Neste Oyj Unsp/Adr

Hello all. Welcome to Neste's Q3 24 results webcast. My name is Anssi Tammelehto. I'm the head of IR at Neste. Today, we have our new president and CEO, Heikki Malinen, and our CFO, Martti Alaherkonen, as our main speakers. As per usual, we will first start with our presentation, and after that, we will have time for your questions. As always, please pay attention to the disclaimer, as we will be making forward-looking statements in this call. With these remarks, I would like to hand over to our President and CEO, Heikki Malinen.

Good morning, good afternoon, good evening, wherever you are. Welcome also on my behalf to this webcast, and thank you, Anssi, for those introductory remarks. Okay, so this is my first Neste webcast, and some of you may know me from the past, but please allow me to introduce myself briefly with a few words here to get us going. So this is my 16th year as a CEO. I've spent almost most of my career in cyclical industries, heavy industry, industries which face tough, fierce competition. I've spent my whole career involved in different types of transformations. I've led many transformations. That's what I know, and that's what I do professionally. And I look forward to discussing with you about how we're doing and also where we're going from here in the years to come, and hopefully also meeting you in person in the not-too-distant future. This is my eighth day at Neste. I'm on an accelerated learning journey, and I will be focusing very much now in the early days more on listening and learning and understanding, but at the same time getting very quickly ready to move then into execution mode, and really with a very strong intent to make progress here within Neste. Those were sort of my opening remarks. And then if we start getting down to the order of the business of today, so a couple of key messages here for starters. So this is backdrop. I've already had a chance to talk to many Neste employees here in Porvo facility. I visited the R&D center on my first day. I've seen the Porvo refinery. I met hundreds of people. also had a chance to visit our foreign locations in Singapore and Houston and Rotterdam. And I've also spoken with a number of our customers. I talked to three CEOs of our largest customers last week and asked for their feedback and perspectives on the industry and on Neste. So I'm still in information collection mode. But a couple of observations still. First of all, my strong view here is that Neste is in a strong position. We are the pioneer in the renewable fuels industry. Really, Neste is the global market leader. We have the strongest technological and innovation base, and this gives us a profound advantage as we move forward into a more competitive industry. Our current performance is not satisfactory, and we will discuss the causes to that here in a moment. But I still want to, just for those of you who look also at the really long term, I just want to say a couple of things. One is, I mean, the green transition, it is coming. It's inevitable. It's very critical for the European economy. But the journey is not going to be linear. It's going to be nonlinear, and it's going to be volatile, and there will be phases when we go up and down. But I think the direction is clear. It's a growth industry, and Neste is well positioned. But Neste is a corporation. We need more focus. We need more focus on revenue generation. We need to take a sharper view on costs and competitiveness, and we need to keep an eye on the balance sheet and on CapEx. And so, therefore, we have now launched a full potential analysis to develop a robust plan, and that work has now started. And then finally, I'll comment in a moment, a little bit later, about what's going on with Porvo and the hydrogen electrolyzer we had been planning to invest in. Here are some of my early observations. I won't go through all the points. I'll leave you if you want to take a look at it later. But let me just comment on a few things still which I already referred to but which I feel are very strong. In addition to the long-term fundamentals, Nesta is in a unique position because we have a strong supply of feedstock. We understand the nitty-gritty of this business, and we have unique pretreatment capabilities and technologies and know-how. So that's a good foundation. We have a huge R&D team. We understand the technologies. You go to Portable and you look at the R&D center there, it's an amazing place. I mean, it's truly amazing, and I don't know if anyone in the industry in our sector has anything similar. And as I said, when I talk to Neste employees, I see really the passion in their eyes. People are very committed to take this company to the next level. So I don't have any problems with the motivation of the staff. I mean, people really have the fire in their belly to move Neste forward. We just need more clarity on the direction. But obviously, we have invested a lot in new capacity, and some of it is now starting, and more capacity is coming. So for us, operationally, we need to improve our ability now to ramp up those facilities and really to get more operational performance out of the fantastic assets this company has. So that's more of an operational challenge for the new CEO, among other things. Marty will go and do a deep dive on the numbers, but obviously maybe it's very easy for me to comment on the left-hand slide. It's the price chart for the renewable diesel sector. The curve, the shape of the curve and the trajectory and the delta is very evident. I mean, prices have corrected quite materially, and we are today in a very different spot than we were just a year ago. So that is one explanation for the change in profitability. You will not hear me making forecasts about prices going forward. I don't do that. But I think that we have a certain amount of volatility in these prices, and they can move in many directions. On the