Neste Oyj Unsp/Adr

Good afternoon, everybody, and welcome to discuss Neste's Q1 results that were published this morning. My name is Jukka Miettinen, Vice President of Investor Relations at Neste. Here with me, we have our CEO and President Heikki Malinen and our CFO, Eeva Sipilä. We are referring to the presentation that was launched on our website early this morning. The key highlights of our presentation include today – our position in the ongoing market volatility, our Q1 financial performance. We will also cover the status of our performance improvement program and the progress towards our financial targets. We are also discussing our near-term focus areas as well as the current opportunities and uncertainties. We will have time for discussions with all of you. And 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. Heikki, please, the floor is yours.

Thank you, Jukka. Good morning, good afternoon, everybody. Welcome also on my behalf to the Neste Q1 call. Really great to be here today again with Eva. Let's start with the summary for the first quarter. Five main highlights. Obviously, as we all know, we had tremendous market volatility originating from the Iran crisis, especially during the month of March. And I can say Neste, we feel, was able to manage through that volatility period pretty well. Our financial performance for the first quarter was really good. Looking at the levels we achieved, I'm very satisfied with your absolute profits. Our utilization in the RPE business was low. We'll come back to that. We could have done somewhat better. There's still work to be done. I'll talk about that. The execution of our performance improvement program continues really well. Eva will give you summer update on that, but I would just say that overall, I'm very pleased with how the team at Neste is executing the program. And then finally, the work on the Rotterdam line number two investment continues The closer we get to 2027, I think the more clear it is that the timing of the investment is good, and I really look forward to getting our production up and running then in 2027. But as always at Neste, we start with safety. Safety is our, so to speak, our license to operate, and we are striving to improve our safety both in terms of employee safety, which we measure as TRIF, it's recordable incident frequency, and then process safety. We have a very systematic five-year roadmap that we're executing. However, if we look at the results for the first quarter, I'm not very pleased. We have not been able in TRIF to move the needle downward, trending sideways, and in particular here in the Nordic region, And in the United States, the cold, harsh winter did impact our safety. We should have been able to perform even better as winter comes every year. But that is work that we need to then learn on. On the process safety side also, we had a few, very few but still, events. And they raised then the score in the wrong direction. So I said safety is number one topic and it is absolutely the highest priority for myself and my colleagues within the Neste organization. But if we look at the figures, again maybe the six main numbers and Eva will talk about them. Obviously on the left hand side renewable product sales volume 874,000 tons. You can see that we had the turnarounds both in Martinez and in Singapore. line number one and then we will talk about the other other topic from from singapore production but i said uh we are at three 874 and would have of course like to have a tad more the margin sales margin for renewables was very strong 856 dollars per ton compared to where we were just a bit of a year ago and in 2024 in the last quarter we've come a long way Our margins are now clearly much better, which of course, considering also how much capital we have invested in the business, these margins are necessary in order for us then to get good returns on the investment. On the right-hand side, you can see oil products refining margin, $23 per barrel. It is an improvement from the previous quarter, just as recognition where we were a year ago, and we were less than 10. So again, significant improvement in refining margins in the oil products business. 861 million euros of comparable EBITDA, and our free cash flow was very, very positive, and we, of course, are pleased with that because it impacts our leverage. As we all know, the markets were very volatile. For those of you who don't follow this that closely, I think the message we want to say to you here is threefold. We've seen significant volatility in crude oil prices. I think Neste was able to manage the volatility pretty well. Subsequently, we saw significant spikes in diesel pricing and jet fuel pricing. when we look at our renewable diesel and soft business. So there is an interlinkage between those prices and also the fossil version of fuel. And this is one big strength is that our product positioning is very much in the middle distillate. So we are primarily a diesel and jet fuel producer, both for renewable and fossil. And our product positioning of course is good given the circumstances we are now facing in the energy markets. And what is very important to note is that if you look at the renewable feedstock prices, maybe you cannot really see that that well from this graph, but the message we want to communicate to you is that the feedstock prices, animal fats, cooking oil, et cetera, in the markets where we buy most of our volumes, they were fairly stable. We did see some movement towards the end of the quarter, originally initially from the U.S., following the big RBO decision. So you saw soybean oil movement, you saw then animal fats in some markets in Asia move. But overall for Neste, the feedstock cost overall burden stayed fairly stable. And I think that is an outcome of the fact that our sourcing is very diversified globally and we're able to then always optimize and try to go for a lower cost position. Now if we talk about where the world is today in geopolitics, Of course, very important is to understand where does actually Neste produce its products. And as you can see, we are logistically and location-wise far away from the crisis areas. In the Nordics, with the portable refinery resource, most of our crude from the North Sea. In Netherlands, west coast of the U.S., I think overall our geographic footprint is good and helps us in this situation to stay away from the conflict area. As said, our crew supply was stable and we were not, from a supply standpoint, impacted by the crisis. So I think that shows that it puts Deste comparatively in a good position. Those were my initial remarks. I'll now hand it over to Eva to go through the financials, and then I'll come back and talk a bit more about Neste and where we are. So let's click then. Eva, please.

