Neste Oyj (NESTE) Earnings Call Transcript & Summary

You were muted since the beginning, sorry, Martti.

Was I muted from the whole beginning? Okay. I'll take it backwards, sorry about this. So thank you, Anssi, and good afternoon also on my behalf. And what I mentioned in the beginning that we will have some questions -- time for questions in the end. And I also noted that after that the market outlook in Euribor products have further weakened during the second quarter, we revised downwards our full year 2024 comparable sales margin guidance for Renewable Products on May 14. And the remains -- guidance remains very important to note. Our revised full year comparable sales margin guidance for Renewable Products is that the full year 2024 average sales margin expected to be in the range of USD 480 to USD 650 per ton. And the previous full year guidance was that we will be in the range of $600 to $800 per ton. Also mentioned that the rest of the guidance for Renewable Products as well as the guidance for oil products remained unchanged. So looking at this stage into the second quarter, like I said, the market in renewables has been further weakening compared to the first quarter. From the demand perspective, it is yet positive that the next year 2025, in the European renewables market, we should be clearly turning back to growth. And I want to highlight that this has been more recently also highlighted by Argus. And besides the supply and demand balance outlook, we have often during this quarter, reviewed Neste's competitive advantages in the renewables business, which we believe to be unique and sustainable. Another discussion point has been our belief on the ability of Neste to be able to demonstrate clearly higher margins versus key competition also in a weak operating environment. Also a reminder still that despite the new production capacity, there's a lot of that now in the renewables market, particularly in the U.S., the demand for renewables is expected to grow and continue to grow strongly going forward. At our Analyst Day on March 12, we projected that by 2030, we expect the supply potential to grow by roughly 11% compound annual growth rate, taking the currently known production projects into account, whereas demand was projected to grow even by about 20% compound annual growth rate. Well, now looking back short term into this year. Our full focus is on operative execution as well as inefficiency improvement. Operationally, I'd like to highlight that from a production point of view, our second quarter has proceeded according to plan so far. I will next go through the development of some of our main market parameters during the second quarter in Renewable Products. In Renewable Products, the RIN D4 price to start with has continued to stay at a low level, reaching a low point so far in the second quarter in the end of April at USD 0.42 per gallon. And on average, the RIN D4 has averaged at around USD 0.50 a gallon during the quarter so far. On the other hand, the LCFS credit price has started the second quarter at the level of USD 67 per ton, but thereafter decreased even to a low point of USD 41.5 per ton in mid-May, after which it has continued on a level of approximately USD 45 per ton. And both of these RIN D4 and the LCFS credit, they are rather low levels. Important to also note that the Northwest European diesel price has decreased quite significantly from the second quarter peak of approximately USD 880 per ton. That was in mid-April to a low point of approximately USD 716 per ton on the 5th of June. There is a decrease of roughly 20%. However, on a positive note, as a reason the Northwest European diesel has again appreciated somewhat. I think yesterday's notification was USD 794 per ton, but its impact for the second quarter will still be limited. Hopefully, that trend could continue into the third quarter, of course. Also, the U.S. West Coast diesel price curve decreased since April until mid-May, after which has been up and down, but I would say the trend wise somewhat upwards lately. And important to note that the diesel price overall has a least impact on our renewables sales margin. Also, European spot prices, which can be followed, for example, from Argus and other external data providers have been trending downwards since our first quarter earnings call. As mentioned earlier, it's good to note here that Neste has turned up our -- approximately 80% of our renewable diesel sales for the full year of 2024. During the year, we have seen this important some of the first U.S. biodiesel producers informing on closures of production or in the renewable diesel space impact from the lower margin environment, leading to lower production rates. There have also been quite many comments even on financial losses and our financial stress at least in the segment already being visible. Again, good to note here that we believe Neste to possess clear competitive advantages against an average producer or key competition in the sector. After the feedstock side, the prices and spreads have really not provided support lately. Both animal fat and used cooking oil spreads compared to veg oil have stayed on a relatively high level during the second quarter. And also in absolute terms, both AF, animal fat and UCO have not followed the declining diesel price level, but has still been quite expensive. UCO in the EU and U.S. are currently, however, more expensive than, for instance, Chinese UCO, there's a difference of roughly -- or at least USD 100, if you just look at today. And this is an example of how Neste's global feedstock sourcing continues, we believe, to be a source of competitive advantage as there are also opportunities in a difficult market. As to our product mix in Renewable Products, it's good to know that SAF volumes are expected to grow quarter-by-quarter, but mostly in the second half of the year, very important note here. Also, the Martinez joint venture sales margin continues to depress our overall margin at least before we have extended the ramp up and improve profitability at the site. Well, in the midst of the weak renewable prices, our renewable sales volumes have also been rather slow in the quarter so far. However, it's good to note that the quarter's last month's sales activity, which is typically always the highest for the quarter, but of course, naturally not yet our knowledge. As to production, I already commented on it already, but continuing that our Singapore new line continues to be running well, very stable at approximately 75%, as communicated earlier and also our SAF production has been stable. At the Martinez facility, we continue to operate at somewhat below 50% capacity in the short term. However, we could expect that by about mid-third quarter, we should be operating near 75% utilization. And furthermore, we continue to align with the regulator to achieve mutual agreed upon path forward, and we target Martinez to ramp up to full capacity by year-end. In Oil Products, our large scale turnover at Porvoo was conducted during the second quarter as planned, very important. And the overall guidance is as communicated in our first quarter interim report. In the Marketing and Services segment, our business has proceeded largely as expected during the quarter. And like I said earlier, the sales volumes and unit margins are expected to follow the previous year's seasonality pattern. Next and before Q&A, I'd like to still shortly summarize some of the key activities and announcements we have made during the second quarter so far. They can also be found in our quarterly IR newsletter, which you can find at our website. Going back into the second quarter on April 29, Neste announced that its Board of Directors and Matti Lehmus, our President and CEO, have reached a mutual agreement that Matti will leave his position as the President and CEO. In order to secure an orderly transition to the new CEO, Lehmus will continue as CEO until his successor starts. On May 2, Neste announced that its Board of Directors had appointed Mr. Heikki Malinen, as the new President and CEO of Neste as of 2nd November 2024 at the latest. Malinen joined Neste from Outokumpu Corporation, where he has held the position of President and CEO since 2020. On June 13, we announced also that Heikki Malinen has announced his resignation from the Board of Directors as of Neste, sorry, on the 13th of June. On May 8, still Neste announced that Katja Wodjereck, our Executive Vice President for Renewable Products Business Unit will step down from her position and leave the company to pursue other opportunities. Carl Nyberg, Executive Vice President, Renewables Supply Chain and Sustainability took thereafter the interim lead also in the Renewables Products business in addition to his existing responsibilities. Otherwise, you refer to a large number of Neste announcements during the second quarter, for example, relating to our new customer as well as partnership contracts and our recent regulatory news. As to our IR meeting activity, during the second quarter, we completed roadshows and attended various conferences in London, Frankfurt as well as New York and attended conferences both on site and virtually. And during the quarter, we also hosted several investor meetings here in Helsinki as well as Espoo. And with this, I would like to thank you for your attention, and we will now have time for a few questions. So any questions, so please.