right-hand side, you can see the results, performance overall, compared to what we did a year ago in the third quarter. The change is really a major drop in profitability. But for me, that is more a challenge, an opportunity to improve. I look at the number and I say to myself, okay, what is it going to take from us to improve those numbers? And I said, you know, for me, that's more of a – it's an opportunity to show what NESTIC can do. So that's how I look at that number, although in itself it's not, of course, something that we like. So as I mentioned at the beginning – We have now started the full potential analysis. So what is that and why are we doing it? Well, as a person, I'm very fact-based. I'm very analytical. I want to see the facts and numbers. So we're now doing a deep dive where we can see basically the company. We're looking at the revenue side. We're looking at the cost side. Very comprehensively, we're looking at the capital side, including working capital. And out of this work, we will come up with a robust plan, which will have clear prioritization, and we will start executing in a logical sequence in an order that makes sense from the standpoint of trying to really hit the heavy items first, and that execution will then start next year. And I will come back to you in the beginning of the new year when I have something more concrete to share. But I just want to give you a heads up that that work has now started and is really an essential tool for me so that when I now start leading the company that we get on the right trajectory, the right clock speed, and right angle of attack, so to speak, from the get-go. Then today we have announced a decision, which of course is unfortunate, that we need to withdraw from investing in the 120 megawatt electrolyzer plant in Porvo. Now, Nest is very committed to decarbonizing our company, and Porvo, of course, does have CO2 emissions. So our objective is to reduce those and solve for that. But in the immediate future, situation we are now in. So we have two issues. One is the regulatory framework is moving in the right direction, which is positive, but the regulatory scheme does not sort of balance sufficiently well with the capacity that we were initially contemplating, so the 120 megawatt. And then secondly, we are in a cyclical business. And it's my point of view that in cyclical business, we also need to look at the leverage. And we have set clear targets on where our leverage can go. And as the trend has been rising, I think it's prudent for me as the new CEO to make a decision here and to just halt this project. Let's focus on the things we are working on now, and we will try to see if we can solve this decarbonization problem in Porvo another way, get to the same result, but through a more capital-effective manner. So we will come back to that later in the future when we have a new pathway on how to do this. But overall, as I said, I want to confirm that we are committed to the decarbonization of the Porvo facility. So those were my introductory remarks. I'll now hand it over to Marti. Marti will then go into the Q3 financials. Let's see if I can get the slide going. Marti will talk about that. And then I will come back later and talk about the outlook and give you a bit of a broader perspective about opportunities and uncertainties in this sector. And then we will be happy to answer your questions. Thank you.

Thank you very much, Heikki. So let's now go into the figures. I'd like to start by saying that financial-wise, the main theme in our third quarter result is that it reflects really the further weakened market, both in renewable products as well as in oil products. Like Heikki already mentioned, our current result level is unsatisfactory. We realize that. The challenging market conditions clearly impacted our margins, while on the positive side, we see clear initial progress on cost savings. More specifically, our third quarter EBITDA was 293 million euros. That is 72% down year on year. Last year in the third quarter, we had the peak quarter of that year, a result at that time north of 1 billion. Going more specifically into the segments, in the renewable products, our comparable sales margin was 341 U.S. dollars per ton, down about 62% from the last year's high level at 912, or 10%. still from the second quarter level of US$382 per ton. Similarly, in oil products, our total refining margin was US$10.6 per barrel, down about 60% from last year's high level at US$26.9 per barrel, and down also by 30% from the second quarter, US$15.1 per barrel. So the challenging market condition is very clearly visible in our third quarter figures, both in renewable products as well as in oil products. But on a positive note, our sales volumes increased quarter on quarter, both in renewable products. That includes also our SAF sales, where we reached a new quarterly high of 112 kilotons. clearly up also from the second quarter. As well as in oil products, we had a very solid performance and good sales following the turnaround in Portovo in the second quarter. On a positive note, furthermore, our fixed cost savings are becoming now clearly more visible, what we've been initiating over the last 12 months and starting to be visible. Our total fixed cost in the third quarter were markedly below our last year as well as the previous quarter. However, it's very clear, considering the challenging market condition, that further performance improvement actions will be required going forward. I'd like to take one more metric from this slide, which is that our greenhouse gas reduction in the quarter was 3.6 million tonnes. That is a clear increase year on year over the 2.5 million tonnes last year. This is a clear improvement, of course, about our environmental handprint. Here we visualize the key market environment drivers that impacted our margins in the third quarter. In the third quarter, looking first