Thank you, Heikki, and good afternoon, everyone, on my behalf as well. Starting with the renewable diesel reference gross margin, as you can see, it pretty much was an upward trend throughout the first quarter, supported by the anticipation of positive regulatory news from both U.S. and Europe. Next, the comparable EVTA reached 861 million for the quarter. In renewable products, the 433 million was reflecting the significantly higher sales. Term sales premiums this year, something we indicated already last time we were here, that we're going to have a stronger year from the term sales premium point of view. But then obviously, of course, the gas oil surge in March had a positive impact. In oil products, 337 million euros and supported first by a cold winter, so we had a good January, February from a weather point of view. Cold is always good for us for the demand of our key products. And then in March, the Middle East conflict. In marketing and services, 48 million euros for the quarter similar to oil products driven by first a couple of good cold months, but then also the conflict resulted in a relatively high inventory gain in March, and that's visible in our results. Our performance improvement program continues very solid and strong progress. We achieved 115,115 million euros of EBITDA as an impact in the quarter. And in total, we've now so far reached a run rate, annualized run rate of 476 million euros of EBITDA. And we have a pretty... a pretty balanced mix, I'd say we're moving a bit more from purely sort of cost reduction to also revenue and margin optimization, so 64 versus 36 percentage from between the two main areas. Then if we move into the sort of segments and look a bit more detail into them, starting obviously with renewable products. So as you can see from the graph on the left, so indeed the sales volume was clearly low due to turnarounds, but also an equipment replacement delay in Singapore, which affected our March volumes. Maybe something worthwhile noting that as of the beginning of this year, we are now including in these sales volumes also our trading volumes. They are still very small in the total, but it's something that we see the market evolving and something obviously that we're building capabilities for, and hence we feel that this was the time to start including them in its sales. Now, of course, the light blue line on the left-hand side, the sales margin is, is one that strikes out and clearly sort of rising to $856 million, $856 per ton is something that was very supportive for our result. And on the right hand side we compare the fourth quarter and this now recent quarter and obviously a very big improvement. Sales volumes were negative but then again the sales margin more than outweighed that impact. As you can see from the few smaller numbers, so we were very focused on renewable diesel. We said already entering this year that we expect the market demand for SAF to be slow in the first part of the year, and because of the price difference not being attractive enough, we did indeed very much focus on renewable diesel in our sales. And then on the fixed cost, you don't see much of a movement, slight decrease, but that of course includes slightly higher maintenance cost and some sort of fixed costs that come in the early part of the year. So nothing significant in them as such. Moving then to oil products. So here obviously the left hand graph, you see the blue columns indicating our very strong refining margin for the quarter, $23. And indeed we had healthy January, February, so good margins also for those two months, but then really the spike in March due to the Middle East conflict was the one that took us this high. it's important to understand that the sort of how rapidly the crisis hit in March meant that during the first quarter we were still in our production using crew that was purchased prior to the conflict. And as we sort of typically have sort of one to two months, less than two months difference from procurement to actual sort of running in production, This means that we're currently already now running with crude prices that are in a very different level reflected by the conflict and hence the margin, refining margin for Q2 will be lower due to that. And then whenever the conflict ends, hopefully sooner than later, it's good to know that we'll obviously have one, two months negative of the fact that we will be then running with higher cost crude in our production system before then any sort of reduced pricing comes through the system. As Heikki already mentioned, so we are mainly procuring from the North Sea, so availability hasn't been an issue, but really the sort of prices are obviously reflecting the fact that there's a lot more buyers for North Sea oil as well now that the strait is closed. Marketing and services, similar to oil products really, so a strong quarter thanks to the cold winter and then indeed the inventory gain is something worth noting that had a big impact in the quarterly margins. Also, what you see here is in the fixed cost, they're slightly up. We have a pretty busy investment program ongoing in our retail network in Finland, and that is reflected in that number. Moving then to group figures again, so we had a busy investment quarter, the Rotterdam expansion, you'll soon hear and see more about it, is ongoing, progressing very actively, so 206 million cash out investments in the quarter. Now, despite this, we delivered healthy cash flow of 286 million euros before financing activities, and we're obviously very pleased with that. This is very much driven by the strong financial result. which enabled us to really have a step change down in our leverage. Very pleased to be at 31.7% at the end of the quarter. And this means, obviously, that we are tracking very well on both of our financial targets already this early in the year. So with that, I would hand it back to you, Heikki.

