Wärtsilä Oyj Abp (OTCPK:WRTBF) Q2 2022 Results Conference Call July 21, 2022 3:00 AM ET
Company Participants
Hanna-Maria Heikkinen – IR
Hakan Agnevall – CEO
Arjen Berends – CFO
Conference Call Participants
Vivek Midha – Citi
Sebastian Kuenne – RBC
Sven Weier – UBS
Antti Kansanen – SEB
Sean McLoughlin – HSBC
Erkki Vesola – Inderes
Nancy Ni – Goldman Sachs
Hanna-Maria Heikkinen
Good morning, everybody, and welcome to this news conference for Wärtsilä Half Year Report 2022. My name is Hanna-Maria Heikkinen, I’m in charge of Investor Relations.
Today, our CEO, Hakan Agnevall, will start with the group highlights, followed by the business area development and then our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Time to start. Please, Hakan.
Hakan Agnevall
Thank you, Hanna-Maria, and thank you, everybody, for joining us. Let’s jump into the second quarter for Wärtsilä. Some really good news on the service order intake side. Service order increased by 36% throughout the business. Also on the overall order intake, we had a positive development.
Order intake increased by 25%. So strong order intake in still a market with a lot of uncertainty, but we are making good progress. Net sales increased by 24%. And also on the services, we see that service net sales is developing in a positive way with increased service net sales of 18%.
Comparable operating result also increased by 20%. So — but cost inflation, supply chain bottlenecks, COVID-related lockdowns in China and sanctions in Russia have put and continues to put the global economy under pressure and cost challenges also for us, but still, we managed to grow our order intake. And starting point, also 2 very important announcement from Wärtsilä and if we start with the most recent 1 this morning is we — this morning, we confirmed that our exit from the Russian market has now been completed. All adjustments and closures were completed in accordance with local regulations. The financial impact is in line with the provisions that we took already in the first quarter and no material impact on our financials in the second quarter.
Then earlier, we have also announced the plan to further optimize our European engine manufacturing footprint, ramping down our factory in Trieste, Italy and centralizing our 4-stroke engine manufacturer to Vaasa in Finland. This means taking the next step in strengthening our competitiveness and creating a structure enabled for future growth. Italy and Trieste will continue to be very important for Wärtsilä in many areas. And now we are highly committed to working very closely together with unions and institutions to identify different support solutions for the impacted employees. This has not been an easy decision for Wärtsilä to take.
Coming back to the overview of the figures, and we will talk through them. I highlight a couple of the first half year, I mean we had a good second quarter, but also a good first half year with order intake up overall 18%. We have an order book that is up 13%. And our comparable operating result also from a first half year, up 35%. If we then look at the highlights of the second quarter, we say that net sales came in at €1.4 billion, 18% increase in service sales, strong contributor.
The comparable operating results landed at €85 million, growing 20% and strongly supported by higher sales volumes. You also see that our operating margin kind of stabilized at 6.1%. And one could expect the operating margin to continue to develop in a positive way, given our increased sales. But here, we are also facing headwinds in terms of cost inflation, which is impacting our existing order backlog. We are also facing challenges with under absorption in our industrial system.
And we also said earlier that 2022 is a newbuild year. So the mix between newbuild and services weighs over a little bit more than normal to the newbuild side. And we know that the profit margins on the service side is higher. So these are a bit of the headwinds, so to say. But we are moving in the right direction.
On the marine market, activities are at a good level. Investments in new vessels eased off a bit due to increased prices and also a few available slots at key shipyards. And there is also some uncertainties related to future demand for tonnage. The number of vessels orders in Q2 decreased to 701 compared to 829 in Q2 last year. Vessel contracting has been driven by containership and a record level LNG carrier ordering.
And the LNG carrier market activities has improved significantly during the Q2 as many countries in Europe are looking at replacing Russian pipeline gas with LNG from other sources. And on the cruise side, at the end of June, 90% of the cruise capacity was active, up from 70% end of March. And when I talk to our key customers on the cruise side, I think they have a very optimistic view on the demand side here in the months and the year to come. On the energy market, markets are affected by global cost inflation and price volatility. But we also see the continued trend of increasing demand of balancing solutions.
Cost inflation and continued COVID-19 pandemic have contributed to higher quotation prices, increase of cost of supply and higher energy prices have also caused slower customer decision-making, we see that. The market transforms as Europe is moving away from dependency on Russian imports and more liquefied LNG projects are moving forward globally. We see an increasing level of intermittent renewable energy that is expected, and we do see an acceleration in the need for balancing solutions. Storage growth is picking up after a slow first quarter. You’ve seen that in Q2, it’s really taking place again after, I would say, a digestion of the new cost and price level in the market.
