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.

Thank you, Eva. So let's switch gears for a moment and talk about a fairly complex topic, and that is regulatory affairs. Obviously, the world around us has a lot of stuff happening, and during the second quarter, many, many new initiatives and laws were prepared. I'm going to go through first what's happening in the European Union and then say a few words about the U.S. situation. So, first of all, with respect to the EU, we know that as far as the refuel EU is concerned and aviation particularly, we have now the two-person mandate until 2030. And if we look at what that means in volume terms, for mandated volume, that is about 1.2 million tons. The question for us from Neste is that as we are now also constructing the new refinery in Rotterdam, which starts in 2027, how do we actually bridge then ourselves in the industry from 2% now to the 6% in 2030? And our position is that the European Union should help to develop some type of a bridging mechanism on how to get voluntary demand, so to speak, pulled forward from the post-2030 time period. So last week, there was an industry dialogue on the Sustainable Transportation Investment Plan, or STIP, in Brussels that I attended. And the discussion really was among various topics. One of them was this bridging question. Neste has proposed that one idea could be to use the ETS tool to provide a mechanism to narrow the gap between the kerosene price and the soft price as one idea. There was also discussion about the book and claim approach, whether that could be helped to further support the market. So I guess our view is that we hope that the work of DG MOVE will continue, and they have indicated that during the course of autumn, hopefully we will then hear something more. On the Renewable Energy Directive Red 3 implementation, now as it goes into the member states, there was some very exciting news coming out of Germany. So in Germany, they are considering actually a number of things, which when you turn that into volume, we can calculate that it should create as much as additionally 2 million tons of volume if it were to be implemented as presented. But let's see. The German process will take its own time and And then we will then see what happens. But net-net still, I think the direction of trouble is that there will be implementation plans which help create more RD volume. So that was a second positive thing. Then on the U.S. front, three subjects, the renewable volume obligation, the RVO, the LCFS, the low carbon fuel standard, and then the CFPC. So a couple of observations. So the RVO decision here, actually, it's a very strong market signal. And the administration actually, you know, is to be commended for really taking a historic decision of this type. So it's a very positive for us. for the whole sector and the industry. So we're very, very pleased to see that. From the standpoint of Neste, don't forget we have half of Martinez in California. And then we also own a quite interesting feedstock business, which we internally call Mahoney, where we collect youth cooking oil from nearly 100,000 kitchens. So while as the programs in the U.S. focus very much on the domestic industry, Neste can participate in this either through the, both from the standpoint of the collection of heat socks through Mahoney and then of course through Martin Neste and the joint venture with Marathon. So those are good things. On the low carbon fuel standard, it went into effect on July 1, and then on the CFPC, the 45Z tax credit. So, well, they will expand the credit pool and we will then see, you know, in practical terms, you know, we will come back to more detail, you know, how Neste will then hopefully, you know, react and respond and benefit from that. Then let's talk about Rotterdam again because this is exciting, you know, confirmation that our investment program is moving forward We have now had the start in April. It is half a million tons of capacity. And then when Rotterdam 2 starts in 27, that will be additional 700,000. So totally by the end of 27, we will have 1.2 million tons of soft capacity. And as I said before, if you look at the current volume of mandated soft, it's 1.2. So basically, Neste in itself out of Rotterdam could supply the whole European demand. And that is why we believe that we need a bridging mechanism to take us into 2030 mandates earlier through a voluntary scheme. I mentioned at my opening about flexibility and Neste's competitive advantage. I wanted to open this up a little bit with a few more details. So first of all, if you look at the left hand of the slide, We often talk about feedstocks, and I really want to – the more I sort of work here at Neste, I've really come to understand the tremendous strength of Neste when it comes to global access of feedstocks. So we are constantly sourcing more and more. We're broadening our geographic footprint, and we have a very strong sourcing team that is able to take advantage of different opportunities globally as they materialize. As I already said, we're backward integrated into collection in the U.S., but also in Europe we are partially backward integrated. And we are developing our trading capabilities as our feedstock business grows over time. On the middle side here, production on three continents, it gives us an opportunity to optimize, that is, an advantage for the company. We also have leading pre-treatment technology. And don't forget, this is also not a question only of getting access to feedstocks, but also access to feedstocks which are cheaper and oftentimes more complex to process. So our pre-treatment capabilities in our new refineries are unique and things where we can try to squeeze more value out of the system. An important point here is the ability to move between SAF and RD. So if we see that it is commercially more viable and more interesting to produce RD, we can allocate SAF volumes that direction or vice versa. We can move then RD back to SAF, both in Singapore and then in Rotterdam. So this flexibility, both geographically, but also between products, on a case-by-case, month-by-month, quarter-by-quarter basis is a strength of our industrial system. And then finally, global commercial presence. I'm very happy to see these great brands, FedEx, DHL, and Amazon be interested to buy from Neste. And I think that that's really the essence of some of the sources of strength for the Neste system. Then I want to close off, before I mention the outlook, just about a couple of opportunities and uncertainties. Obviously, this industry is facing global challenges like so many other industries. I want to highlight, as I mentioned, the German bill. That is a net-net positive. Let's see how it gets implemented. And also, the fact that if we can get EU now to do something on soft demand, that would also be a big positive. Eva mentioned the need to diversify a crude oil slate. We're doing a lot of work around that. And if it's successful, that would help us also take some of the pressure off in terms of the OP production costs. And then finally, on the uncertainties, I guess the global macroeconomy remains a bit unpredictable. But I think Neste has so far managed pretty well, you know, to get through these more challenging times. Then, on the final points here, if we go to the market outlook, so the outlook for 2025, if I just briefly go through it, so the uncertainty in global trade and geopolitics and their impact on the global economic outlook are causing market volatility. Markets for both renewable fuels and oil products are sensitive to oil price development. The market in renewable fuels is expected to remain oversupplied in 2025. And then we have the guidance. It is unchanged, and I think we mentioned here earlier on the additional information at the bottom about the change in CAPEX that you can read at the bottom. So a lot of information for today, and I think, Eva, are we ready to take the questions?

