook is unchanged and you expect improvement. So could you talk about what do you see in the market? And you previously commented that you expect improvement in all the 3 energy categories, service, storage and power plants, So it's still the case?

[Håkan Agnevall, executive]

So if we start there, and you saw our guidance, I mean we expect the demand environment to be better. And if we look at the balancing side and if we start on battery storage, there is a lot of activities out there. I mean, countries like U.S., Australia, U.K., et cetera. So a lot of market activities. And it's really -- it is this narrative about more renewals, challenges with stability of the power system and the need for balancing power. That is -- so that's a clear driver for storage But it's also a clear driver for our power plants. And then if you look at the LCR, the Lower Colorado River Authority, I mean these -- there are many of these type of dialogues that we have ongoing in the U.S. right now. So a lot of activities. Then if we look at base load for energy power plants, there are quite a lot of activities both in Southeast Asia and in South America, so to say. So that is the kind of underpinning logic. If you look on our services side, we continue also on the energy side, service value ladder, moving in the right direction. Yes, you can say that Q-on-Q, it is a bit flat, but coming back, that is also periodization. So we see a continued positive development.

[Panu Laitinmaki, analyst]

Okay. So no change in the statements basically?

[Håkan Agnevall, executive]

Correct.

[Operator]

The next question comes from Mikael Doepel from Nordea.

[Mikael Doepel, analyst]

Just coming briefly back to the [Aster] market business where I guess you had probably a double-digit organic growth in the quarter year-over-year for the order intake, which is obviously a very strong number and a continuation of what we've seen in the past couple of quarters. Within that, I can see that Marine seems to be very, very strong. Energy seems to be a bit more muted, this on a year-over-year level. So I was just wondering, is this the level of growth fair to assume going forward as well? And within energy are things kind of slowing down there? Give some more color.

[Håkan Agnevall, executive]

So I didn't hear in the beginning, were you focusing on service business or new build business? Just -- can you just start the first project -- you're talking about service?

[Mikael Doepel, analyst]

Yes.

[Håkan Agnevall, executive]

Yes. Okay. Good. I didn't hear you. No, I think we see a positive development, clearly going forward. And it's these 2 pieces of the equation that I talked about, strong underlying operations of the assets. And yes, when we look in the market, I think there is still -- the underlying operations will continue to be strong, certainly in our core segments. And then the other piece of the equation, which is, of course, moving up the service value ladder. And there is so much activities I talked about service agreements, we continue to see a positive trend. We can also talk about the retrofit business. I mean, now with marine industry, joining Europe's ETS, strong focus for ship owners to develop the CII, the carbon intensity index strategy, how to drive down the CO2 emissions, yes, they start maybe with slow steaming, but then it comes to retrofits of maybe bringing hybrid system, bringing methane slip down, doing drastic derating of 2-stroke engines. And all of these retrofit businesses, we are very much active, so it is a positive outlook. On the energy side, we -- it's -- you could say this strategy is the same, moving up the service value ladder, looking at agreements, and we do see a continued positive development.

[Operator]

The next question comes from Tomi Railo from DNB.

[Tomi Railo, analyst]

[Indiscernible] from DNB. A question on Marine equipment. Would you be able to share how much [Jose] comment, how much engines represent of marine equipment orders? And how much alternative fuels represent out of engine orders in the first quarter?

[Arjen Berends, executive]

I think in the first quarter, I think -- but that was more a market trend, I think it was 45% alternative fuel generated orders Okay. I don't have exactly in my head now how that translates to our order intake. But I wouldn't expect it to deviate a lot. It might actually a little bit more on our side.

[Håkan Agnevall, executive]

Yes. We see -- I mean, so far, we haven't made public the share of the incoming orders, maybe this is something we should consider but so far, we are not making this public. But I can clearly say that if you talk about methanol, that we have a solid order backlog from methanol engines. Methanol enabled engines because, as we talked about, it's a lot about fuel or even multi-fuel capability. So we see -- we still see a lot of demand for the LNG, also for the heavy fuel type of engines, but it's really focused on dual or multi-fuel capability. If we talk about ammonia, we launched our -- commercially launched our ammonia engine by the last -- I mean, Q4 last year, and we are still negotiating the first order. So that is a very early stage but I would say methanol is really catching up volume-wise. But let's see if we are prepared going forward to be more transparent about the volumes.

