Neste Oyj Unsp/Adr

and welcome to discuss Neste's Q2 results that were published early this morning. My name is Anssi Tammelehto. I'm the Head of Strategy, M&A and Investor Relations at Neste. Here with me on the call, we have our President and CEO, Heikki Malinen, and our CFO, Eeva Sipilä. We will be referring to the presentation that can be found from our website. And please pay attention to the disclaimer. as we will be making forward-looking statements in this call. And the presentation includes key highlights, for example, our Q2 financial performance and the status of our financial targets, including the performance improvement program that is progressing well, and the work continues. We will also discuss the key regulatory developments and geopolitical topics, and also the outlook. In the end, we will also have time for discussion with you all. With these remarks, I would like to hand over to our President and CEO, Heikki Malinen. Heikki, please, the floor is yours.

Heikki Malinen Heikki, thank you very much, and good morning, everybody. We have some folks from the U.S., and also good morning, good afternoon to those of you here in Europe and elsewhere. Really happy to be here today to share with you the results of the second quarter with Eva and Anssi. As always at Neste, we start our presentations with safety. Safety really is the core of everything we do here. This slide has two pieces of information. First of all, on the left-hand side, you see the data on total recordable injury frequency, which is the so-called the people element of safety. It's calculated based on incidents per millions of hours, and you can see from the direction of travel that this year we have been able to start to reduce the number of incidents and we are heading more in the right direction. However, I want to say to you that the figure we have there, 1.6, is not where we want to go. We want to go clearly lower. In this type of an industry, we can and we should be lower. So we have our work cut out for us, but I am happy to see that this quarter went the way it did. On the right-hand side, then, we see data on process safety, and we've had actually two remarkably good quarters now behind us, Q1 and Q2, where we had basically no PSE1, PSE2 incidents. Those are more the high-risk events. Why is process safety so important? In this type of an industry, we're dealing with fuels, high pressure, high temperature, a very flammable, easily flammable material, which, of course, when it gets in connection with oxygen, you know, can create flames, can create even explosions. So we really have to monitor process safety very carefully. Even small pinholes can create problems. So it's very much a matter of preventive maintenance, asset integrity analysis, trying to understand where you might have corrosion risks and so forth. So I said a good performance from the team, and I'm happy to share this information with you. Then if we look at sort of the main, the key things at Neste that we're focusing on and what actually we've done and how they're progressing. So let me start from the left-hand side. Reliable operations at the refineries. Well, we remember how last year ended and how we've now been in recovery mode this half year. Our availability and reliability at our plants has been much better. Sure, from time to time there are incidences, but it's also a matter of how you recover from them and how well you can anticipate potential risks. So I was really happy to see that our utilization levels were high, availability was high, and overall performance was good. And then, of course, the Rotterdam modification, which started in April, we now have soft capacity there as well. The reason why operations are important, of course, from the reliability standpoint is the logic of a positive spiral. So good reliability, good operations also means better safety. It also means the ability then to more effectively to reduce costs. It also means less extras, for example, demurrage costs when you have delays, less shipping costs, and hopefully also happier customers. We really want to continue and get ourselves on this positive spinning wheel and continue to gain momentum as a business. On the right, then, achievements on the commercial front. When I started, I mentioned that we at Neste want to become much more intimate with our customers. We need to put more emphasis on our commercial approach. We need to find new, good customers for us who will sort of match up well with our offerings. And in the second quarter, we were, again, able to expand, you know, the roster of companies, you know, DHL, Amazon, FedEx, you know, brands which are very well known today. And Neste is the world's largest producer of renewable airline fuels. And if we looked at the results of the second quarter in terms of volume, soft sales went up 80%. And overall, renewable volumes in the second quarter were the highest in Neste's history. So, you know, again, you know, kudos to Team Neste for good work there. And then I'll talk about flexibility and competitiveness later, but I think when we look at the situation, especially with the Singapore, so ability to move our volumes into different jurisdictions is also a key part of our core strength. But I'll come back to competitiveness later in the back half of the presentation. Then the performance improvement program, we'll talk about it extensively today. What I can report to you is that we are on track. We are moving forward as we have planned, as we intended, and that's a good thing. The objective here is still to reach the €350 million EBITDA run rate improvement by the end of 2026, That is what we told you in our capital markets update in