Thank you very much. So let's talk about a couple of other subjects. I want to show a slide here that goes through some of our key priorities. It's obvious that for us at Meste, improving our refinery performance on the renewable side is an absolute priority, in addition, of course, to the safety matter I showed earlier on. Our utilization level in RP for the first quarter was low. We did have turnarounds in Singapore, line number one, and also in Martinez. These were planned. And the turnarounds went well. But after the Singapore turnaround, we had an installation of critical equipment which did not proceed according to our own expectations. And that has created a delay in taking that equipment into use. And that is the explanation why then our output or utilization in Q1 for RP was below our own expectations. We are going to have a major turnaround in Portugal in the second quarter after the summer holidays. This turnaround is very critical for us. We planned it very thoroughly. We've taken a lot of time to make sure that everything is ready. And I have strong confidence in the team's ability to deliver on that turnaround. You may ask, well, given the market situation, could we postpone the turnaround? Unfortunately, the case is that technically and for safety reasons and also for permitting reasons, we will have to execute the turnaround and we will do it as professionally and as timely as it is possible. So I said I have good confidence in the nested team. Turbulence in our markets continue. We continue to navigate and try to take advantage of all the opportunities. Eva already mentioned briefly about trading. We started to do that with limited volumes. It's still early days. But also, as the market for renewables grows, it will, in the coming years, most likely also provide more opportunities for trading. And Neste also wants, as a major supplier, wants also to participate in creating more liquidity into the market and taking advantage of the positions we have, whether it's on the feedstock side or on the final products side. And then finally on the foundation of Neste, we've talked a lot about our performance improvement program. We have reduced our fixed costs. I think our fixed cost base is now solid. We have improved many of our processes. I think we're better buyers than we were in the past. All of this is providing us with greater efficiency and cost competitiveness, which are of course fundamental backbones of being a world leader in our industry. On advocacy, That is a very important part of our business. As you know, advocacy is basically what creates demand in some ways, and we can't really sell before we have the demand creation. It will be interesting to see how this Iran conflict, whether that in some way will positively accelerate the, let's say, the adoption of these new fuels like the ones we produce. We've talked a bit about Rotterdam in the past, but we've never shown a video. So what I will do is I will click the button here. Let's see if this video comes on screen and you can enjoy a minute looking at what's happening in Rotterdam from aerial view, so to speak. So here we go. Thank you. Thank you. So there you have it. That is, it's a very exciting project. I have to say, I go there frequently. And every time I go, I just wonder at, you know, the skill and the work results of our engineers and construction partners. But I said, as you can see from the video, the project is moving forward. It is being built, you know, step by step. And then in 27, we will start production. It's a complex project. We've taken advantage of the learnings from Singapore. But as I said, every project of this magnitude is its own animal in many ways. And there's a lot of work to be done. The safety track record of the project has been really good. We've had very few incidences in the construction site. And I think that just is also a good signal on the quality of the initiative underway. But as I said, the Luby's types of refineries in Europe is something that hasn't happened really for many years. We've had few industrial projects in Europe, so it is in some ways also one-of-a-kind activity here in the heartland of the European Union. Then a few words about short-term opportunities and uncertainties. I think, as I said in my previous slide before I saw the Rotterdam video, is that I think it's going to be very interesting to see what impact the Iran crisis has on the discussion about energy security. If you look at the debate we're going to have, it's going to be about how much energy supply do you need to have within the domestic markets. Where do you supply the feedstocks from? Where do the crude oil supply come from and so forth? So I think given our geographic location in Singapore, Netherlands, Finland, and the United States, I think in that discussion, I think we should be pretty well positioned. Regarding regulatory developments, the last months have been very positive. We have in the United States a historic renewable volume obligation decision by the U.S. government. It is very positive in terms of volume increase, and as it gets implemented, it will bode well for our Martinez refinery. We're, of course, very pleased with the decision. We also – remember, we also have the Mahoney business in the U.S. We're a major collector of cooking oil from over 100,000 kitchens in the U.S., so we also have good supply of feedstocks, you know, for our joint venture. operations in California. And then in terms of European regulation, Red Free implementation goes forward. Germany is now very close to making its final decision in Parliament. Based on our understanding, the Environmental Committee of the Parliament has now reviewed the matter. They've made their recommendation that it should be coming to a vote in the early weeks of May. And looking at the proposal that they have. The way the text is written, it's also very positive for Neste, not only in terms of the increase. When passed, European demand, starting from Germany, will increase from four and a half, five million tons to over 10 million tons by the end of the decade. So that's a big demand increase in renewable diesel. We look at that policy. It's very attractive from the speed stock selection part. Double counting will most likely be eliminated. That's positive. and there are very strict requirements regarding control and monitoring of supply, audits, checks on refineries, and that, of course, is something Neste wants, that, you know, the quality and assurance of the feedstocks that are being used is tightly controlled. That is Neste positive. As I said earlier, we're in a good position because of our presence in the middle of the spillage markets, We know the jet fuel market is fairly tight. We provide jet fuel mainly for our domestic markets here in the Helsinki-Vanta airport and the environment close by. And as I said, as we improve our capacity utilization renewables, you know, we will have more volume. On uncertainties, well, geopolitical circumstances are very Complicated matters, as we know, they take time to resolve, and I think we will refrain from making any forecasts on how the matters will evolve. I think the only main point for me really is that for NIST's renewable business, the conflict in Iran does not really impact us from the supply standpoint, and I'm also confident that our sourcing of crude oil from North Sea is in good shape. So those are roughly the main points we wanted to show today before we take your questions. We have the outlook. The outlook basically is unchanged, so I won't go into that any further. And with those, I guess we're ready to take the questions. Thank you.

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

Hello. Thank you for taking my questions and for the results. The first question is about the volatility we are seeing in conventional products. How are you taking this opportunity in terms of margins? How much of your volumes for the rest of the year are already sold with fixed conditions? That would be the first question. And the second question is about the Rotterdam project.

and the startup during 27 you think is going to be a low end process or you are expecting a material contribution from rotterdam already in 27. thank you thank you alejandro so eva you you fill in but i think regarding volatility regarding the renewable products business as we said uh we have termed you know half of our business about 60 percent uh for this year so so So let's see how our utilization now develops out of Singapore, how we get that solved. So, of course, we're trying to get this matter resolved very quickly and we get more volume, but half of it is termed. Then on the Rotterdam startup curve, so I really want to refrain from making any comments on that yet. I think, you know, it's a very complex project. I recall we have, was it in terms of The flanges, I think they're almost like half a million, you know, flange connections which have to be checked and tested. So this is a huge, you know, refinery. And what is most important is that we have a safe start, even if it's a bit slower, but safe and stable start so that when we make commitments about volumes... then we will not have a repeat of what we had when we had the Singapore start. So we really want to avoid that under all circumstances. Anything you want to say about volatility and how we can take advantage of it?

Yeah, and I think we're doing obviously our best to take the opportunities the market has, but we are, as I would say, more volume constrained, so that obviously limits the opportunities to a large degree. But obviously being agile, and I think our Q1 results prove that we did a pretty good job with our teams in all of the segments.

Thank you.

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

Hi, thanks for taking my question. Two for me, please. This is the first one. Obviously, there's been a big shock in the energy system from the conflict in Iran. There's likely to be some rethink of energy policy here, and you've noted this as an opportunity for renewables in your presentation. If I flip that around, if there are continued energy probability concerns, do you see any risk on the policy front as it relates to the mandates in Europe and elsewhere, particularly given how reliant you are on these mandates in the RP business? And just a second one on the oil products business, utilization rates were slightly below where it has been in recent quarters. Are there any issues here that may restrict you from running higher rates in the coming weeks and months and not fully realizing the margins that we're seeing in the market before you go offline for the turnaround? Thank you.