Service growth continues at a good level, and customers really show interest in our long-term agreements. Our market share, the Wärtsilä market share in gas and liquid fuel power plants also increased the notch now to 9%. Order intake was up by 25%. Equipment order intake increased by 13%, service by 36%. And what is really encouraging on the services side, we do see that the major driver of the growth in the second quarter was around agreements.
And you know we have been talking about moving up the service value ladder, and we see it happening gradually as we go forward. We have a strong order book. And this is despite that we have now in the second quarter, removed €240 million of Russian-related projects, you also see that if you look at the share of delivery of the current year this year, this share has increased compared to previous years. Net sales increased by 24%. Equipment net sales increased by 31%, and service net sales increased by 18%, so positive development in both areas and throughout the business.
Now technology and partnership highlights. Moving on our way to shaping the decarbonization of marine and energy. So what is happening? I think on the hydrogen side, we have some really interesting partnerships here, 2 very concrete examples where the blending of hydrogen starts to be tried on the energy side. So we have a collaboration with Capwatt in Portugal, and we test up to 10% green hydrogen blends in our 34SG engines.
In the U.S. we blend up even up to 25% of hydrogen, and that will be tested in cooperation with WEC Energy and where they have a current plant running on 3 of our 50SG engines. We also launched a new large bore engines, 46TS dual fuel engine has a modular design. It’s part of our modular platform and with a focus on efficiency. And we are really taking fuel efficiency and, therefore, reducing emissions to the next level.
And we keep the fuel flexibility, which is — will be needed as we talk about the gradual shift to different type of fuels. And in gas fuel mode, this engine has the highest efficiency in the industry so far achieved in the medium-speed engine market. We also really celebrated our opening of our sustainable technology hub in Vaasa in Finland. This is a new technology center where we invite customers, partners and companies, academia to come together to incubate, test and validate ideas. Evolving a lot around the new fuels and the new sustainable solutions, we need to increase the pace of innovation.
It also features a modern fuel laboratory, flexible technology and engine testing facilities as well as a highly automated production system. And it’s on land, but it’s also at sea because we have a great cooperation around Aurora Botnia, RoPax ferry in Vaasa, which actually is a floating test lab for us, which is an integrated part of the whole ecosystem. Now if we look at the businesses, let’s see how the businesses have evolved. For Marine Power, order intake and net sales increased. Service order intake is up here also 36%.
Overall, the order intake, you can see it’s up 21%, net sales with 8%. Our operating — comparable operating result is going from €44 million to €45 million. On the positive side, strong services sales. What is holding it back is the factory capacity, the under absorption also the cost inflation, both on materials and logistics on the existing order backlog. We do a lot of testing on fuels and the fuel costs are going up, which is affecting the profitability.
And then we also carry cost to ramp up the sustainable technology hub, SDH this year. If we look at the service agreements, they are really growing. And the net sales from the installations under agreement is clearly increasing. And here, I think it’s a great example. Maran Gas has extended their optimized maintenance agreements for an additional 5 years. This agreement ensures that operation, they can run safely in control and also — in a controlled way, but also with predictable cost for the fleet of 21 LNG carriers.
And in addition to the maintenance service, this agreement includes remote operational support, dynamic maintenance planning and also our digital predictive maintenance solution based on our expert insight platform. And already today, Marine Power is supporting globally more than 700 vessels with our life cycle agreements. And 1 interesting metric, we sold 90% of the cases remotely. And for me, a very strong proof point of the whole logic and the whole concept is that we have a very high renewal rate with our customers. Customers that have signed up for agreements, they come back and they want to prolong.
Maran Gas is 1 great example. Looking at Marine Systems. Net sales increased. Order intake and comparable operating result decreased. Order intake went down with 24%. I think on the newbuild, 1 year ago, we had a spike in our Gas Solutions order intake. It’s a bit of a periodization. And on the services side, there is also this year a bit of a periodization, but order intake is down. And net sales is up. Then in spite of the higher sales, you still see that the comparable operating result is going from 13 to 11.
So on the positive side, we have higher sales volume, but on the negative side, we do have an unfavorable mix between equipment and services, and we also see the pressure from cost deflation in our existing order backlog. Voyage. Voyage order intake increased, but the Russia exit impacted clearly the sales and profitability negatively. However, I would really like to recognize the significant efforts and commitment from the voyage team in rebuilding the business in new locations outside of Russia, keeping 100% focused on the customer and really delivering. So that has been a monumental effort.