February in London. And then finally, Rotterdam capacity expansion, it is progressing. Remember from our earlier meetings that it is delayed. It will cost more money than we had anticipated. It is a big project. It's going to be the largest soft renewable refinery on the European continent, probably maybe even worldwide. And it is really a core part of Neste's long-term strategy. So a lot of time spent on that. I've been to Rotterdam multiple times, keeping an eye also from my standpoint on how things are progressing. But as I said, a lot of work still remains to be done in Rotterdam, and that's a high area of focus. Then if we look at the Q2 numbers, Eva will dive into the details in a moment. I just want to highlight out of these six numbers, I want to highlight a couple of things. I already talked about the amount of volume we sold. That was a positive. Gives us also confidence that, you know, our product is a good demand for our products. People like what Nestec produces. On the lower side in the middle, we had the cash flow number. Recognizing the amount of debt we have and also the fact that we have significant investments ongoing, I was very pleased that our free cash flow was as high as $226 million. We, of course, continue to put a lot of emphasis on working capital management and, of course, trying to generate more profits than to get good free cash flow. Maybe a comment still on the upper right-hand corner on oil products. The refining margin at $10 a barrel was significant. less than we had hoped it would be. One issue we are carefully sort of thinking about is the crude oil slate, the cost of crude oil. It has risen. We need to think carefully about, you know, continue working on how we can expand our crude oil slate to reduce those costs. But we will see how that progresses. Then here's my slide on the performance improvement program. I'm very pleased that we can report here that 107 million EBITDA run rate improvements have been booked. The process is very rigorous. We're conservative with Eva and my colleagues. It's important that, you know, every single saving we identify and we take to the process that we are confident that will really create value. So just to give you a bit of a sense here that out of the probably 400 initiatives we have, you know, once they get to the level of the so-called the G3, G4 phase, myself and my closest colleagues, we scrutinize all the initiatives. So we want to make sure that they are bona fide real initiatives and that they will then deliver. So I said I'm happy with the way this has started, and it's a two-year program, so we have now two quarters. We still have, you know, one and a half years to go, but I'm happy and confident about the trajectory of travel. One final thing I want to say here about this whole – how I think about this program. You know, when I started at Nest, I mentioned that the way I sort of see Nest transforming it is that, you know, we've come – We've been very much a development-oriented company with a lot of expansion, but we need to transform ourselves into a global industrial enterprise. And part of being successful long-term relates to the fact that we need to be very good at continuous improvements. And so, for me, this program is also a sort of, you know, segue into making also Neste much better in the area of continuous improvement, and we've done a lot of things here alongside of this program to continue strengthening our bench strength in that area, and hopefully that will then carry Nesta forward, you know, well into the future once this exercise is done and completed. Those were my introductory remarks. Let me now hand it over to Eva, and she will dive into the figures, and I'll then come back with some more commentary about regulatory topics and so forth. So, Eva, please.

Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with a few words on the market before going into that nest of financials. So many of you will recognize this renewable diesel reference margin that we've been sharing with you as a good proxy on the market. And for the benefit of those who are newer in the audience, A reminder that this is indeed a gross margin, so we deduct the feedstock costs from the revenue. However, you should note that the difference between the gross margin and then the sales margin, we will talk later in the presentation about, is then the production and logistics costs. So they are two different things. But what you can see from the graph is that the market was volatile, but on a sort of positive trajectory during Q2. And that gave us some tailwind for our business. Moving then to the Neste financials. Q2, our group comparable EVTA reached 341 million. Of this, renewable products was 174 million, really thanks to reliability driving volumes because in the market, the feedstock prices continued high. In oil products, 135 million for the quarter. As Heikki mentioned, the refining margin was a disappointment for us. Volumes, as such, were good. So, again, here the reliability did support our profitability. And then on marketing and services, 32 million. Considering that the market is actually down year over year, the team did very good work on commercial operations to compensate. Performance improvement program is obviously a key part of what we're doing at Neste, and happy to report that was the run rate, annual run rate at the end of June was 107 million euros. In the quarter, we had a realized impact of 26 million euros. And in order to give you a bit of an idea on the broad array of things we are working with, there is some detail on the slide. I would say that the majority we're working on is really around procurement costs. The headcount