I think we are.

Okay, excellent. Please.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Alejandro Vigil Garcia from Santander. Please go ahead.

Yes, hello. Thank you for taking my questions. The first one is about your sales strategy. You are selling more into the European markets, significantly more than in the previous quarters. Of course, it depends on the opportunity, you know, in terms of both markets. How do you see this opportunity in the coming quarters? Do you see the U.S. potentially more attractive or you will keep focusing on the European markets? And the second question is this very interesting comment about the SAF regulation. I'm also interested in your thoughts about the synthetic fuels, the 2030 mandate in the European Union. This is something that could also be, you know, adjusted by market reality or market conditions. Thank you.

So, Alejandro, thank you. If I take these questions to start off. So, on the sales strategy, so very happy that, you know, we have this flexibility. The RD market in Europe has been short, and we have been able to sell volume from Singapore to keep the refinery running quite well, so I'm very happy with that. Of course, we need to look at this quarter by quarter, but now that we have the system flowing, and especially if, for example, the German decision goes forward, we believe there will be good demand for RD. You know, of course, the U.S. market is an option, but it, of course, will be very situational, I think, at the moment for the time, probably for the near term. Then on your question about, I guess, synthetically referring to ESOP, if I understand correctly, you know, of course, our position is, you know, we're focusing on these renewable products. We are not producing ESOP. We have no plans to get into the ESOP business. At this point in time, we have other interests. Of course, for Europe to completely decarbonize itself in aviation, ESOP will be needed. But I think it's enough to the European Union and the respective producers then to find a mechanism how those investments go forward. I think there are quite a lot of investments, but very few FIDs so far in that area. But as I said, Neste is not involved in that. Thank you.

The next question comes from Derek Whitfield from Texas Capital. Please go ahead.

Good afternoon, all, and thanks for taking my questions. I have two. With the first one, with respect to your EBITDA margin bridge on page 13, could you perhaps speak to where you're seeing the greatest contributions in your fixed cost improvement? And then separately, as a second question, regarding the global feedstock markets, could you speak to the trends you're seeing across the waste-focused feedstock markets, and more specifically, are you finding that U.S. 45G policy is creating opportunities to buy lower-cost feedstock outside of the U.S. as a result of less demand for those feedstocks, given that 45G policy favors domestic feedstocks?