And now we have taken a significant step. So order intake, up 8%, net sales down 15%. You can see operating results, minus 11, minus 12 . On the positive side, we had a favorable sales mix between services and equipment, but we had lower sales volumes I mean, we also had — I mean, the cost related to ramp down of our R&D capabilities and building up outside of Russia, again, so to say. If we see how our cloud solutions are evolving, we continue to see the increase now 23% increase in connected vessels. We also closed the acquisition of PortLink.
And I will say this acquisition as 1 example of the type of acquisitions we want to do going forward. It’s bolt-on acquisitions where we acquire maybe small or midsized companies with certain critical edge in technology or service capabilities. And PortLink, is a leading provider of port efficiency solutions. It was founded in 2007, and it is headquartered in Vancouver, Canada. It has a global partnership with more than 3,500 users and a customer network in more than 20 countries.
The workforce is 20 professionals. It’s not a big team, but it’s a really good team. And they will be integrated now in the Wärtsilä voyage business. This acquisition, it will speed up voyage journey towards creating an end-to-end connected maritime ecosystem with intelligent port logistics solutions.
Then energy. And you can see the lady was smiling, energy significant improvement in all key figures. Service order intake up by 56%. If you look at the order intake, overall, it’s up 51%. If we just zoom in on a battery storage business, it was up 91%, but also the thermal side was up with 34%.
Net sales up with 52%. And we can see that the comparable operating result going from 24 up to 41. Major driver is the sales — service volume growth but also energy is working with cost inflation. It’s a headwind in existing order backlog. There’s also a less favorable sales mix between equipment and services.
And also within the services, there is a less favorable mix between the different disciplines of services. But in energy that is definitely going in the right direction. And Q1 was tough on our energy storage business. Q2, we see order intake really picking up again. One example from the U.K., we are delivering 100-megawatt hour storage for our partners there, the SSE.
The project also includes our GEMS software platform. And this is very normal for us when we deliver to our equipment that we deliver our software solutions. And you know our approach to the storage arena, it’s power system optimization. It is how you connect the battery to the power system in combination with different generating assets. This is where you can really create value, uptime reliability and also lowest overall energy cost.
This battery system is connected directly to the transmission network and support access to clean and reliable energy by balancing the intermittency of renewables. The energy storage system will support U.K.’s national grid with reliability services and we will also support the wholesale market trading that is crucial for establishing the market mechanism for balancing power.
And we are actually in — we have received earlier orders in the U.K., and we are installing similar sized energy storage system across the U.K., helping supporting U.K. to meet this ambitious renewable energy targets. On the service agreements, we also see that the installed base is increasing — the service coverage of the installed base is increasing. And this is 1 example from Brazil, where we have a performance agreement that will enable our Brazilian customer to meet its power purchase agreement obligations. It’s the full operation and maintenance agreement for Termocabo covers 48-megawatt power plant, and it operates on 3 of our 46 engines.
And this agreement includes performance guarantees, on availability and on fuel consumption. Now other key financials. Arjen, please.
Arjen Berends
Thank you, Hakan. Other key financials, probably the main thing to highlight on this slide is the operating cash flow minus €90 million negative. The other key financial parameters quite much linked to that number. We have been during the first half of this year, we saw it in Q1, and we saw it also now in Q2. We have been building up working capital to facilitate higher volume deliveries going forward.
And that was also actually shown by the order book graph that Hakan showed earlier. Let’s say, if we look at the order book for the remainder of this year, it’s much higher than the year-to-date net sales. That on this slide, if you look a little bit deeper into the working capital, and you can see it from the right side slide here, the main increase comes from, let’s say, trade receivables. We have been invoicing a lot of milestones or recently in quarter 2, which we anticipate to get paid for in the coming months. So I’m — if you ask me the question, are you more positive about the future cash flow? Yes, I am.
With these words, I give back to you on the prospects, Hakan.
A – Hakan Agnevall
Yes. Thank you, Arjen. And if we look at the prospects, I mean we expect the demand environment in the third quarter to be better than Q3 last year. Of course, there is still uncertainty in the markets, but we do expect it to be better. So with that, we open up for Q&A, and we suggest we stick to the normal routine. I mean, 1 question per participant and then we try to go around the table and then we can come back with more questions. So please feel free.
Question-and-Answer Session
Operator
Okay. First question on the line is from Vivek Midha from Citi. Okay. Next question is from Sebastian. Vivek, can you hear us?
Vivek Midha
Yes. I can hear you. Can you hear me?