at renewable products and comparing to a year ago, our margin was above all affected by a substantial decrease in diesel price. The weakening diesel price was also the main factor quarter on quarter. Being more specific about that, European Northwest diesel came down about 65 U.S. dollars per ton from the second quarter compared to the third quarter average, or the South Coast diesel in the U.S. even 80 U.S. dollars per ton. In addition, when we compare year over year, the U.S. buy-your-ticket and renewable credit prices, as well as spot premiums in Europe, have both clearly weakened in a yearly comparison. At the same time, the waste and residue prices have remained relatively flat and not really giving us a helping hand margin-wise. On a positive note, during the third quarter, the credit prices, however, they slightly strengthened versus the second quarter levels. At the same time, in Europe, the spot premium still remained weak. And also in oil products, that goes for our product cracks, they decreased very clearly during the third quarter, and the decline is very visible both in year-on-year as well as in quarter-on-quarter comparisons. Our focus on efficiency, networking capital optimization, as well as balance sheet strength, those are set to continue going forward. In this slide, I'm sharing a few highlights of each of these from the third quarter. First, as to our fixed cost efficiency, in the third quarter, our comparable fixed costs were €16 million lower than a year ago. And more specifically, our employee benefit costs were €126 million in the third quarter. That is €36 million below last year at €162 million. We also now forecast that our total fixed costs will be lower compared to last year. Still in our second quarter report, we said that's slightly higher. Yet, of course, considering, I'm stating that again, considering the challenging market conditions, all our efficient actions naturally need to continue going forward. Second, looking at our change in the networking capital in our cash flow statement, our third quarter networking capital change was 143 million euros positive versus 268 million negative last year. There's a clear improvement year on year. And more specifically, in the third quarter, we succeeded in reducing our inventories by almost 600 million euros versus changes in receivables that was also due to a Higher sales volumes as well as payables contributed negatively to our network capital chains. Of note that also year-to-date, there is an improvement in the networking capital change compared to last year. And if you look forward, networking capital optimization continues to be a very high-focus area for the group, also in the fourth quarter. We have set very clear end-of-the-year targets and actions both for renewable products as well as oil products. Finally, preserving a strong balance sheet continues to be a cornerstone of our strategy and financial planning. We are extremely determined to focus on the balance sheet strength. And the same goes for preserving a strong liquidity. Here I'd like to note that at the end of the third quarter, our liquid funds as well as committed unutilized credit facilities totaled about €2.6 billion. That's actually up by €149 million from the end of the second quarter. Looking here more specifically at our cash flow in the third quarter, our cash flow was mainly impacted by the weak EBITDA, as well as by somewhat higher quarterly CAPEX compared to several earlier quarters. Cash flow before financing activities came in at slightly negative for the quarter at minus 16 million, yet a clear improvement over the first two quarters of the year. Our cash-out investments total 488 million in the third quarter. That is clearly above, for example, last year's level at 258 million. The turn rate in our total networking capital was 41 days compared to 40 days a year ago, so at about the same level. If we look at our cash flow trend, I think that the actions are already starting to be visible also here in the third quarter. Going forward, cash flow, and as I mentioned, networking capital optimization, they continue to be very high focus areas for us in the fourth quarter. Let's then turn to our third quarter group result bridges by business segment as well as by business driver segment. When first looking at the third quarter comparison bridge by business segment year on year, that is here on the left-hand side, we can see that all our business segments contributed actually to the decrease in comparable EBITDA year over year. Positive contribution only comes from others, including eliminations, but it consists of common corporate and functional costs, which as such have clearly reduced year over year, and thereby the allocation of timing of these costs to business segments very, very year over year, and as well as also by quarter. When looking at the comparison bridge by driver year over year, on the right-hand side we can see that there was a positive impact of 87 million from higher sales. And that's positive. There was actually a positive sales volume contribution from all our business segments. On the other hand, the major decline in EBDA comes from declining sales margins. And again, unfortunately, actually from all our segments, in total, 839 million. Here we again observe the impact of the adverse market conditions. On a positive note, like already mentioned, the group's comparable fixed costs were 16 million lower than last year. As to a business segment level analysis, here we have first the third quarter comparable EBITDA bridge for renewable products, as well as a longer trend of renewable sales volume, as well as comparable sales margin by quarter since the beginning of 2020. That's the graph on the right-hand side. Our comparable EBITDA in renewable products was €106 million in the third quarter, Year over year, that was positively impacted by a high sales volume, which contributed