So thank you very much for your question, Derek. If we do so that Eva takes the first one and I'll take the second.

Sure. Yeah, so Derek, on the contribution from the fixed assets, it really relates to the performance improvement program. So the topics I touched on the previous slide are the good ones to go back to. I would say the biggest lever is really around various procurement initiatives and logistics is important. As CEO mentioned, it's also supported by more reliable operations where we're able to plan better and planning ahead is always a cheaper option. And then obviously the headcount changes we have done. So those would be maybe, but really the full list, it's a wide array of actions.

Okay. So regarding your feedstock question, if I try to sort of focus in on two things, one is use cooking oil, yuko, and then animal fat. So So, of course, if there will be less demand, or it will be unattractive then to, well, let's say the U.S. suppliers will be less financially interested to buy Asian feedstocks and Australian animal fat, then, of course, there's a question, where does that volume go? And I think on Yuko, you know, we have seen some moderation in Asian prices, but not a lot. And it is a question, you know, where the Yuko will go. I think one area we don't know very well is how much Chinese demand for these products and how much Chinese domestic consumption of yuko will actually grow in the years and whether that will then keep the yuko price in China from maybe declining as one might expect if the U.S. sales are not continuing. But so far we haven't seen any big material decline in yuko price in China. So let's see, some of the Yukon probably has come to Europe for the time being. Then on the animal fat for Australia, that, of course, that will need to find a new home. And of course, if there are attractive opportunities to buy that, of course, we will also consider that. So I think we have to wait a couple of months, maybe a few quarters to see how this then starts to play out in more detail. But it's clearly a very important topic, Derek, that you raised.

The next question comes from Autumn Beletsky from SEB. Please go ahead.

Good afternoon, and thank you for taking my questions. I actually have three relating to renewables. So, firstly, starting with volumes, you made record when it comes to sales and production. What is the outlook for third quarter volume-wise? The second is relating to fixed costs in renewables. So, there has been quite meaningful decline quarter-on-quarter, I think something like 14%. Has there been anything exceptional and how we should think about the trend during the rest of the year, given the fact that you are still in early phase of performance improvement program? And the last one is I wanted to pick your thoughts on European market, and we have seen that the margins have been improving quite significantly during Q2, also in the beginning of Q3. How do you see the situation? What is actually driving such healthy development given the fact that we are still seeing global overcapacity on the market? Thank you.

Thank you. So volume outlook, fixed cost, and then European market. Maybe if I just comment on the volume, of course, we don't specifically guide at the level of granularity that you may be looking. But I think overall this year, you know, we have made good traction on our business. We reported earlier that we have made, you know, term contracts that take us until the end of the year. And we have also been doing spot sales. So, you know, I hope that, you know, we will be able to maintain the current level. But I think we don't really guide in much detail. The market at the moment, I think, is fairly stable as we see it to be. On the fixed costs, big change.

Yeah, maybe it's already partly answered, I hope, to Derek and the previous question around that. There's nothing exceptional, no. I would say that it's a wide array of things. Now, obviously, we had a few, always when you start these type of initiatives, some low-hanging fruits, so the trend has been very rapid on parts, but then again, there's areas where we're more in the sort of just starting, and we're very comfortable with the overall 350 million target we have for the performance improvement. So in that sense, I think we are very focused on delivering also in second half. Because also, you know, when you look at what was discussed on the feedstock issue, We're not seeing much help from that side, and the market is oversupplied, so it's really a lot focused on our own actions and driving costs from out anywhere where we can.

But I would like to still say that we have really tried to front load. the fixed cost savings, so really try to address that as quickly as we can. And that's why we made these structural changes immediately, you know, in the beginning of the first quarter and the negotiations were done in record time. So trying to front load the things we can control ourselves as quickly as we can. Then if I heard you correctly, we're asking about the premiums in Europe. Our read is that partially, you know, the German news has been extremely positive. And I think the market is sort of, you know, preempting a bit, you know, what might be coming out of there. I think that was sort of our read on what has happened here. Then, yeah, so shall we go to the next question?

The next question comes from Peter Lowe from Rothschild.