reductions were done a few months back. Now we're really into less spending, but also then spending more wisely, renegotiating quite a lot of procurement contracts. On the logistics side, a business with a global network like ours, there's a lot of opportunity for efficiency. So we're looking at the routes. We're looking at how much we sort of optimize in various parts of the sort of transportation chain and a lot of work going in all aspects of that. Part of our profitability improvement is also from reducing the amount of lease assets, terminals. We discussed, I believe, also in the first quarter. That's been a sort of first area with good potential for rationalization, and then we see the benefit also on the asset side. In some areas, we're still in the sort of, one could say, low-hanging fruits, quicker wins, but ramping up sort of now very well for the second half. Moving then into the segments, I will start with renewables products and maybe a few highlights from this. On the left-hand graph, you see very well in the column the volume increase and supporting, and when you combine that with the sales margin that was continued on upward trajectory, obviously that supports the profitability improvement. Moving then to the right-hand side, I know some of you like to compare sequentially, so there's a few things I'd want to point out. On the sales volume side, obviously the SAF volume, thanks to a very good ramp-up, of the new line in Rotterdam. We've been able really to sort of double, more than double our SAF sales in the quarter. Also, it's worth noting that we've continued to successfully focus on our home market Europe with our sales, with European sales amounting for 73% of our sales. So the North American share continued to decrease from the Q1 levels. Then on the margin side, I'd like to highlight that we did now for the first time book the CFPC credits for the Q2 share, not yet Q1. The clean air production credits are still waiting for some regulatory confirmation and final details, and we want to wait for that. We do expect that to come during the second half, and then we'll be able to proceed. But we now booked $33 million for the Q2 share, and that obviously supported our margins. At the same time, there were also negatives. Diesel price was clearly lower compared to Q1. RINs were up, but at the same time, then, so were U.S. feedstock costs. So, all in all, a net positive of 11 million for Q1. for the court. And still maybe just to point out the fixed costs. So the profitability improvement program is obviously visible also on this graph. Moving then to oil products. So you see the refining margin on the left-hand side, and really it was basically flat from Q1. And considering that Q1 was hit by the warm winter in our home markets, then the Q2 margin was indeed a disappointment. Really coming from two factors. The crude slate we use was more impacted by the volatility in the oil markets. We all know all the various events during the Q2, and clearly our production costs were then relatively tougher. And at the same time, the gasoline export markets were also very tough and contributed very little to the overall. So then, despite the sort of volume support, the margin improvement was very small. Moving then to marketing and services, so here you do see on the left-hand side the sales volume reflecting really the market demand kind of on a downward trajectory. Obviously, in Q2, we do have the seasonal support from the B2C market recovering, so that helped on the right-hand side comparison, but I think the sort of team really excelled on the commercial front and worked hard to recover to reach the 32 million that we delivered. Then on to the group level again. So we talked about capital discipline and the focus on cash flow being very high on our agenda, and pleased to report that in the Q2 we were able to demonstrate that type of discipline and had cash-out investments of $221 million. You may have noted that in the full report, we did also guide for the full year number to be slightly lower. So we're now in a range between a billion and a billion and a two, which would mean that we're slightly higher cash out in the second half. Now, this is due to the maintenance breaks in Rotterdam and Singapore that are upcoming. normal business events as such, but good to note. On the cash flow, on the right-hand side, this is thanks to good profitability, but more importantly, also very focused work on the working capital. So we were able to clearly reduced cash from working capital to the extent that actually we were successful in pulling some of our initiatives into Q3 that we had originally assumed that would only impact Q3. Altogether, the first half, when we can report that we were able, with operative cash flow, to fund our CapEx growth in Rotterdam, that's a really big achievement from the team and something we're very proud about. I think looking forward, it's good to know that in the Q3, the cash flow will be more dependent on the operative profitability. We will have to add inventory because we are preparing then for the Rotterdam maintenance break. And obviously, we need to be ready to serve our customers throughout that six-week time period normally than in Q4. So you'll see an impact on that. in Q3. But all together really the Positive cash flow helped us secure our leverage at sort of below our financial target. We're obviously still very close to the bar, and it requires a lot of attention in the coming quarters as well. But nevertheless, I think a sort of good indication of the capacity we have when we really put all our full team focused on what is important. And with that, I would hand it back to you, Heikki.