Hakan Agnevall
Yes. Now we can hear you.
Vivek Midha
Okay. Sorry about that, technical issue. So I have 1 question on Marine Power, if I may. So you’re back at 90% utilization increased over 50% marine powered service growth. So my question is, do you expect now that we’re going to see some elements of stabilization at this high level, maybe a moderation in growth? Well, how far do you think your service initiatives such as moving up the service value matter can push services growth going forward?
Hakan Agnevall
I think it has potential to further — we have potential to further grow services. When we talked about the service value ladder, and you can find it in also in our CMD material, we said that going from spare parts up to performance based, you see a factor of 2 to 5 on the performance related to the first step of the ladder, which is parts.
So there is growth potential still. However, it will take time, but I think we are on a growth trajectory here. And clearly, we can see, I would say, concrete proof point on that because it’s really agreements this quarter that is a major growth driver.
Arjen Berends
And we’re also seeing good renewal rates on the agreements as well. Giving a proof point to — giving a proof point to the customer that they really value what we deliver.
Vivek Midha
And if I could just quickly follow up. Would you say it’s not a similar picture in the energy business because you’ve also sort of seen very strong growth there in service.
Hakan Agnevall
Yes. And it’s a key pillar of our strategy. And you could say we apply the same logic. It’s about the service value ladder. And also on the energy side, it is using digital tools to enter different type of agreements and then, of course, to deliver on those agreements, creating values for our customers. And also there, we are moving up the ladder, and we see that we are growing our agreement business.
Operator
Next question on the line is from Sebastian Kuenne from RBC.
Sebastian Kuenne
I have only one question on the comments from Reuters yesterday that Fincantieri in Italy is indicating it wants to stop the cooperation with you on the 4-stroke engines. And given that he’s got the biggest cruise ship yards, Wouldn’t that be severe problem for you guys. Can you maybe elaborate a bit on this one?
Hakan Agnevall
Well, first of all, I have a lot of respect for Fincantieri and they have to make the decisions. I think we have a very in-depth cooperation. We have ongoing deliveries with them, and those we will continue. Then when we talk about developing new green technology, we like to work with Fincantieri for sure. But we’re also working with a lot of other partners in the world. We had the seeds cooperation in Norway on ammonia. It’s going in a really interesting way. You could see here we are working with hydrogen in the U.S., in Portugal. We are delivering our methanol.
So we have respect for Fincantieri. I think we have a very good relationship with them. And we will continue to evolve our technology. We love to do it with them, but we do it also with many other partners.
Sebastian Kuenne
Sorry, just to follow up, do you see — I mean, how angry are they that your accidents…
Hakan Agnevall
I think you need to ask them. I think it’s best to ask them about that, so to say, they have to answer.
Sebastian Kuenne
But you have spoken to them in the past date.
Hakan Agnevall
I mean — but I don’t comment our customer discussion in public, so to say. So we are in dialogue with them. We have quite a lot of ongoing business with them, and this dialogue continues.
Operator
Next up is Sven Weier from UBS.
Sven Weier
My question would be on price costs. Obviously, Hakan, you commented a lot about the cost headwind that you still had in Q2. When I look at then your written remarks, it sounded like we’ve probably seen peak inflation growth and at the same time, the pricing of the orders is improving. So is it fair to say that Q2, how should I say, it was in terms of the worst — in terms of price cost headwind and we should see gradual, let’s say, slow improvement in the coming quarters. This — is that a fair comment?
Hakan Agnevall
I clearly see that the acceleration of inflation that has tapered off. We still see a high inflation. The price realization, I would say, it’s certainly there on the services side. It’s also there for new tenders on the newbuild side. I think what we are working with is our order backlog. And this — in the order backlog, we have a mix of setups where we can renegotiate to adjust for the cost. And in some, we cannot. And this is, of course, where we are overall affected by the cost inflation.
Sven Weier
And can I just follow up real quick on the Sebastian standpoint about Fincantieri because I was also curious about that. How is it in the cruise industry because we know in merchant, it’s not the yard who makes the decision on the engine, but it’s the customer a lot of times. Is it the same in cruise? Or is that different in cruise?
Hakan Agnevall
No, it is the same in cruise. It is the end customers. It’s the Royal Caribbeans of the world, it’s the Carnivals of the world. They decide which engine goes into the vessel.
Sven Weier
Okay. Understood.
Hakan Agnevall
And I should add, we have a great relationship with both of these 2 and other cruise companies. And we have a very exciting discussion with them on what is their right path to decarbonization. So that is a very, very interesting discussion that we have right now.