Hi, thanks. You've talked a bit about the increase in SAF volumes in the quarter. Are you able to say whether that was accretive to the overall margin, i.e. are those SAF sales at a higher margin to RD? And just as a context to that question, on their quarters now, a larger European oil major was quite bearish on SAF margins due to rising imports into Europe. And then secondly, can you just comment on what proportion of your sales are sold on term contracts as opposed to spot basis?

Thanks. Okay, so maybe if I start, so I think we have said before also that if you look at the publicly available information on spot pricing, so of course on spot soft pricing, I guess is the right way, so of course there are points in time And they have a value of information, but it is only what it is, right? So our order book is more robust and more versatile. So of course for us, the soft business, it's a more refined product than renewable diesel. So we have to get a return on our investment, if I put it this way, to answer your question. when we think about pricing. But I don't want to go into more detail. And I think I made a comment earlier about the flexibility between RD and SOF. So, of course, if we have to make choices about where we allocate volume, you know, based on commercial and financial reasons, then, you know, we will use that flexibility. Do you want to continue with the other points?

Yeah, yeah, I can. So I think the concern on the imports on the south side is real. I think there's obviously sort of capacity in Asia that one would expect the Chinese to tap these markets. Remains then to be seen how much really will happen in the second half. But I think we would share that view. Then on the portion of terms, so this obviously is a business decision that we will sort of change in time depending on the market dynamics. And like our CEO said, we are, in that sense, happy to deliver stuff. Or then if the price is not accretive, then we're happy to sell more RDs and that sort At this point of time, I would say that a significant majority of our volumes are turned for this year because there's only six months to go and we have the maintenance breaks coming. So we've obviously wanted to plan ahead so that we can supply our customers. On the RD side, we have some flexibility still out there.

The next question comes from Nash Kui from Barclays. Please go ahead.

Hey, good afternoon. Congratulations for the strong results. Two questions from me, please. The first one is on soft volume growth. So soft growth, 80% Q on Q. I just wonder if you can comment on the trend for the second half, please. And then my second question is really on RP and OP margin. I understand it's hard to guide into 2H, but any color will be helpful, especially given diesel crack has been very strong. Or if you can't say anything, just wonder, Can you provide some color on the spot margin you are getting right now, both RP and OP? Thank you. In July, please. Thank you.

So if I comment on the first one, you remember, I remember we discussed in the previous quarter, you know, how will the volume be allocated through the year? Is it, you know, front-end loaded, back-end loaded? This is very much, I would say, a bit of a, you know, test year because we just don't know, you know, ultimately how things will pan out. The 1.2 million should be purchased. And so far, I think, you know, it would be our understanding that, you know, the summer is reasonably, you know, busy. But we just – I mean, it should be 1.2 million tons, you know, the mandated volume by the year end. Not more, not less. Will there be a voluntary demand? I think, as I mentioned earlier in the call, We are seeing especially cargo companies, you know, parcel delivery companies, I think they are able to price or pass on some of the costs to their customers. You know, they have a product and a value offering that works. But I think on the more traditional airline side, you know, that is more difficult. So that's why I think the 1.2 is probably a realistic number plus then something on top of that for voluntary.

And then maybe, Nash, a few comments on the margin, obviously, in this volatile market. I think we're all... we're all following the events and the diesel crack is something that clearly sort of will be impacted by what happens on the oil markets and with all the geopolitical dynamics, it's very hard to sort of make any sort of statements on that. What I can say that on On the OP side, as I said, the second quarter refining margin was a disappointment. We do see the two reasons that kind of pulled it down, the supply cost as well as the gasoline exports being more healthy going into Q3. So we're definitely sort of aiming for an improvement in OP on that side. And then in RP, we will be really driving the flexibility to the utmost, depending then on the market dynamics. But obviously, diesel crack is something that we take what is given. It's not something we can really influence.

Understood. Thank you very much.

The next question comes from Adnan Dhanani from RBC. Please go ahead.

Hi, thanks for taking my questions. First of all, I'm just on feedstock. In your presentation, you've highlighted the increase in feedstock price of this opportunity. Could you please just elaborate on what that actually looks like and just your outlook for the feedstock market when we're still seeing a bit of price pressure in a number of markets? And then second on the long-term SAF demand, assuming you don't get a bridging mechanism in Europe for SAF until 2030, what are the opportunities in other markets that could help utilize that capacity that comes online in 2027?