Thank you very much. Your question about energy policy, of course, is important. It is something that NIST is, of course, dependent upon. I think that is a fact. We had here recently in Finland a debate in the government around what to do with the renewable fuel obligation, and the outcome of that debate was ultimately that the government decided to keep the mandates in place. I think the decision was very clear that that is the intent of the government. I think that is also sending a strong signal. I've also made the comments very broadly that this is not only a question about fuel supply, but it is also about fuel security. The thing with renewable fuels and also having domestic supply is something that is in the moment when there could be big shortages. And we know that, for example, in some countries there's serious shortages of jet fuel. So for Neste, I think we're well positioned. So at the moment, and especially if this German decision now goes through in May, I think the policy concern is much less of a concern than rather that it could be a very good tailwind for us in the coming years. So that's our read on that as we speak. Regarding all products utilization, so we were two percentage points below the previous reference number, so a bit below But I think overall, I think Corvo is running smoothly. So the only thing that you need to have in your models is a turnaround, and we will do our utmost to get it done in the shortest possible time, as long as it is safe. So no visible concerns there.

Thank you. The next question comes from Derek Whitfield from Texas Capitol. Please go ahead.

Good afternoon, all, and congrats on your results. I have two questions. So, first, with the benefit of clear regulatory policy in the U.S. and exceptionally strong diesel and jet-crack spreads in the EU and Asia, how are you thinking about the allocation of RP cells across your end markets? Could you elaborate on the trends you're seeing across the global waste-focused feedback markets? Referencing slide 30, it appears that the EU markets are depressed relative to the U.S. markets. Are you also seeing that in other eastern markets for fats, oils, and greases and PFAD?

Okay. Thank you very much for your comments, Derek. Well, I think the decision in the United States regarding RBO is, of course, very positive for marketing this. If you recall, looking at the margin levels and the oversupply we have had in the U.S., this should start balancing out. So we can, of course, not say, you know, how close to balance, you know, the U.S. market is at. That calculation is very difficult to make. But I think anyway we can see that the market is balancing. And, of course, the margins, if you look at the spot margins, they are moving in the right direction. And now that we have the marketing turnaround behind us, we should be good to go and then get that volume out. In terms of your question about optimizing volume, so following the loss of the BTC, so our Singapore volume has been going to Europe to a large degree, and that is the current status of affairs. So we've been very clear that as we've committed so much capital to this business, We need to now get the return, so we will, of course, be optimizing globally our volume, especially out of Singapore, depending on how, you know, the market levels vary. So it's a large market, but we'll just have to see, you know, how this all evolves. But as I said, we're very, very pleased with the decisions taken by the current administration. Then regarding your question about feedstock prices, so it was evident that when the RVO was announced in the U.S. or maybe a bit before that, we saw soybean prices, soybean oil prices go up. We then saw animal fat prices in Australia move upward. They were very actually, I recall mentioning in one of the calls that that the ANZ animal fat prices were actually fairly low. So that has now corrected itself quite rapidly. And so they're not anymore at the low levels they were just some months ago. So that clearly is a bit of a signal that, you know, there's increasing demand coming out of the United States, which is then impacting animal fat demand in some parts of the western part of the Pacific. Regarding Yuko, fairly stable European market has been overall quite, you know, I think, you know, subdued, I don't know if subdued is the word, but, you know, fairly stable. And as you know, we also have now sourcing from Brazil for animal fat. So we have now multiple options on how we can play. Maybe one important thing is still coming back to European policy is that in some European countries, animal fat has not been, you know, accepted. And I know some of the regulation seems to be going in that direction that maybe even animal fat could be to some degree approved or accepted. So if that happens, you know, that would be net positive and give us more tools to play, you know, as we optimize our own production. Overall, I think we're well positioned, if I may say that way.

Thanks, and great update.

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

Yeah, hi, guys, and thank you very much. Two questions. The first one is on the renewable fuel margin. I know you've put up a chart that kind of implies that margins at the end of one Q were close to $1,300 a ton. Is there anything you can talk about what you've seen in April? Have the margins been higher, lower, broadly in line, anything you kind of mentioned there? And then I guess the next question is a strategic question. The balance sheet is de-gearing. It's dropped from 40%, roughly 40%, in 3D25, down to 32% today. If these current margins persist, clearly the balance sheet is going to deleverage even further. Do you have an optimal balance sheet level that you think about or work towards? And if you reach that, What are your priorities at that point? Is it capex? Is it capital allocation to shareholders? Is it inorganic acquisition and growth? Could you just kind of talk about your early thoughts on capital allocation? Thank you.

So maybe, Eva, you take a crack at the first one. I'll start with the second, and then you can fill in the gaps, so to speak.

Yeah, so, Paul, so we've seen a healthy renewable fuels market also in April. And, of course, it's supported by the gas oil prices that are a result of the conflict ongoing. But that's kind of has been a, in that sense, healthy start for the quarter. And then to the balance sheet.

Yeah, so... Of course, we're very pleased with the good cash flow. We, of course, needed a lot of money for Rotterdam, but still the cash flow is good. My own personal point of view, and I think Eva shares it, is that we are very much in the deleveraging category or deleveraging camp. I personally believe that if a business is this volatile in terms of earnings profile, you know, the balance sheet should be fairly robust. And so if you ask me about priorities, you know, where to use this money, I would very much vote for deleveraging. Going then forward a longer term, your question about where are we going to use, you know, incremental funds, you know, if and when they arrive, and hopefully, of course, they will come, but let's see. We now have Rotterdam as a major investment. We need to get that up and running. We're, of course, looking through our whole system if there are any more de-bottlenecking opportunities, and hopefully there will be in the coming years. That, of course, will require some capital, but obviously less than a greenfield. And then what happens after Rotterdam, I think that is a very much open question. At Neste, you know, that is not a question we're spending, you know, the team Neste is spending much time on. I think about it, and Eva as well, but I think our focus is now on getting everything we have out of our existing system getting Rotterdam 2 up and running, and then we'll just have to see what the world looks like and then, you know, what has been the trajectory of travel as we head into the 30s. But I think we have good capacity now. Let's work with what we have and make the best out of that first and try to get our returns up, you know, to the levels, you know, we want them to be. How's that?

Yeah, I fully agree and I think obviously it's an exciting time to be in the energy space and we definitely see growth opportunities but the time is perhaps not quite yet and hence it's really building on our capabilities then to take on those opportunities.

