Neste Oyj ($NESTE)

Good afternoon, everybody, and welcome to discuss Neste's Q1 results that we proposed 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 Sipila. 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 Eeva. 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 the absolute profit. Our utilization at in the RP 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. Eeva will give you more update on that. But I would just say that overall, I'm very pleased with how the team at Neste is executing in the program. And then finally, the work on the Rotterdam line #2 investment continues. The closer we get to 2027, I think the more clear it is that the timing of the investment is good and we 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 the recordable incident frequency and then process safety. We have a very systematic 5-year road map 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 wind 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 in the score in the wrong direction. So as I said, safety is #1 topic, and it is absolutely the highest priority for myself and my colleagues within the Neste organization. Then if we look at the figures, again, maybe the 6 main numbers, and Eeva will talk about them. Obviously, on the left-hand side, renewable product sales volume, 874,000 tonnes. You can see that we had the turnarounds, both in Martinez and in Singapore, line #1. And then we will talk about the other topic from Singapore production. But as I said, we are at $874 and would have, of course, liked to have a tad more. The margin -- sales margin for renewables was very strong, $856 per ton compared to where we were just a bit over 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 at $23 per barrel. It is an improvement from the previous quarter, just as a recognition where we were a year ago, we were less than 10. So again, significant improvement in refining margins in the Oil Products business. EUR 861 million 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 Neste's 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 RVO decision. So you saw soybean oil movement. You saw the 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 and geopolitics, of course, very important is to understand where this actually Neste produces product. And as you can see, we are logistically and location-wise, far away from the crisis areas in the Nordics with the portable refinery, we source 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 crude supply was stable, and we were not, from a supply standpoint, impacted by the crisis. So I think that shows that it puts Neste comparatively in a good position. Those were my initial remarks. I'll now hand it over to Eeva to go through the financials, and then I'll talk a bit more about Neste and where we are. So let's click and Eeva, 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. Neste comparable EBITDA reached EUR 861 million for the quarter. I mean renewable products, the EUR 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, EUR 337 million 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 from a -- for the demand of our key products. And then in March, the Middle East conflict. In Marketing & Services, EUR 48 million for the quarter, similar to oil products driven by, first, a couple of good old months but then also the conflict rate 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 EUR 115 million, EUR 115 million of EBITDA as an impact in the quarter. And in total, we've now so far reached a run rate -- annualized run rate of EUR 476 million of EBITDA. And we have 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% from between the two main areas. Then if we move into the sort of segments and look a bit more detail into them and 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 two 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 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 is -- this was the time to start including them in net sales. Now of course, the light blue line on the left-hand side, the sales margin is one that strikes out and clearly sort of rising to $856 million -- $856 per tonne is something that was very supportive for our result. And on the right-hand side, we compare versus the fourth quarter and is now recent quarter and obviously, a very big improvement. Sales volumes were negative, but then again, sales margin more than outweighed that impact. As you can see from the few smaller numbers, so we were very focused on renewal diesel. We said already entering this year that we expect the market for -- market demand for soft 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 focused on renewable diesel in our sales. And then on the fixed cost, you don't see much of a movement, a slight decrease, but that, of course, includes slightly higher maintenance costs 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 a healthy January, February. So good margins also for those 2 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 crude that was purchased prior to the conflict. And as we sort of typically have sort of 1 to 2 months less than 2 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 on a very different level reflected by the conflict. And hence, the margin -- refining margin for Q2 will be lower due to that. And then when [ were ] the conflict ends, hopefully sooner than later, it's good to note that it will obviously have 1, 2 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 North Sea, so availability hasn't been an issue. But really, the sort of prices are obviously reflecting the fact that there is a lot more buyers for North Sea oil as well now that the Strait is closed. Marketing & 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. It had a big impact on -- 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 EUR 206 million cash out investments in the quarter. Now despite this, we delivered a healthy cash flow of EUR 286 million 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 will 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 Neste, improving our refinery performance on the renewable side is 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 #1 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 Porvoo in the second quarter after the summer holidays. This turnaround is very critical for us. We've 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 turnaround and we will do it as professionally and as timely as is possible. So I said I have good confidence in the Neste team. Turbulence in our markets continue. We continue to navigate and try to take advantage of all the opportunities. Eeva already mentioned briefly about trading. We've 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 file on products for [ outside ] 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 as 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. Now we've talked a bit about Rotterdam in the past that we've never shown in a video. So what I will do is I will click the button here, and 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. [Presentation]