Do you want to do the first feedstock and I'll do the SAF?

Yeah. So the feedstock opportunity is really around... the flexibility that Neste has, that we are able to take various types of feedstock. And now with the US legislation changing, and like was discussed earlier in the Q&A part, It remains a bit to be seen, but obviously one does expect that the markets within U.S., the prices will go up. But then from some areas where U.S. producers have earlier taken product, with the incentive structure, they are less incentivized to do so. So they could ease a bit the pressure on producers. on prices, but so far, you know, this has all been in the news for many weeks, and we haven't really seen improvement, so it's really around the opportunity trying to play as a very agile operation and use any opportunities we have, but the strength is really the Nesta's ability to use many different types of feedstocks.

So your question about the soft demand, I guess it's more like 27, 28, and 29, so Of course, you know, we are going to continue an active dialogue with the Commission and also the other stakeholders, airlines, et cetera, to try to find a win-win solution, how we could accelerate the demand curve for software that is more linear. So that's a lot of discussions, a lot of work with the Commission Airlines. But let's see. I'm hopeful, but, of course, cannot promise anything because that's, of course, the decisions are in the hands of the Commission. And then, of course, if we're not able to, you know, sell off, then we have the option of selling renewable diesel. And as I said before, you know, the European market has been short. There is more demand coming from the implementation of Red 3. And then somewhere out of that, you know, we will find our own balance. But the details of that, of course, are still up in the air. And we'll have to then see in 27 and 28 when Rotterdam starts, you know, what the final game plan is. So stay tuned then, but still a few years ahead from now.

Great. Thanks for the call.

The next question comes from Iris the Man from DNB Carnegie. Please go ahead.

Hi, this is Iris from DMP Carnegie. Thanks for your presentations, and I have two questions. So firstly, Germany's latest proposal for this regulation proposal, so you mentioned some two millions on potential demand impact. Is that more in the long term, I mean 2030, or do you think that it could materialize already in the short term, let's say 2026, 2027? And secondly, is it still fair to expect the SAF stage to increase towards the year end, as you mentioned in the Q1 report? Thank you.

Thank you. So if I kind of comment on this, so let's say the German decision was positive, you know, the 2 million is probably sort of on the high end. And as usual, you know, traditionally these things may sort of be watered down as the process goes through the system. So Don't know yet what the final number is, but anyway, it's a clearly net positive outcome. In terms of our understanding and how this could go forward, we believe it could show up already in 26, 27. So that would really then help stabilize also the balance of the market much, much sooner than originally planned. And then on SAF, the second half volumes, We, of course, want to be actively participating in the SAF market, but I referred to my earlier comment that we really don't yet know how the lifting of SAF in the second half of the year will materialize and how much of that will then, of course, come to Neste vis-à-vis other suppliers. So I can't really comment until we really see what happens.

Okay, thank you.

The next question comes from Henry Tarr from Burenburg. Please go ahead.

Thanks very much for taking my questions. I had a couple. Firstly, just on the CFPC, you've taken the credit for Q2, but not for Q1 yet. Has something changed to give you confidence to take the Q2 figure? And would it be sensible to think that the Q1 figure, if you gain comfort that you can book it, would be something similar to the Q2 figure? That's the first question.

Yeah, if I take that. So thanks, Henry. The Q2, it was really in a sense we're kind of working also, of course, together with our joint venture partner and that we have a sort of common way of doing and also following the industry practice. And we felt then that as the legislation kind of came, the announcements came during Q2, that we now have enough comfort to book for the Q2. But we would really want to wait for the final sort of information and clarifications to be out before sort of now taking any view on the first quarter, because we basically have the whole second half to then take it equally. It's going to be sort of... coming late anyway. What comes to the Q1 figure, so indeed we did say in connection with our Q1 report that we estimate the amount to be in the range of 30 to 40 million euros, which is a very similar ballpark that we now booked for Q2, so we haven't changed our view on the number per se.