The next question comes from Arjun Baletsky from SEB. Please go ahead.

Yes, good afternoon, and thank you for taking my questions. I have two to be asked. So the first one is relating to renewable sales margin, and it indeed jumped almost 400 USD per ton compared to fourth quarter of this year. Could you maybe talk about... the magnitude of impact coming from renewal of term contracts and what you highlighted was high gas oil prices and maybe what comes to pretty low utilization rate in the quarter, so did it have adverse impact on the margin? And the second question what I had was related to regulation, and you did mention implementation in Germany, so we are close to the finish line, so to speak, Maybe you can remind us, so do you still see that volume impact for this year could be 1.5 million tons or something more when it comes to Germany and the smaller market where registry has been approved is Netherlands. So what is the impact from regulatory changes on that one? Thank you.

Maybe you take the first one, I'll talk on the second.

Sure. Yeah, so the term contract impact is the one I would highlight. Like we indicated in February, I believe we talked about a significant step change in them. You are right, though, to point out that obviously with the lower production, we had higher production costs in the quarter, and that's kind of had a negative impact on the on the margin as well. I'd say the sort of gas oil impact came, it was pretty much the last weeks of the quarter, so yes, obviously an impact, but I think a bigger impact than for Q2.

Regarding your question about the volume increase, our own calculations are indicating that in the 26, 27 window, we're talking between one and a half to two million. we're not able to more accurately at this stage model exactly what year and what volume. But I think the important point here is the direction of travel. We basically, given the volume we have, we can sell that, the market is there. I think the only thing maybe when I just mentioned here is that if fuel prices remain very high, or even if they were to rise, there will be some amount of demand elasticity, especially on the B2C side. And we have seen I know here in the Nordics in our domestic markets, some, you know, pullback in end consumer fuel consumption, you know, maybe less, let's say 6%, 7%, but it's still very early days. It's such a short amount of data from about, you know, four weeks or so, so you can't really draw bigger conclusions. But, of course, if fuel is very high on the B2C side, you will see probably some demand decline. How much would that would then impact, you know, R&D? cannot say. But overall I think the key message when you model is the direction of travel on demand looks to be quite favorable for Neste now.

And Artem on the Netherlands so I'd say that Germany is really the big one moving the needle for the other countries whilst of course everything is important as it accumulates but we're talking about 1-200 kilotons and the Netherlands would be in that camp.

Okay, this is very clear. Thank you.

The next question comes from Saseekans Chilikaru from Jefferies. Please go ahead.

Hi. Thanks for taking my question. First, I wanted to get, again, a little bit of clarity, I suppose, on the current renewable product sales margins. Of course, we've seen a very strong start to the quarter, European and U.S. renewable diesel prices, T4 RIN prices, and fossil diesel prices are all at pretty much three-year highs, and you've referenced renewable diesel gross margins of around $1,200 per ton. All these factors kind of suggest that the current sales margin is also similar, if not more, than these gross margin levels are. I was just wondering if you thought this was a fair interpretation. You did mention healthy margins, but I was just wondering if this was a fair interpretation, or are there any other factors that we should be considering that could materially impact realized margins? The second one was for the oil products. There is, of course, this big divergence in product tracks between metal distillates and gasoline and fuel oil. Your message on Nestle being a metal distillate gate company is pretty clear. I was just wondering how much flexibility do you have to optimize your refining system further towards higher metal distillate deals? What operational or perhaps configurational levers can you use to maximize metal distillate production and how much more can you add?

Yes. I think you had a sort of good recap on the items impacting the sales margin as such. So nothing really much to add on that. Then on the OP side, so Rest assured, we are very much maximizing everything we can on the middle distillates because of the situation that the world is in. I don't see much more flex in a way we are approaching that situation. and that will probably give us a bit more additional opportunities if we're still in the middle of this conflict, obviously hopefully not, but of course the price, the product market might be tight still for even towards the end of the year, so then having brand new sort of components in the system, but right now we're definitely sort of maxing everything out.

Yeah, I said so. We're so close to end of run on the catalyst that there isn't really much, you know, there isn't any wiggle room, so to speak. But when we have new catalysts, you know, set up in the reactors, we will then look at the table and, you know, options and then produce accordingly, looking to maximize margins.

Very clear. Thank you.

The next question comes from Kate Ossolibin from Citi. Please go ahead. Hello.

Thanks for taking the question. So following up on your answer to Paul's question, with the backdrop of renewable fuels margins back at high seen in early 2023, what renewable products margin could you justify sanctioning new investment? What sort of conditions are you looking for to sanction new growth? And anything you had on hurdle rates and geographies where you would consider adding capacity would be helpful. Thank you.

Yeah, thank you, Kate. A big question, but it's much too early to discuss that. Really, I think, you know, for me, at Neste at the moment, it is really critical we get Rotterdam 2 up and running and we start earning a return for that investment. Don't forget, we had initially planned for 1.9 billion. We're now at two and a half. It's a year delay. So, you know, we have some work to do to get the returns back on that. And then we need to get the deleveraging job done. There's also the question of how do we think when we look at the 30s, you know, what type of technology do we really want to employ? We've mentioned that we have the work on Ligno. You know, how will that progress? Is that one sort of route? Another is to route, you know, with the current feedstocks that we use. a waste of residues, we have some key technology choices we will also need to make. And then what options do we still have with our existing facilities to even further de-bottleneck. So I would err on the side of just saying that Rotterdam, let's get the evidence that Rotterdam is generating the cash. Let's look at any de-bottlenecking opportunities within what we have. and then, you know, make smart decisions regarding, you know, where, when, and how we then invest. But far too early to discuss that. We have other priorities for the time being.

And, of course, now really in the midst of this Middle East conflict, I think it will be very interesting to see kind of how energy policy in Europe comes out of this. This is now the second big shock to the system in a matter of a few years, and obviously sort of that we'll need to base our research. our thoughts also on what happens around us. Clearly, for us as a company, it's important that we are returning attractive rates for our shareholders, that we are a competitive investment for the investors globally.