I think we have Sasi on the line.

I had a few regarding the 2024 comparable sales margin guidance. I wanted to understand your perspective on the timing of the revision. Just wanted to see what -- whether these factors are purely macro-driven and what's incorporated within this guidance range? How can we get to the top end of the range and the bottom of the range? If some -- if you could provide some guidance on that. And finally, just related to that, given the macro movements since the 14th of May, how has the midpoint of this guidance range? Is that still fairly in line with what you had expected when you gave the guidance the movements in 2Q?

Yes. Well, we have a full year guidance, as you all know, and it's an average comparable sales margin for the full year, and we reiterate this. At the time when it was provided at the 14th of May, we saw already such a clear drop in some of the market parameters that it was required for us to do that. I already -- I just went through some of the market parameters that had continued on a low level in the end of May or beginning of June, with some pick up, for instance, in the diesel price as so more recently towards the end of June. Otherwise, we are not commenting either on an individual quarter or where we are with the range. But like I commented that overall, it's -- we have clearly -- it's been a clearly weakening market overall in the second quarter compared to the first quarter.

If I can just add 1 more question. I was just wondering where we are with the start-up of the SAF optionality project in Rotterdam?

On that side, the question is about our renewable jet project in Rotterdam. We are currently looking hopefully to start production during the second -- during the third quarter. There is a little bit of delay. We perhaps originally were looking at the mid of the summer. Now it's say mid-third quarter. We will inform when we know better if there are further details.

Then I think we have Nash from Barclays. Please go ahead.

Yes. I have a few as well. So the first 1 is on SAF. It's interesting, Martti, you mentioned about the SAF sale being pushed back towards the end of the year. I understand you have a large SAF sales volume guidance between 500,000 ton to 1 million ton. I just want to understand if you can give a bit more clarity on where are we going to end up for SAF sale for this year? And a follow-up on this is of your SAF sales for 2024 and 2025, what is the latest percentage for longer-term SAF contracts with your customer? Then my second question is, what's your planned CapEx for 2024 and 2025 because I understand you are spending quite a bit on the Rotterdam expansion. And as a result, do you see you still want to maintain your dividend policy?