Okay. Thanks for that. And then my next question is on... balance sheet um clearly you had a good quarter helped by working capital etc you're still perhaps towards the higher end of the gearing range um are you still thinking about or would you think about asset sales and divestments um do you think that's sort of necessary um or would be helpful at this point so if i can answer that so uh when we kicked off the uh

performance improvement program. So the objective and the target really has been to, I've said internally that we need to raise the flight altitude of Neste, a bit of an airline analogy here, and really to lift ourselves enough that, you know, topics like the one you mentioned will not be, you know, of relevance. So, of course, you know, let's see how the business develops. But I feel very confident that this performance improvement program is going to be successful. I know we're really doing it in a very systematic way. And unless something surprising happens, we should stay within that 40%. We did say in the previous quarter, if you recall, that there may be moments when we temporarily go above 40%, and that is not the end of the world. But still... plan is to stick with the portfolio we have and try to make more money.

Okay. Thank you very much.

The next question comes from Henri Patricko from UBS. Please go ahead.

Thank you for the update. Two questions, please. The first one on the discussions for time contracts for 2026. I was wondering if you already have a sense on if that's likely to be taking place a bit later this year as you expect an improvement in market conditions towards year end and whether we should expect a change compared to the speed one-third, two-third that we've seen for 2025. And secondly, going back to some of your comments, I key around the competitive advantage and the level of backward integration. Can you share with us what sort of level of backward integration you have at the moment and where you're increasing this integration? Thank you.

So thank you for your question. So regarding term contracts for 2026, usually the negotiations start in autumn. I can't really say yet how the customers, you know, are going to want to do this. You know, of course, we're ready to have our discussions. But my understanding based on what my colleagues are telling me is that sometime in Q4, you know, that's when the thing really gets, you know, busy. So nothing more. I can't really comment on the splits regarding 2026. It's really all a function of, you know, the state of the market, you know, what we then agree with the customers. So we'll have to come back to that topic then in the spring, probably around the spring of next year when the negotiations are finalized. Then on your question of competitive advantage, I don't really have a number on the percentage, off the top of my head, a percentage of backward integration. maybe we can look into whether we could, for the future reference, come up with a numerical figure.

It hasn't changed, though.

I mean, it hasn't changed. I mean, you know, we have in Europe, you know, we're well positioned, especially on animal fats. In the U.S., we're well positioned in Yuko. We have long-term partnerships with various suppliers, you know, that provide us with the feedstocks. I guess, you know, If I look at our past strategy, it was very much we were thinking about making acquisitions, you know, backward integrated acquisitions to buy more assets, more collection capacity. I think at the moment, given where we are and the state of the balance sheet, you know, our capital is going to be allocated to Rotterdam, and then we have the turnaround in 26. So, really, we spend the money there and, you know, The sourcing of feedstock will be more, you know, through trading, through active, you know, engagement with suppliers, and then, of course, longer-term supply deals, but not, you know, M&A, you know, backward-integrated M&A.

That's it.

Thank you. The next question comes from Paul Redman from BNP Paribas. Please go ahead.

Hi, guys, and thank you very much for your time. I have two questions. One was the first was just on seasonality. So you've got, I think, 80% – tell me if I'm wrong – 80% of your volume, your renewable diesel volume turned up. But the renewable diesel market in Europe is tight. If we started to see diesel prices come off, would that mean that your term sale prices would be lower despite a tighter renewable diesel price? Only 20% of your volumes would benefit from the tightness in renewable diesel. I kind of want a bit of an education because I'm thinking about seasonality and normally you'd get a tightness in diesel in the summer and a weakness in the winter months. And I just want to see whether Nestle would be impacted by that or whether renewable diesel and diesel prices are fundamentally delinked nowadays. And then the second one was just on SAP. You say it's very difficult to know what the SAP sales will be for the second half of the year, but is there a concern that you've got a big maintenance program going on in 4Q25, at which point the SAP market could get tighter if people need to buy to meet mandated levels and you don't have the volume online to provide that, so you kind of miss out on that market? And just in the meantime... How is the extension of the 40B going to drive SaaS sales in 3Q before it runs out at the end of September? Thank you.