Maybe one more thing, which we need to We need to get more better clarity on SOF mandate for 2030. So the current 6%, I mean, we understand that the European Commission is very much sticking to that, but we need to get a bit more closer to 2030 to actually see, you know, how much of the demand as we head into 2030 and into 40 will be sort of skewed into RD, how much of SOF. It's also going to be interesting to see what happens to Asian demand for these products after the Iran crisis, because if you look at Asia, they've been severely hit, probably more than anyone, from this Iran crisis. So will we start seeing some pivot into renewables? For example, Australia, big market, not using renewables at all. So are we going to see these countries rethink their energy policy? post-Iran conflict. Of course, we're going to be advocating that renewables is the way to go, but we need to get more visibility on that before we could make any decisions. But as I said, Rotterdam and debacle-making, priority number one.

Thank you. Just a follow-up. You know your comments about whether the Iran situation could positively affect the adoption of renewable fuels. How do you think about the interaction between renewable fuel adoption and affordability for RD and SAS given today's pricing mechanics, which are largely referenced to a fossil diesel crack plus a green premium? Given your feedstock inputs, animal fats are not directly linked to crude oil prices. Is there any scope to evolve pricing structures so they're less mechanically tied to rising oil prices?

I think this is a complex question regarding price structures, and I really don't want to go into that at this stage. What I want to say, though, is regarding SOF, you know, one could make the statement, well, you know, SOF is expensive. You know, the airlines can't afford it. You know, if, you know, current high jet fuel prices are painful for airlines, how could they pay for SOF? I think we're going to – I don't believe that is – you know, strong argument. I think there are other drivers for decarbonization beyond just looking at costs. And the reality is that if we look at, for example, the B2B segment in software, we have also, you know, cargo customers who want to reduce their scope three emissions. So clearly you can see that, you know, the market is absorbing the per ton or per parcel costs you know, relatively easy. And if you translate then the cost of SAF, you know, into the airline ticket, ultimately it is not a – on the airline ticket basis, it's not that huge a number. So I think we're going – in the airline business, we're going through a transition. You know, SAF will be adopted. It takes its time. The market will grow into the – SAF will become more common, but it will take its own time. And some companies will be faster to adopt others. But, yeah, so maybe that's all I have to say. Thank you.

Thank you, Rose. The next question comes from Alice Winograd from Morgan Stanley. Please go ahead.

Hi, thank you. I wanted to ask about biofuel volumes. Please, so from the release it seems like you sold essentially all of the volumes you produced in one queue. even though for memory inventory levels were reported to be quite low at the start of the year. So I wanted to ask, to what degree are you comfortable with current inventory levels and whether we should expect some production to be saved for inventory in the next couple of quarters, looking at, of course, the heavy maintenance season at the end of the year? And also, still on that, you mentioned a negative surprise with some issue in Singapore. but you have kept guidance essentially unchanged. So I'm wondering if this has any marginal impact on your full-year expectations or if this was offset by the assets running harder. Thank you.

Sure. So, Alice, indeed, your memory is correct that we did start the year with lower-than-planned inventories. And I think, obviously, in this type of a very strong market, it's – It's financially sort of not a very easy thing. easy call to start replenishing inventories when demand is very strong. So I think we'll sort of – we would plan to maybe sort of produce a bit more to inventory, but I think the demand now in the second quarter is also something that will remain strong, and then that will kind of – I think we – we'll manage on that. Obviously, we want to avoid any additional issues such as the one in Singapore, but other than that, I think we'll just need to manage manage our ship with tighter inventories. And it takes a lot more from our sales and operational planning teams and some sort of adds, of course, some logistical complexity. But I don't see in this environment a real opportunity to talk about bigger inventories.

I would say on the – on the volume side, so we are stretching every single production line we have in renewables, looking for any cost, any way we could increase feed rates. We made some good progress here last year and this year. They're not huge improvements, but still, you know, the focus is every single ton we can get out, you know, safely, we try to do.

Great, thank you, and congratulations on the results.

Thank you.

Thank you. The next question comes from Nash Queen from Barclays. Please go ahead.

Hey, good afternoon, everyone. Thank you for taking my questions. I have two, please. The first one is on your inventory impact. I wonder if you could isolate and talk about the positive inventory impact on both of your RP and OP margins this quarter, please. And then the second question is, one of your major energy peers is selling their big 800,000-ton biorefineries near Rotterdam. I wonder how Nasdaq thinks about this as an option. And on the food side, if another company bought it, how will you deal with competition not only on product sales but also on supply chain? Thank you.

Well, if I take the first one, Heikki. So, Nash, when it comes to sort of inventory evaluation gains or losses, so in OP and RP, we have the comparable EBTA, which kind of cleans out that impact. So that would be typically the difference between comparable EBTA and then the IFRS EBTA, and really in a way to provide you with a clean number. Now, in marketing and services, where I mentioned it, the logic is slightly different because, of course, the sort of inventory cycle is very short. We talk about one, two weeks, and it's part of the sort of how we run the business. So there the sort of gains are included in the comparable EVTA. But, again, if it was purely a sort of evaluation at the end of the quarter, it's also significant would be comped out. So hopefully that kind of answers your question.

Regarding your second question, I'm not sure exactly if I heard it verbatim correctly, but when you referred to competition, I would just say that from the standpoint of Neste, this is a growing market. Neste, of course, will not be able to supply it and so on. So it's good that there are other companies investing. I think it then gives confidence to the regulators also to increase the mandates even further. And it's good to have, you know, European supply and not sort of, you know, you know, we've talked about the level playing field. I won't go into that discussion here today, but I think it's good that we have European-based producers also. So, yeah, that's really all I have to say about that particular case.