Operator
Next, that is a recent question from Tomi Railo from DNB. He has few questions here. First, are you able to guide storage orders in 2022 compared to 2021? H1 is a bit up after weak Q1 but strong Q2.
Hakan Agnevall
Yes. So no full year guidance. But I would say we described there was a kind of reset in the market in a whole view, a price reset because of the increased cost, the market that stepped back and digested the new price level. We see order intake coming up in Q2. And I would say in many areas, the market has now digested the new price level. So we see a positive market development going forward.
Arjen Berends
Lots of activity.
Operator
And then was storage was bigger or smaller in Q2? And will it be smaller or bigger for 2022?
Hakan Agnevall
Yes. I say I respect the question. The message continues to be the — our storage business has a positive gross margin, but it has a negative EBIT and why the EBIT is negative, is related. We are scaling the business. We invest in R&D. We are building up the team.
Operator
And then next question on the line is from Antti Kansanen.
Antti Kansanen
I hope you’re hearing me well. Through to the price and cost. So did I interpret it right that you are seeing better price realization on vendors but not so much on, let’s say, actual orders during Q2. And let’s follow up that assuming that the inflation is flattening out. However, you have quite long lead times, it would take into, let’s say, back half of next year before we will see kind of the pricing improvements, especially on the new equipment side.
Hakan Agnevall
So I would describe that for newbuild, as inflation has really escalated, I would say it really took off in the beginning of this year. We had inflation last year, but it was a different magnitude. We immediately started to compensate by increasing prices, both on newbuild and services. But for the orders that we had taken before as I said, that’s a mixed bag of what we can do on pricing, so to say.
Arjen Berends
But I think your point, Antti, is quite right. Let’s say, we have been able to, let’s say, get better prices now for the new orders in Q1 — sorry, in Q2. And of course, when they are delivered, and that’s probably, as you indicate, next year somewhere can vary, of course, a bit, but most of it is probably next year then We should have better margins.
Hakan Agnevall
And you know that if you look on our order backlog, if you talk about newbuild, you’re normally talking about 12 to 24 months to do that.
Antti Kansanen
And a quick follow-up on that one. If we are then seeing kind of inflation turning and let’s say, your customers are then expecting the cost levels to come down, are you fearful that they would be starting to postpone investment decisions waiting for more affordable prices?
Hakan Agnevall
We haven’t seen any tendencies on that so far.
Antti Kansanen
And I think you guys mentioned earlier that you are introducing this new type of cost indexation, would that also help in that regards to the customer will also get the benefit of lower input costs, assuming that, that happens?
Hakan Agnevall
Absolutely. I mean here, I would say the indexation, there is not 1 formula. There is not 1 approach. I think on the storage side, given the significant cost inflation, I think this is becoming an established market practice. But if you look on our rest of our business, it’s a mixed bag of — on how indices are adapted and also different indices how they will be used.
Operator
Next up is Sean McLoughlin from HSBC.
Sean McLoughlin
I hope you can hear me.
Hakan Agnevall
Yes.
Sean McLoughlin
Just wondering how we should interpret your comments on the outlook. If I think back to Q2, you were talking about similar year-on-year demand. But clearly, the order intake has come out significantly better than that guide. So you guide out to demand being better on a year-on-year basis on what appears to be a fairly low bar. So how should we think about this?
Are we going — or how should — maybe should we think about it sequentially if that can help.
Hakan Agnevall
Well, sequentially, it’s not always the relevant because our business is a bit periodic. So I think the relevant is to compare Q-on-Q from last year. And you’re right in how we guided for Q2. And here, we are a project business. And sometimes, a couple of big orders can make a big swing. So we — I would say we feel fairly confident when we say that Q3 will be better.
Sean McLoughlin
And would it be energy storage that drives a lot of that? Or are there any other segments that you would highlight in terms of improving demand?
Hakan Agnevall
It is storage, but it’s also the other businesses as well. It’s service, it’s thermal balancing. So it’s not only storage.
Arjen Berends
Hybrid installations for marine.
Operator
Next up is Erkki Vesola from Inderes.
Erkki Vesola
Can you hear me?
Hakan Agnevall
Yes, we can.
Erkki Vesola
Regarding order intake growth, is there any possibility to divide that growth in Q2 between volume and pricing components in both energy and marine in general?
Hakan Agnevall
Well, if we see — yes, no, it’s very — that is really difficult, I would say. If you talk about FX impact, it’s fairly limited, I would say.
Arjen Berends
Yes, a couple of tens of million.
Hakan Agnevall
And if you talk about — yes.