a positive 62 million. The main reasons are our total sales volume in renewable products was now 999 kilotons, almost a million tons, versus 883 kilotons a year earlier. There's growth of about 13 percent, out of which SAF volume reached a new quarterly high of 112 kilotons, up from 36 kilotons a year earlier. Just to note that the share of sales to North America was 49% in this quarter and to Europe 51%. Going forward, we expect our SAF sales to further increase towards the end of the year. Our sales margin had a negative contribution to the EBITDA by 492 million. They're the main elements, like I outlined before, where a clearly declined diesel price, as well as weaker U.S. credit prices and weaker spot premiums in Europe. During the third quarter, there were also planned maintenance shutdowns, both in Singapore original line as well as in Rotterdam. And this is reflected in the utilization, which was rather low at 52% compared to 92% last year at our own renewable production facilities. And the maintenance shutdowns also contributed to an increase in total production costs, which impacted also the comparable sales margin. Martinez continued to have a diluting impact on Neste's overall comparable sales margin as well. On the right-hand side graph, we can see the markedly declined comparable sales margin during this year versus early years. As required, we are now reporting that very clearly. Also, Neste, we are prepared to optimize our production capacity in renewable products according to the market situation, if necessary or required. It's good to note also here that after the third quarter plant maintenance shutdown in October, we have reported that Singapore's first line, that is the original line, encountered an unforeseen equipment failure that led to the shutdown of the production line at the refinery. This is also expected to influence some renewable diesel customer deliveries to the U.S. in the fourth quarter. Here we have the same third quarter comparable EBITDA bridge for oil products, as well as along the trend line of the total refining margin in U.S. dollars per barrel, as well as the utilization rate by quarter since the beginning of 2020. Our comparable EBITDA in oil products was 141 million in the third quarter. Year-on-year, positively impacted by higher sales volume, contributing 24 million. Sales were north of 3 million tons, or about 140 kilotons, or roughly 5% higher compared to a year ago. There was solid operational performance throughout the quarter at our Port of Water Refinery. The decline in EBITDA comes compared to last year from the market and a weak total refining margin in total contributing 347 million euro a year. All product cracks basically declined in a yearly comparison, but overall the key product margins still stayed above the pre-COVID averages. The summer driving season, as well as the cooling season, was supporting demand in the third quarter, but at the same time, the weak industrial cycle affected middle distillate demand, and the expected weather-related risks did not materialize. Brent crude oil prices were very volatile actually during the third quarter, ranging between U.S. $70 or up to $89, and the quarter ended at about U.S. $73 per barrel for the Brent crude price. On the right-hand side, we can see also the market declined total refining margins for oil products during this year, if we compare on that especially to two former years, 2022 and 2023. Here we see the third quarter comparable EBITDA breach for marketing and services, as well as on the right-hand side along a trend line of the comparable EBITDA, as well as comparable RONA return on net assets of this business segment by quarter since the beginning of 2020. In marketing and services, our comparable EBITDA was 32 million, down 10 million from a year ago. That was mainly due to the unit margins, which were tighter and had an impact of 8 million on the comparable EBITDA. The decline in unit margins was primarily driven by the decrease in global oil product prices, which led to inventory losses. The prior years benefited in turn from a significant increase in Brent crude oil prices, resulting in turn in higher unit margins. Fixed costs were 3 million higher also year over year, mainly due to an ongoing ERP replacement that is IT costs. Overall, I would like to say that we are satisfied with the performance in marketing and services. We have been able to maintain high market shares in our respective markets, and the performance overall has been relatively steady and returned strong. I'd like to note here that the comparable RONA was almost at 30% at the end of the third quarter, although the EBITDA in this quarter was impacted, like I said, by inventory losses. I'd also like to note that in marketing and services, as opposed to our other two business segments, renewable products and oil products, the inventory gains and losses are continuously reported in the result of the business. I will close up by taking a short look at our performance against our financial targets. At the end of September, our comparable ROAC calculated over the last 12 months was 8%, and of course not meeting the group's financial target level of higher than 15% ROAC. Going forward, actions will be required, of course, to change this trend. As to our leverage, net debt to total capital, it averaged 35.2% at the end of the third quarter, which is still meeting our financial target level of less than 40%. I'm overall somewhat quite satisfied that we were able to reduce the growth trend line in leverage in the third quarter. Having said that, of course, we have really high focus on cash flow, like I said, in the fourth quarter, and also a high focus on preserving going forward very determinedly a strong balance sheet. Also in the longer term, that is an absolute high priority for us. I will stop here and hand it back to Heikki, who will next continue on our outlook.