Thank you. Sorry, Eva, can I just follow up on your first question, please? Because I'm looking at slide 15 in the presentation where you were talking about pre-conflict price crude that contributed to the high OP margin. So that's why I'm asking whether you have any inventory impact within the margin rather than the EBITDA. Okay. I hope that makes sense, but I just want to clarify on that.

Sure, sure. Okay, yeah, so... Yeah, though I was thinking of sort of the inventory valuation part. But indeed, from that sense, like I tried to explain on that slide, so just the sort of lead time from procurement to production, there is obviously one, and hence the production runs we were running in March were using crude that came into the system at a lower price and then, in that sense, gave us a high price. higher margin when the product prices then very swiftly jumped and that you see in the refining margin. But that obviously now, you know, as I mentioned, has already balanced out because the cycle is relatively short, less than two months. So, yeah.

Thank you.

Thanks.

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

Hi, thanks for your presentation. I have two questions left. So firstly, depreciation was down from the Q4 level in RP. So is this level a good indicator for the rest of the year? And then secondly, regarding OP's margin, did you mention that you expect a lower refining margin in Q2 due to higher crude costs?

All right, maybe I'll take both of them. So, yes, Iris, you may remember that in the performance improvement program, we've had one specific area looking at lease costs. And as we are bringing them down, that has a sort of positive impact on depreciation in the sense that kind of – lowers them as well. So I think the Q4 is a good proxy. I think you would have seen some movement between the quarters already earlier, but yes, I think we're sort of, we're still in a few areas. I think we can sort of do some work on the leases, but not anything significant anymore. And then on the OP, so indeed, when I was referring to this total refining margin of 23, which was boosted by by the exceptional circumstances in March. So we would guide you for a lower total refining margin in Q2 than the 23.

Okay. And a follow-up question on obvious margin or crude costs. So do you see somewhat lower crude costs currently versus, for example, in March?

I would say they change on a daily basis, so you can't really have – there's no real trend, and I think we're all – we can all read from X what happens this hour and the next hour. So I wouldn't be able to draw any such conclusions other than that they're all over the place, in lack of a better expression. Okay. Thank you very much.

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

Hi, and thanks for taking my questions. Just to follow up quickly on the OP previous question, there's obviously a lot of sort of moving parts to that, and it's been very volatile. Is it the case that because of the premiums you're going to be paying for crude now that the the sort of realized margin is going to be different to the sort of indicator margin that you might see? Is that what's happening? And then could you give us any indication as to where sort of the realized margin has been running in April for OP?

Well, I think, Henry, the challenge is that there is a pretty big difference between a paper market and the physical market in a conflict like this. As I said, this is a sort of extraordinary shock on the system. So I think the sort of – obviously, we play in the physical market, so that may sort of make it more complicated from your point of view if you're purely looking at the – kind of on the screen, so I would just say that obviously our view is based on what the real cost of physical delivery is. And then on April, we wouldn't sort of provide that exact guidance. I think I've tried to be very clear enough to help you out on the Q2 without even, of course, ourselves knowing what's going to happen remainder of the quarter, but just based on the input that we have now in the system. That's our sort of what we kind of wanted to kind of give you a bit more guidance than typically because of appreciating that in these circumstances, it's not an easy job that you have to predict our margins.

Okay, that's great. And then just one quick follow-up, just on hedging within renewable products. Was there any impact on hedging for Q1 in terms of the margin, et cetera? And then do you see anything – do you have any sort of hedges in place for Q2 as we sit here today? Okay.

Sure. So, in RP, when we talk about hedging, you could perhaps call it also margin management, but we typically are active in when it comes to the term sales, because that's obviously where we have an open position, if you may. We're not able to buy feedstock at the sort of same length as then our commitments on the term sales, and it may be that Of course, then the shorter your term contracts are, then they sort of start to be better in line. But certainly in the beginning of the year, we would look into hedging to reduce our exposure, then that's the sort of feedstock goes in a very different direction. We're not sort of – I wouldn't say it's a – because of the proxies we need to use. We're not sort of very big in hedging in the sense that obviously you have to be very careful when you're using proxies. But in a market like this, I think it's not surprising that the hedges will be more negative because, of course, the sort of March developments were something that one wouldn't expect. But it wasn't a sort of big impact, but nevertheless there was a negative impact from hedging in RP, but that is kind of something that we would consider a cost of doing the business, and as I said, it's more sort of a margin management approach that we think that this has proven served us pretty well.

Okay. Okay. Thank you.

The next question comes from Yulia Bocharnikova from Goldman Sachs. Please go ahead.

Hi, everyone. Thank you for taking my questions. I have a couple, please. The first thing, just to clarify on Q2 volumes, in renewable products, you mentioned that you would optimize production and probably sell everything without problems. building inventory to the same extent as in previous years. I'm just wondering if we should assume pickup in production and sales volumes in Q2 versus Q1, or this is probably going to be more flattish and then we will see pickup in second half of the year. And then on refining volumes as well, given there is a poor return around in Q3, how should we think about refining wholesale volumes versus production? Is there going to be any inventory built ahead of maintenance, or you will just sell everything because there is a very, very strong margin? Thank you.

Sure. So in Q2, obviously, we have the benefit of we don't have any planned turnarounds, so that we expect to support production volumes and sales volumes. Now, unfortunately, as Heikki explained, we have lost one month on one line in Singapore now here in April. So that, of course, eats up some of it. But still, I think the overall is good. positive and then we sort of decide for Q3 it's a bit early to say now when the conflict is as said moving by the hour so obviously we would typically sort of look to build some inventory before we go in RP into the turnaround season and balancing those discussions in the coming months but my commentary was really more for now for Q2 and where we are now that we obviously want to want to support our customers who have a need for the product.

Thank you. The next question comes from Madi Karola from OPP. Please go ahead.

Hi. Good afternoon on my behalf as well. First question actually regarding the maintenance taking place in Singapore and Martinez. if you could a little bit more open up the increased production costs or what kind of share margin impact we are speaking of. And then the second one is actually regarding your term contracts. So if I'm calculating the buyer premiums you've been logging in during the March, sorry, November, December timeline. So I think you've been giving some of the discount compared to the spot levels. Is that the correct to be assumed?