Arjen Berends
Couple of tens of millions on the FX impact, but I don’t think we can really open up on say what is price and what is volume.
Erkki Vesola
So kind of apples-to-apples price increases they are — they just can’t be disclosed?
Arjen Berends
No, we are not willing to disclose that. That’s, of course, the competition sensitive as well, so.
Operator
Next up is written question from Massimiliano Savarese [ph]. We noticed a sizable ramp-up in the receivables Y-o-Y and sequentially, could you please explain the drivers behind it how much relates to ramp-up versus something else?
Hakan Agnevall
I would say the majority, as I also said earlier, relates to, let’s say, ramping up. Let’s say, we have a — as you could see from the order book statistics as well, we have an order book for the second half of the year, which is significantly higher than the net sales, let’s say, year-to-date, also including then, let’s say, what is still coming in for out. So that’s the main reason.
Operator
Next up is Antti Kansanen from SEB.
Antti Kansanen
Yes. Just a housekeeping regarding the 3 asset [ph] ramp down and kind of the cost savings and one-offs that you flagged, how should we kind of find those and then perhaps kind of could you also remind us how the costs are allocated between the Marine and Energy divisions, where the fixed cost actually exceeds?
Hakan Agnevall
So should I start? And I mean we — as you know, we communicated, it’s €130 million provision. When you think about IAC for the second half of this year, I would say it’s about €90 million to €100 million.
Arjen Berends
And Sorry, if I may interrupt if I can add a comment to that or, let’s say, the assumption is around €90 million, but all depends very much on, let’s say, what’s the process and the progress of the process now in 3 years. Then there are lots of, let’s say, open ends at the moment, which we need to, let’s say, conclude in the coming months. So it’s very difficult to say, give you an exact number, but that’s ballpark the assumption that we have taken now.
Hakan Agnevall
And when it comes to the savings, I mean, we said full potential in 2025, this will be a gradual journey. And why we cannot be more specific is that, of course, we want to do this in full alignment with the Italian regulations and requirements. And it’s a little bit hard to make very concrete detailed forecast on how this will play out.
Antti Kansanen
Yes. But if I remember correctly, kind of the majority of your engine manufacturing fixed cost is in the Marine Power side and then kind of the energy price production slots is that we also for kind of the tested — and just thinking about the margin impact between energy, marine and power?
Arjen Berends
No, I think you can more or less assume, let’s say, equal share, let’s say, let’s say, slots are planned in the beginning of the year, and they carry a certain value. And if you execute or not execute a slot, and let’s say, if it’s an energy slot and energy, let’s say, pay for that missed slot. So it goes pro rata the volume that both businesses generate.
Operator
Next up is Sven Weier from UBS.
Sven Weier
Yes. I had a follow-up, please, on environmental solutions. I think Hakan talked about very good demand on the environmental side in Marine, I was just wondering what you see currently in Marine on the environmental solutions?
Hakan Agnevall
And can you just tell what do you mean with our environmental solutions? Because there are so many solutions here are the fuels, they are the energy savings et cetera, you want me to just show the whole to say.
Sven Weier
I mean, of course, for them, it was probably more on the ballast water side where, I guess, you are not so strong. And I guess also the order intake has been a bit better than yours. But just wondering, maybe also in terms of your pipeline, what you see coming up there is that maybe also you haven’t mentioned it precisely now in your upbeatness about the Q3 demand guide. But just generally, if you see an increase there on the various solutions you have, of course.
Hakan Agnevall
So, okay. So I go through — if we start with the green fuels and methanol, ammonia, there is a lot of things happening. There’s a lot of interest, a lot of focus, testing, there are a couple of initial orders. You know them that we have announced before. But this will, of course, take time. But I see a very strong interest from all of our customers and end customers. And I say the interest is only growing. It’s driven by CII. I mean the regulation is kicking in, in 2023, and the need to work with your fleet to decarbonize. And that rights certainly a focus on this very strategic decisions on what fuel should I go into because I know that during the lifetime of the vessel that I will be contracting, I need to have the right mindset.
Then on the retrofit side, similar interest. I mean how am I going to make sure that my fleet stays in a certain CII class. And there, it’s looking at energy saving solutions like the flat like the alleviation systems. It’s also looking at hybrid systems that we talked about. And we think that the hybrid where you win the batteries converters together with engines and you have a Toyota Prius that see, this will be 1 important way to achieve this CII index reduction that you need to have year-over-year.
So — and there is strong interest there. We are working on the 2-stroke side, as you also know, upgrading capabilities to go from heavy fuel to LNG. I mean today, the price for LNG is not attractive, but I think this will stabilize. So there is a lot of interest in that. Also — yes, so we are doing a lot of things on the service side on the 2-stroke.