Thank you very much. So first, on the SAF sales. So it's an important element for us this year, and we have the guidance -- it's quite a wide range between 500 kilotons to 1 million tons. During the quarter in our communication, we have also discussed frequently that because of the RD market weaker prices, there are very limited price quotations with very small volumes if you look at either the Argus database or Platts. But there has been some -- there has been definitely some impact also to the SAF prices, which I think is well communicated from ourselves and known by the analyst community. So it also relates a bit when it comes to -- we have said very clearly that we focus on the second half because the mandated demand should be supporting also the volume growth in the second half of the year. And currently, we have been -- hopefully, we don't know yet if this is a weak point of the market, but we have had a weak market parameters, particularly now in the second quarter. We haven't announced how much of -- I think you asked about SAF contracts and how much is contracted for next year. But of course, in our base case targets, we have a substantial increase in the volumes plan for next year. However, having said that, I think it's very important to note that from the start Neste has been telling that our business is based on the optionality. So we have constructed our main production line, so we can maneuver between the products. So whatever is -- and this provides a lot of -- also a source of competitive advantage. So we will be producing those products that we have the highest margin, of course, against our production and cost base. Regarding the dividend, no change in the dividend policy. So it stayed as a competitive and growing dividend over time.

Can I just ask let's assume your SAF nameplate capacity is 1.5 million pounds end of this year or beginning next year, out of this 1.5 million pounds, how many percentage of that is contracted out through longer term agreement with your customers?

We haven't provided, I'm sorry, Nash, that figure and important to note, of course, I think we've been going through that a lot that this year, the demand is what we are saying, it's based on voluntary demand as well as incentivized demand also in -- and next year, you have more of the -- next year, you have the mandates coming in. So we are in the -- very much in the process of creating also that demand with a longer-term perspective. That's what we've been a lot going through in our communication.

Then we have Pablo from Kepler. Please, Pablo, go ahead.

I would like to ask on Martinez. I think this is -- or at least I have the impression that it's probably not getting fixed. I think last year, when all this happened in December, we're having the impression that we were supposed to go mid this year already. We provide capacity ramping up. I heard the comments that you were mentioning now mid-Q3, expecting 75% nameplate capacity, now by the end of the year, 100%. So just wanted to ask if you can provide a little bit more color what's the regulatory parameters that are required to happen in order to make the ramp-up because it's clearly already 6 months since the fire happened. And just to have a little bit more visibility on which are the drivers that need to happen in order to see that ramping up of the capacity. And secondly, on that is, I think I remember or I may be wrong, probably that you originally targeted to have some kind of the pretreatment facility at Martinez probably up and running at the end of this year when the initial investment was done. Is that timing still valid? Or with all this delay, all this is moving 2025. Can you clarify that as well, Martti?

Yes. Thank you for excellent questions. On the Martinez, of course, we are there as a joint venture, as you know, and our partner, MPC is actually handling -- been handling this regulatory issue how to get the permits approved. What I just went through with the target that's been aligned with our communication together with MPC. So hopefully, when we are reporting on the second quarter, we could possibly say something more. So we -- I don't have anything more precise to available. I think it's still a rather positive view. Maybe we are slightly delayed from the original. But as I mentioned, clearly targeting to be ramping up. Then you asked about the pretreatment unit, and that's, of course, highly important part of the operation. So once we had the unfortunate fire and we have not been running at the full capacity. Of course, we have been planning also with the, you could say, the feedstocks and the optimization, and it's been not at all in an optimum situation for that facility when it's been running. So the same goes for the PTU that importantly, we are looking really to have more advancements when we can get fully ramped up with the overall facility. As to the Martinez, otherwise of course, our target has been from the start that when efficiently fully ramped up. So it should be one of the lowest, you could say, CapEx per barrel facilities in the world, taking into account it's right combination of scale, location as well as logistics among others. But of course, it's still not a proven case. So we need to first ramp up, and that's really where we have our focus and then start optimizing as usual with the production and all the efficiencies.

Just catching up on your answer. So with that, shall we assume that, therefore, the, let's say, the beginning of the kickoff of the pretreatment in Martinez should go clearly for 2025 at the earliest, right?

No, we are -- it is in usage, but we have not been able to fully take advantages of optimization. So you could say that it's partly helping, but it's not really fully optimizing our sales yet at this stage. That might be the right way of putting it. Rather further opportunities on that side.

And I think next in line, we have Matthew Blair. Matt, please.