[Tomi Railo, analyst]

Thank you. We have our calculations, but happy to confirm later if you can. Second question would be on energy and level of EPC orders or maybe not EPC, rather your own kind of product orders in the first quarter. In the Capital Markets Day, you mentioned that more than 80% of the backlog is equipment orders, what is the situation during the first quarter?

[Håkan Agnevall, executive]

So I would say the trend continues. I mean, clearly, the focus on equipment relative to EPP continues, not a major shift. But I think also when we look at this and then we discuss this, just looking at one quarter, you will have a lot of swings so I don't think we should talk about the percentage for every quarter. But -- because it's going to swing a lot.

[Arjen Berends, executive]

I was -- 80% has not been diluted.

[Håkan Agnevall, executive]

No, exactly. I think the trend is very clear and it continues.

[Tomi Railo, analyst]

And would you say that this has kind of played a clear role in the profitability in the first quarter? I know 1 quarter is 1 quarter [Indiscernible].

[Håkan Agnevall, executive]

No. So I mean you recognized in the bridge there that we said that the profitability of EPP is increasing. And the shift to more equipment certainly has -- is contributing to that. It is.

[Operator]

The next question comes from Sven Weier from UBS.

[Sven Weier, analyst]

Yes. And the follow-up question from my side is a slightly bigger picture question on the Marine business. Because as we all know, in the last 15 years, we had a bit of a structural down cycle, of course, which has led to the lower shipyard numbers and I guess you guys have also reduced our capacities. I was just wondering how you go about capacity planning, let's say, with a view to the maybe next up cycle that is driven by decarbonization. Are you still extremely reluctant to add a lot of capacity here? Is that kind of limiting your ability to access orders because we talk a lot about yard constraints? But I'm more curious about your constraints that you have on the capacity side potentially.

[Håkan Agnevall, executive]

Yes. No, first a general remark. I think the trend for shipyard capacity is turning. I think it turned in 2020, 2021. So we actually see that shipyard capacity is a little bit coming back, but you're right in the sense that was a big downturn before that. So if we look at our capacity, no, we are not a bottleneck. I mean, as you know, we have now stopped the manufacturing of engines in [Indiscernible] in Italy. So we have our 2 major manufacturing hubs, you can say, in Vasa in Finland, but we also have our Chinese JVs. We will not be a bottleneck. I mean we have significant capacity to scale up if needed, so to say, because we have the built-in flexibility in Vasa and in China. So we would take that as a very positive challenge. If the volumes suddenly will go up very drastically, so to say. And I think the long-term trend, we do see a positive development, and we are ready for it.

[Sven Weier, analyst]

Does that also mean you don't have to really invest a lot of CapEx to get there. It's more about managing the shifts, managing people numbers in the factories?

[Håkan Agnevall, executive]

Yes. No. I mean -- as you know, we invested about EUR 250 million in [SDH] in Vasa. And so we can grow within that facility. If it really would grow, we can build a little bit more but I think the overall CapEx level will not drastically increase, so to say. I think we have an industrial system, including our supply chain that is flexible and also capable to scale in a growth scenario.

[Operator]

The next question comes from Vlad Sergievskii from Barclays.

[Vladimir Sergievskiy, analyst]

Yes. Thank you very much for taking my follow-up and hopefully, the line is all right. I would like to ask about your progress on the strategic review of storage. I mean it has been ongoing for about 6 months now. Would you be able to give us some idea why is it taking such an extended period of time and maybe some preliminary conclusion that you have come up to after 6 months of the work?

[Håkan Agnevall, executive]

So good question. I think when we set out the strategic review, we said that we're not going to communicate a specific deadline because we want to take the time that is needed, and that's the same approach that we have today. So we haven't said and we will not say the deadline. I mean, time is running clearly, but we are also working through the review and I think it's premature for us to go out and say where we are, so to say. So I'm sorry, but you will have to wait for that when we are ready with the analysis.

[Vladimir Sergievskiy, analyst]

No. Thank you very much for sharing that.

[Operator]

It seems like that there are no questions on the queue, but we still have a couple of minutes left. So in the case, you have a question now we have good time to answer. Thank you. Thank you, Hakan. Thank you, Arjen, and thank you for all of the good questions. I would like to remind you that we are hosting a Marine Theme called together with the President of Marine Roger Holme and together with Arjen Berends, our CFO, It will take place on May 7. And then we are also hosting a site visit to our sustainable technology hub in Vasa, which will take place on May 30. So hope to see many of you there. Thank you.

[Håkan Agnevall, executive]

Thank you for today.