So there were three questions. Maybe I'll take a crack at the second and third if you want to think about, you know, the first one. So... Let me try to answer this in such a way that, first of all, on the 45Z, our understanding is that it basically equalizes more, you know, the domestic SAF production and, you know, the imported sort of equalization effect. But we have sold some SAF from Singapore, you know, to North America, also in Canada. And, of course, we will look to continue that, you know, where demand exists. In terms of Rotterdam turnaround, which is then in – October-November timeframe, you know, we will, of course, develop an educated point of view on what the demand could be and then we will, of course, we can drive into inventory. So that is Eva's comment about working capital. But that's sort of a business decision we'll have to make here after the summer vacation period is over on what is our read on the market. So it is possible that we will have to push more into working capital, you know, for that period of time. Backstop, of course, is, besides Rotterdam and Singapore, that can also produce stuff online too. So that's a very detailed, operative question and a tactical question, and I can't really go into that more. Anything you want to say about the seasonality?

Yeah, maybe on the term sales. So, indeed, an element of the term sales is that then it is binding on both sides. Obviously, there are some parts of the pricing can be linked to various market drivers, but that's the kind of, we as a producer get the visibility into volumes, and then the customer gets visibility into the pricing, so that's why we, I think we've tried to sort of warn you from focusing purely on a few sort of spot deals on the On the markets, any volume we are able to push out extra, and like we were now successful with the utilization rate, obviously, helps, but certainly then part of the upside could also be not available. So it's a... That's why we need to think very closely for 26 in a way, how much do we term, how much don't we, and with what type of contracts. It's like our CEO said, it's a highly important commercial question.

Indeed.

The next question comes from Jason Gableman from TD Callen. Please go ahead.

Hey, thanks for taking my questions. The first one is just on kind of global industry rationalization. And I think we saw a decent amount of it last year. Given it seems margins are stabilizing a bit. Do you think that's kind of run its course? Or do you think they're still more that needs to be done here, given your view that the market, I think, is still a bit oversupplied. Thanks.

So, Jason, thanks for your question. I'm not sure if I would call it industry rationalization. I would more call it postponement of projects. I think what we have seen globally, primarily, especially in Europe, is that plans to add capacity have been withdrawn or postponed. It does actually put Neste in an interesting position because in 27 when Rotterdam starts, if the others, you know, do postpone their projects as has happened, you know, we're coming with a new facility, world class, you know, very competitive assets. So I think, you know, the development, you know, has been Neste positive. I can't really say anything more. Other companies will make their own decisions regarding, you know, capacity addition. for renewables, which is a gross market, by the way, so it isn't really that much of a rationalization question.

Got it. Well, hopefully you can say more about the next question, which is on anti-dumping duties from the EU on U.S. SAF and just wondering if you have an update on expectations if and when the European Union can pass those and provide some support for Neste's business.

Actually, I don't think we have any information on that, not even aware of, you know, what the European Union is planning or thinking.

Okay. Is there, well, let me ask this. Is there some expectation given that the EU does have anti-dumping duties against U.S. biodiesel and RD? Is there, is it, would you assume at some point you would get this anti-dumping duty?

I think that the primary sort of, you know, long-term question has more related to China and, you know, the direction of, you know, Chinese investments. There is anti-dumping duty for Chinese RD and the question we have discussed in other calls has been about the software, the software being included in the Chinese anti-dumping duty. But I said no new news to report on the Chinese matter.

Okay, I'll leave it there, thanks.

Thank you.

The next question comes from Pasi Verzenin from Nordia. Please go ahead.

Thanks, this is Pasi from Nordia. I have three questions. I see that your net assets in variables is roughly 9 billion, so What are the assumptions behind your valuation model for these assets? And practically in more detail, what is the margin assumption you are using to continue this Rotterdam investment? And what is your margin giving this 9 billion asset value for Neste? Or are you using maybe ROI assumptions here? But some figure would be helpful on this matter. And secondly... So, regarding the leverage, so are we going to see a temporary addition above 40% leverage already in the third quarter due to this inventory effect you were speaking about? And lastly, do you think that the global supply-demand balance could be even better on next year than we have seen in this year? And these were my three questions. Thanks.

So, thank you, Pasi. So, Eva, you take the net assets and the leverage, and I'll talk about the global demand.