The first is, can you remind us where you stand on the D4 RIN hedges for Q2 versus Q1 and what that might look like heading into the third quarter? The second question, do you think it's fair to say that your RP comparable sales margin is lower today than the Q2 average. And then the final question is, do you have a view on when these changes to the California LCFS program might be implemented? Are you confident they will -- it will start up on January 1, 2025? Or is there a risk that, that will be pushed back again?

Thank you, Matthew. Excellent questions again. So on the D4 RIN hedges, we have a certain amount of hedges in place for the second quarter, but lower amount when compared to the first quarter. We have been communicating also that the market has been quite illiquid in terms of the ability to do a lot of hedging. And of course, we have come to low levels, so you need to also consider whether going forward, you need to hedge, but certainly some impact. So at this moment, I'm looking at a situation that probably there will be a lower hedging ratio in the third quarter than the second quarter. Your second question was on the RP comparable margin today lower than the second quarter. I don't think I fully understood that. Did you catch up with, Anssi?

Yes. I think, Matt, you mean that is it now currently at what level compared to the Q2 average. But if we just look at the external data providers like the Argus data, for example, in the U.S. and in Europe, we can see that the margins have been facing quite some pressure. As Martti mentioned, the diesel price has quite recently then started to increase, but not probably impacting Q2 that much.

Yes, exactly. And then the third question was the CARB program, I think there is -- now there is a hearing in November. When we -- we have positive hopes for that, but you never know. But I think it's -- the main case expectation is that there would be something positive coming forward with tougher targets, How? That would then impact the credit bank and the prices, it's really too early to call on the whole of the targets. But it's good to note that in the new target, it is currently proposed. There is also this accelerated mechanism how to automatically raise to higher targets when the lower targets are met. So overall, we think it's a positive momentum, but we need to wait still.

And then we have Chris from Bank of America.

Martti, I'm sure you're not going to call my question an excellent question, but I'll try it anyway. What can you tell us about management changes? I'm assuming you and Matti will be on the Q2 results call. And are there any other positions following Katja's departure that you are looking to fill reappoints or at least what we should expect in terms of the new team that's coming in with Heikki's arrival? Any color you can give.

Yes. Not too much color. Thanks for the try, Chris. And -- of course, from a company's point of view, it might be the sooner take it could start. So it's been said at the beginning of November at the latest with the current knowledge that I do have that it would be us together with Matti handling the second quarter call. That's all I can tell and definitely, I have no new news of other further changes in the management. So of course, we gradually are starting some preparations for the transition, which is sort of business as usual in a CEO change like this one.

And then we have Giacomo from Jefferies.

Two more questions. First is you talked about RIN hedges coming down quarter-on-quarter. What about -- do you have any other -- do you expect any other impact from other hedges in the quarter in any direction? Second question is on fixed cost. What do you expect to -- your fixed cost -- is it still valid for the guidance you gave us in 1Q in terms of direction for fixed costs in the second quarter?

Yes. Thanks for the question on the RIN D4 hedges. So, yes. And then overall, my expectation is pretty much -- we are doing, of course, a lot of utility hedges as well. So the overall impact to be rather neutral for the second quarter as I look. There are some elements, which are positive and some providing negative and overall quite neutral impact. On the fixed cost, we've been doing a lot of streamlining also with our renewed organizational structure. So I'm very hopeful that we're going to see also at the most keeping ourselves at same level and in many areas also a decline in fixed cost rate. Of course, we need to take into account as we have new areas of production like coming online, that binds fixed cost and our fixed cost structure is also a little bit changing for the fact that, for instance, we've been all the time expanding with our Mahoney platform in the U.S. and there we are -- we have drivers and trucks. So the whole structure of the cost structure is much more fixed cost heavy than it's in a capital intensive side. So these sort of elements also involved. And on the other hand, we mentioned that Martinez still with the repairs will incur us some extra fixed cost that year one-off. But overall, I'm very happy about the fixed cost trend if I look at it apple by apple.

If I can have a follow-up here. Just to be clear, so overall, you would still expect -- because of what -- all that what you said that you would still expect fixed costs to be up quarter-on-quarter?

Yes, let me know, actually, sorry about -- because we haven't been discussing so much of fixed costs. So let me just double-check what we said out there. What we've said on that side, sorry about that. Yes, we said a somewhat higher for -- in '24 compared to '23 due to the forward turnaround and the buildup of resources for the growth projects and under construction but it's expected to level out compared to '23 due to cost savings, efficiency measure. I think this pretty well said, as I mentioned. So where we look into areas compared to last year, like apple to apple, we can see clear decline. And then we have those couple of areas where we have increases related to our business, as I mentioned. And yes, that's the trend. So the overall trend is positive.