Our carbon capture, as you know, we are piloting carbon capture. We are moving in the right direction. We have a lot of interest. We are very grateful for that and very strong customer interest that want to engage in pilot projects, and we need to focus a little bit. Then coming to the digital solutions, also strong interest on the Voyage side, we are really excited now about the acquisition of PortLink because now we have all the pieces in in-house where we can continue the journey to make the logistics and therefore, reduce emissions in the whole system. So strong interest, I would say.
Arjen Berends
Perhaps in the comparison with Alfa Laval, we are always compared on the scrubbers. So perhaps you should comment the scrubbers.
Hakan Agnevall
And on the scrubber side, I would say that the scrubber business if you look at our business now, it’s down a bit. And that’s because many of our customers — they’re in a very profitable business right now, which means that they do not want to bring the ships to yards for retrofits. And also because of COVID, many of the yachts have been shut down. So that is impacting our exhaust business. But there is a lot of interest in the scrubber solutions going forward.
Arjen Berends
And the underlying fundamentals with the fuel spread are absolutely there.
Sven Weier
And the other reason why I was asking because as you mentioned, EEXI coming soon, CIIs coming soon on EEXI, we can read reports that 75% of the fleet is not complaint. And of course, we all know that the marine industry has a history of adopting things that the latest possible moment in time. But now with 2023 coming a bit closer, I was just wondering if you could also start to see a little bit of a rush to the exits, so to speak.
Hakan Agnevall
Yes, it’s…
Sven Weier
It won’t be done with slow steaming alone, I guess, right now.
Hakan Agnevall
No, we see a lot of interest. And the thing with — I mean, with the new regulation, we have EEXI, which is a kind of past pale. But CII, it’s — and you know the concept, but just to set the scene for everybody it’s like when we go and buy the washing machine in the store, there is this classification from A to I think it’s ERF. And you can buy a washing machine that is in yes, hopefully, as green class as possible. It’s a little bit similar to CII. But we don’t need to think with a washing machine to make it more energy efficient every year. You have to do that if you’re a shipowner. So to stay in a certain CII class, if you want to have a B vessel, you continuously will need to have to reduce your carbon footprint over the years. So it’s also not only to rush to solution and then it’s a quick fix. You will have to continuously improve. So it drives a different mindset.
Operator
Next up is a written question from Panu Laitinmäki from Danske Bank. Can you please comment how the recent FX changes, including USD will impact your profitability going forward?
Arjen Berends
Of course, I will not comment in too much detail because there are lots of things that, let’s say, are behind it. There’s a lot of detail behind. But basically, let’s say, we hedge basically all the exposure that we have on projects. So the main — you could say the commercial pipeline, commercial orders, I think that’s pretty safe and stable, then it’s more about, okay, what’s your fixed cost in the U.S. versus, let’s say, Europe and how will it evolve, let’s say, then from an FX point of view. But otherwise — and of course, the transactional part, which is not typically hedged. Like I said, let’s say, we had about what is it? I think it was €38 million now FX impact in Q2. And okay, that’s typically a range you can expect, but it’s mainly coming from fixed cost as well as, let’s say, the transactional side.
Hakan Agnevall
But 1 tidbit of information. If you look at 2021, 25% of our revenues were U.S. dollar dominated. So from that perspective, if the U.S. dollar strengthened is a benefit because most of that cost is euro denominated.
Arjen Berends
Yes.
Operator
Next is another written question from Q – Nancy Ni from Goldman Sachs. When do you expect the €240 million receivables to be collected 2H or 2023?
Arjen Berends
I don’t think we will collect anything of this €240 million because that’s what we took out of the order book. So likely, we will not get it. say, these projects partly, let’s say, they have not been executed at all. Let’s say we clean the order book. Let’s say, if we have an order in this order book that is for 2023 delivery, you might not have had too many costs generated on it. So there is nothing to correct you just take it out of the order book, while for a lot of other projects with a much shorter delivery mostly within this year. There is cost and there are also, let’s say, receivables outstanding. But the likelihood of getting them paid, I think, is this much.
If you ask me, let’s say, how much of the €240 million relates to this year’s order book versus, let’s say, next year’s order book, it’s about 40% for this year and the rest is for 2023 and beyond.
Hakan Agnevall
And also coming back, I mean, for those that we have started and we likely will not be able to continue — was included in the provisions for Q1. So we have provided for them already.