Well, I don't think we sort of want to go to that level of detail that provide the production cost as such. But as I said, it's, of course, a fair point that when you have production issues and, of course, just the sort of fact that that we had sort of big turnarounds and ramping up and all that, that of course eats up on the margins. So I think that's the right view to have, but I wouldn't go into more detail. And then to your comment on possible discounts on term sales, I would say that typically in order for the term sale to be a win-win equation, it would not be the sort of based on a spot price. But, of course, it has to be a commercial decision that makes sense for both parties that we do end up terming. And as you remember, we did end up terming more than we thought, so we thought that we saw the sort of – commercial value in turning slightly more without them sort of commenting more specifically on the market prices. We have said earlier as well that of course the market prices sometimes can be a bit misleading. It's a very thin markets and not fully transparent. So obviously we sometimes have the benefit of being a big producer of having a pretty good sense and perhaps a better sense on the real value.

That's good. Then maybe one follow-up question regarding regulatory environment. So, Heikki, what are the top three things your PA team is right now working kind of with most right now, or what are the key things that you're focusing on?

Right. Well, the agenda is very broad. I think, of course, The most important thing is now to make sure Red 3 gets implemented across Europe. So as the German decision gets hopefully now finalized, there's still some open areas. Another interesting area for us, I think, longer term is the whole question of Asia, you know, starting all the way from Japan to Australia. I think if you think about how many people live there and how much, you know, transportation there is, One, of course, would like to see the mandate start to move also there. I think these are really the most important things. We have these trade questions that we've discussed in the past, but maybe in today's situation, given the crisis, these trade matters are of lesser importance, although I'm sure they will come back here once the Iran crisis is over. So those are the three things.

Maybe one more question. I just saw a headline that there is a strike in Martinez building place. So do you have any kind of estimate at this stage how long it's going to last and any volume impacts compared to the Martinez sales volumes?

Yeah, the turnaround went according to plan in Q1 and production is up and running. There are negotiations between our joint venture partner who is the operating partner and the U.S. Steelworkers Union, U.S.W., and those conversations are going well in a constructive manner, and my understanding is that at the moment the refinery is operating, you know, pretty close to normal.

Yeah, production is running there as we speak.

All right, thank you. Thank you very much.

The next question comes from Christopher Coupland from BOFA. Please go ahead.

Yeah, thank you very much. I've only got one question left, and maybe for you, Eva, to sort of talk to us about U.S. tax credits. You were calling out quite a significant number in Q4, which seems to have dropped. Is that a quarter on quarter headwind that I think may be around 50 million euros that's hidden in your sales margin? Now, when I look at your variation charts, which slide is it on? for renewable products on page 14, that 400 number is that inclusive of this time around in Q1 receiving less help from these CFPC credits. So, just a clarification, please. Thank you.

Sure. Yeah, so I was just checking the release that indeed we had a lot less credits because of the turnaround in Martinez. So we state in the release that we booked 13,000,000, one, three of credits. And yes, that is then... I wouldn't say hidden in that, but it's such a small number that doesn't really move it. But now, of course, you can expect that number to grow in line with a more normalized production.

Okay. Thank you very much.

The next question comes from Matt Lofting from JPM. Please go ahead.

Hi, thanks for taking the question. I wanted to just ask you about freight costs. They've obviously gone up a lot on a headline basis in recent weeks. Neste procures feedstock on a pretty extensive basis in the renewables business in particular. So could you just talk about what you're seeing from that perspective and how it affects and feeds into freight? the realized margins including the capture of that in the margin chart that he showed I think on slide 11. Thank you.

I think overall this pertains primarily now given our situation to volume coming out of Asia for seed stock and final product into Europe. Everything is going through, you know, around Africa. So you have the extra, you know, delivery time and freight costs have risen somewhat. But I don't think we have yet any material number that we would flag as being a concern.

Yeah. Yeah, I think it's obviously one of those indirect impacts of this conflict that may matter, but I think that's more relevant for those trading in that area. For other security reasons, a lot of our cargo has been, as Heikki said, going around Africa already well before this, so in that sense, no significant change. But, yes, as we see price pressure in this area, yes, I think that's, of course, the reality in one of the indirect areas where this conflict, I think, is causing inflationary pressure for many of us.

I would, though, say that in terms of our performance improvement program, and I think we've commented on this, I think we've made very good progress across the host. whole sort of expenditure base also looking at logistics costs in terms of better consolidation of freight and better negotiating of terms with freight suppliers. So I think we've been able to buffer this through our own internal measures, become much better buyers of freight. So just as a mention of that.

Super. Thank you.

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

So thank you very much. That's a very quick summary after this long and colorful and good discussion. So as I said, I think both Eva and I are pleased that we were able to manage our way through a fairly volatile quarter, and of course manifest with very, very good results. Our focus and my focus and my colleagues in the line organization, our focus really is now on operational reliability. I think everybody at Neste recognizes that this is a technical industry and when the demand is there, we need to produce. So that message is very well understood by everybody at Neste and we're working very hard to get production where it needs to be. The performance improvement program is going very well. We have exceeded the target we set for two years. I'm very happy with that. You saw in the charts We have a bigger number. We still see more opportunity across Neste, and we're working on that, and you will then get updated reports as we go through the year. So still more to come. And then, as I said, the decisions on regulations from the United States to now hopefully in the next few weeks in Germany and in general in Europe, I think it's also providing a longer-term tailwind for our business in renewable diesel. And, of course, I mentioned the role of Asia. Let's see what the Iran conflict, once we're over, whether energy resilience, energy security, will then give an even further boost. But we'll have to just wait and see what comes our way. With those words, thank you very much for your attention. Eva and I will then return back to you after the end of the second quarter. Have a very good day. Thank you.