Yeah. Yeah, so we don't publish our sort of internal margin assumptions. You can obviously read something from the annual report notes if you look at the asset impairment information, which we obviously annually do. Our focus is now on improving the profitability and RP, and that has the biggest impact on the equation. Then on the leverage, I think what I wanted to say is that we don't expect support from a release of working capital in our cash flow in Q3, rather more relying on the operational cash flow, so not a such sort of – meaning it to be that Grima view. I think we're very focused on being below 40%, but obviously, as you well know, many things can happen in the turbulence we have on currencies and things like this the last day of the month, and that can have some impact, but I wouldn't say that the And the inventory impact in Rotterdam is that we consider it that significant. I just wanted to point out that it will sort of hinder any additional release.

And then on the – anything else?

No.

And then on your question about the global demand balance for 2026, so I guess if we look at SAF – So probably we will not, you know, hopefully the EU will come up with some new ideas or implementation of bridging mechanisms for SAF into 2030. Doubt that would happen necessarily in 26. So that basically would then imply that, you know, the oversupply in SAF will continue then if that's the case because we know the mandate is the 2% and voluntary demand will require more tools. On the RD side, though, as I mentioned, I think Iris was asking about the implementation of the German program. So if that starts to materialize faster and the RD market has been somewhat short, then, of course, that would be a positive for renewable diesel in 2026. But as I said, a lot of moving parts, a lot of uncertainty, and really cannot make any sound forecasts about 2026 at this time. But that would be my read on what I see at the moment. Excellent. I fully understand.

Thanks.

The next question comes from Christopher Cutland from Bofe. Please go ahead.

Hi, it's Chris Goodman from Bank of America. Can I ask on CapEx and your lower guidance for the year, maybe go a little bit into detail, if you can, where that savings come from? Is the budget for the Rotterdam project unchanged, or is that one source of it? And if you could give us a bit of... I guess it's a second follow-up question, a bit of an insight into FX exposure of this CapEx. How much of that is locked into yours, and where do you still have exposure to the quite considerable fluctuations we've seen so far? Thank you.

Well, if I answer your first question, so the Rotterdam budget is unchanged, so the The small decrease that we've been able to sort of push is really on collecting on all, going through everything else we have. We had planned and really sort of scrutinizing, do we need to do it? How can we do it with a lower budget? And hence, that really comes from the sort of the rest of the CAPEX. And obviously, we are very focused on really making sure that we only do the work now that we absolutely feel comfortable doing in this current situation. Then on the effects exposures, I would say that we're... we're pretty much in Rotterdam approaching a situation where it's work. So all the components are pretty much already at site. And the work, obviously, the work done there is Euro-based. So I think the sort of ethics risk from that point of view starts to be very marginal. It's just based on where we are. Now, obviously, we will be for our maintenance breaks, there are certain components that are priced in dollars. Again, I think we're sort of, there's not much open purchases. Some may be, but October comes very soon for Rotterdam, so I think we're But something to follow, and obviously with the turbulence being such, but not sort of on, I would say, a big factor, but you're right to point it out that the currency impact is obviously something that keeps us all on our toes.

Great, thank you.

There are no more questions at this time, so I hand the conference back to the speakers.

So thank you very much for your time and interest today to go through Neste's Q2 results. I'm going to maybe summarize our key message today. I'm very pleased with the progress we started to make on the performance improvement program, and we look forward then to report to you in more detail how we make progress. But as I said, it's been a good start. The Rotterdam project is, of course, of highest importance at Neste. We at top management are focusing a lot of our attention and time on that to make sure, you know, we make the commitments on budget 2.5 and then the start then in 2027. I'm also very pleased about the success we've had on the commercial side. It was a big internal, you know, sign of confidence that we were able to reach such a good sales volume in renewable diesel and SAF in the second quarter. And then finally, I think it's important to note that after some challenging times on the regulatory front, it now seems that we are having a bit of a tailwind when it comes to regulation, both here in Europe and in the United States. And that, of course, is something we need. We focus on our internal actions, but, of course, it's important also that we get a bit of tailwind, and hopefully that will then start. The wind will start blowing in 26, 27, and 28 also for our industry. So with those words, I wish you all a great summer. I'll look forward to seeing you then after the end of Q3, and take care.