Operator
Nancy wrote a follow-up, sorry, I meant the trade receivables you mentioned.
Arjen Berends
Sorry, I thought you mentioned the order book cleaning — sorry, my mistake. And the question was how much of that will be collected this month or next month? Or what was the — let’s say, out of that, let’s say, €240 million, the majority will be collected this month — or this year — sorry, second half of the year.
Operator
Next up is Erkki Vesola from Inderes.
Erkki Vesola
Okay. Thanks for the follow-up. In June, the EU Council agreed to raise the binding EU level target of energy from renewables from 32% to 40% by 2030. When should we see this kind of force acceleration to show in your storage and renewable offering order intake? Will it be kind of back-end loaded, i.e., not so much before ’25 or well sure already in the near future, just a take on that.
Hakan Agnevall
I think in general, these type of reforms take time to develop and concretize. And the whole kind of logic behind the balancing is that, first, you need to build a lot of renewables. And then your power system will need a balancing because otherwise, it will not be stable, and then you bring it in. And in the U.S., this is happening now as we speak. So I would say U.S. is definitely ahead in this development compared to Europe. So I think in Europe, it will take a little bit longer time. We also have a different grid situation in Europe. So I think the first wave is that there needs to be even more renewables. Then you could say U.K. is also part of Europe. U.K. has made a very conscious decision on balancing. And you can see that in some of our storage orders. So U.K. is actually ahead in Europe, so to say. So I would say the balancing in Europe to evolve, it will take as a concrete consequence of the initiatives that you talked about. That will take a little bit longer time. What we are seeing here and now, and you probably saw that we are getting balancing orders, thermal balancing orders in Europe, in Italy, in certain countries, but that is not triggered by these reforms that you were talking about. That is triggered by already ongoing policies.
Erkki Vesola
That’s very helpful.
Operator
Next up is Nancy Ni from Goldman Sachs.
Nancy Ni
I just had a second question regarding the Trieste closure actually. So post-acquisition you got all your engine production be in Finland then. And in which case, will you looking to increase your capabilities elsewhere to sort of mitigate any kind of potential overreliance on supply chain to production concentrated in 1 area?
Hakan Agnevall
Okay. So just to clarify, we are centralizing our European footprint. So we will only have 1 factory in Europe, and that would be in Vaasa. But we still have JVs in China. So we are also producing engines in China. When we look at our supply chain, that is, you could say, not a Finnish supply chain. It’s a European supply chain. So — and that we will evolve as the volume and as the business is evolving.
Operator
Next up is Antti Kansanen from SEB.
Antti Kansanen
Yes. Just a quick question on voyage and kind of the reorganization and what you’re doing there and compared to the losses that you have made in the past couple of quarters. So how should we think about that the following quarters. I mean I assume there’s a lot of moving parts in there, but how does kind of the loss picture in your minds develop in the next second half and going into next year?
Hakan Agnevall
As you know, we have talked about that we want to turn around voyage over a couple of years. We were clearly delayed by the COVID situation, also this shift in Russia has suddenly delayed us as well. But I have a lot of respect, as I said before, for the efforts that has been made to change, you could say, the footprint of — especially of our force fleet optimization services team. I think the team is on the right track, but it’s still a turnaround to be made.
Antti Kansanen
So nothing really quarter-on-quarter dramatic expected in second half and into a longer process?
Hakan Agnevall
No, as I said. It’s a turnaround still in the making. And I think moving out to a new country, of course, you need to focus on that and then you need to move ahead with the turnaround.
Operator
Next up is a written question from Tomi Railo. Have you been able to sustain or expand services profitability?
Hakan Agnevall
Yes, that’s a very wide question. In certain segments, absolutely. I mean if it’s related to inflation, we have compensated for inflation. If you look on the profit margin, it’s very much mix related as you could see here between the different businesses because also within services, there are different levels of profitability. But if you look at each discipline within services, I would say we are maintaining or increasing profitability.
Operator
And the last question is from Panu Laitinmäki. How does the margin in long-term service agreements compared to the overall services business?
Hakan Agnevall
Well, it’s contributing because the performance based — of course, it includes service — and then on top of that — I mean, sorry, it includes spare parts. But on top of that, it has a service, so to say. So it positively contributes to profitability.
Hanna-Maria Heikkinen
Thank you, Hakan, and thank you, Arjen, and thank you for our active audience for all of the good questions. Wärtsilä Q3 report will be published on October 27, but I hope that all of you can enjoy the warm and relaxing summer before that. Thank you.
Hakan Agnevall
Thank you, everybody.
Arjen Berends
Thank you very much.
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