Okay. Then we have Jason from TD Cowen.

I wanted to ask on renewable product sales volumes for 2Q. Understanding Singapore is running at 75% of Martinez under 50%. Taking lows into account, should we expect volumes -- sales volumes to equal kind of that production output from the entire system accounting for the lower utilization out of those 2 sites? Or are there other considerations we should take into account?

Yes. I mean I mentioned earlier that sales volume has been a little bit low. Typically, it's like I mentioned, always in the quarter the last month is the most important. I think our volumes were at 849 in the first quarter. Yes, we should have some more of SAF, S-A-F, but not as much as maybe it's more leaning towards later part of the year. So we'll, of course, depend hugely on the last month's sales volumes, but I was a bit cautious in my earlier commentary on the sales volumes. As such, if I look for the overall guidance, there is nothing. So it's more like periodic. And we must remember that we are currently in a -- with weak prices. So there is always also some optimization that we are doing between the quarters.

Yes. And that maybe is a good segue to my other question. Do you expect to see inventory build in 2Q related to building SAF inventory for the second half of the year. And then as you mentioned, just optimizing margin for the entire year, building inventory for the second half of the year sales?

Thanks for mentioning that, Jason. That is in our plan, yes, yes. So there will be a buildup in the inventory, particularly in the Renewable Products side. And of course, during the quarter, we have seen inventory buildup like we are communicating on the Oil Products side because of the Porvoo major turnaround, but that we can start optimizing already towards the end of the second quarter. But overall, for renewable products, really the optimization is in the second half of the year more in -- with our targets. So sort of following what you just said there.

Thank you. Next up, we have Peter Low from Redburn.

Yes, there is another question on the comparable sales margin guidance, rate. You're sticking with the rates today, but clearly, it's an average for the year. And given the first quarter was above the bottom end of that rate, we have a good chance that would really be below bottom end in 2Q. Is that the right way to think about it? And is that how you've structured that, that we could be below or above in certain quarters? And really context of the question is that if I look at just the movements that you pointed to in diesel prices with LCFS credit [indiscernible] and apply those delta Q-on-Q, I would expect you to be below the EUR 480 million in the second quarter. Am I thinking about that the right way?

Yes. Again, I mean we have said earlier that when we have a full year average guidance, it could mean that at any single quarter, we could be up or below. So it's an average for the full year. So I think that's as much as I can comment to your overall question. Anssi, you want to add anything?

Yes, I think when we look at the market parameters as we've been discussing what Martti mentioned in the beginning, I think those have, of course, moved since Q1. And of course, the...

But good to remind that for the second half, we have -- we are targeting to sell much more of SAF and we see it still as an accretive margin-wise for the group.

Thanks, Peter. And then we have Paul Redman from BNP Paribas, I think.

So I just have one quick question on -- well, 2 questions, both on SAF. First is just on inventory levels. Do I read it that you're going to push a lot of inventory -- you're going to build a lot of inventory this year and then push it into 2025. And do you have any concerns about other companies doing that and that weighing on SAF margins in 2025. And then the second question is, if you can produce 1.5 million tons per annum of sustainable aviation fuel next year, do I assume that you then will sell all of your sustainable aviation fuel because it's a premium product. So essentially, if you're selling for the highest margin, you sell SAF and always sell SAF. Is that the right way of thinking about it?

Yes. There is a certain limit on the inventory. I mentioned on the optionality. So it's not just only the case of -- we want to -- we're also looking at the DIO, the overall churn rate of our inventories and targets with that. But we can do a bit of adjustment and now particularly with the mandate kick that impacts also our sales plan for this year. Then the 1.5 million tons is, of course, the nameplate capacity. And again, we're going to be looking at where do we get the best margins, optimizing our production. But perhaps the base case assumption is that we -- as we're currently seeing that we would optimize full angle on the SAF, but it's not [indiscernible]. So as an example, the RD demand is projected to grow quite clearly next year in Europe. And I saw some Argus predictions of the margins also improving next year, quite significantly. That's, of course, their prediction. But -- it will depend on the overall prices, how we optimize that overall chain -- supply chain in the global scale. Actually, we have a very tight sales and operations planning process on a monthly level, and then we executed even on the weekly, we call it the [indiscernible] optimization or even at the daily level. All right. Anssi is showing me that these were the questions. So I want to thank you for your attention, and I'd like to also thank you for the active dialogue and for joining this call. So wishing everybody a good summer holidays and stay safe. Thank you.

Thank you, Martti.