So there you have it. That is -- it's a exciting project. I have to say, I got to go there frequently. And every time I go, I just wonder at the skill and work result of our engineers and construction partners. But as said, as you can see from the video, the project is moving forward, it is being built 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 on [ 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 side. And I think that this is also a good signal on the quality of the initiatives underway. But as I said, building these types of refineries in Europe is something that hasn't happened really for many years. We've had a few industrial projects in Europe. So it is in some ways also one-of-a-kind activity here in Heartland of European Union. Then a few words about short-term opportunities and uncertainties. I think the -- as I said in my previous slide, before we -- I showed 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 had the Mahoney business in the U.S., where a major collector of cooking oil from over 100,000 kitchens in the U.S. So we also have good supply of feedstocks for our joint venture operations in California. And then in terms of European regulation, RED III implementation goes forward, Germany is now very close to making its final decision in parliament based on our understanding of the environmental community or the Environmental Committee of the Parliament has now [ view ] the matter, the EBITDA recommendation that should be coming to a vote in the early month -- 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 4.5 million, 5 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 audit, checks on refineries and that, of course, is something Neste wants that the quality and let's say, assurance of 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 distillates market. We know the jet fuel market is fairly tight. We provide debt fuel mainly for our domestic markets here in the Helsinki-Vantaa Airport and the environment close by. And as said, as we improve our capacity utilization in renewals, 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 forecast on how the matters will evolve. I think the only main point for me really is that for Neste'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.

[Operator Instructions] The next question comes from Alejandro Vigil from Santander.

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 will be the first question. And the second question is about the Rotterdam project. The start-up 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, Alejandro. So Eeva, you fill in. But I think regarding volatility regarding the renewable products business, as we said, we have termed half of our business, about 60% for this year. So -- but 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 start-up curve, so I really want to refrain from making any comments on that yet. I think it's a very complex project. I recall we have was it in terms of just flanges, I think they're almost like 0.5 million flange connections, which have to be checked and tested -- so this is a huge refinery. And what is most important is that we have a safe start even if it's a bit slower, but safe and stable starts 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 the volatility and how we can take advantage of it.

Yes. And I think we're doing obviously our best to take the opportunities the market has. But we are that, 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.

The next question comes from Adnan Dhanani from RBC.

Two for me, please. Just the first one, obviously, there's been a big shock to 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 affordability 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 the second one on the Oil Products business. The 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 very much. Your question about energy policy, of course, it's important. It is something that -- and this 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. And I think the decision was very clear that, that is the intent of the government. So I think that is also sending a strong signal. I've also made the comment 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 a moment when there could be big shortages. And we know there, for example, in some countries, there's serious shortages on jet fuel. So for Neste, it's -- 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 it could be a very good tailwind for us in the coming years. So that's our read on that as we speak. Regarding oil products utilization, so we were 2 percentage points below the previous reference number, so a bit below. But I think overall, I think Porvoo is running smoothly. So the only thing that you need to have in your models is the 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.

The next question comes from Derrick Whitfield from Texas Capital.

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 EU and Asia, how are you thinking about the allocation of RP sales across your end markets? And second, could you elaborate on the trends you're seeing across the global waste-focused feedstock markets referenced in Slide 30, it appears the EU markets are depressed relative to the U.S. markets. Are you also seeing that in other Eastern markets for fats and greases and PFAD?

Okay. Thank you very much for your comments. Derrick, Well, I think the decision in the United States regarding RBO is, of course, very positive for Martinez. If you recall, looking at the margin levels and the oversupply we have had in the U.S., they should start balancing out. So we can, of course, not say how close to balance. The U.S. market is that calculation is very difficult to make. But I think, anyway, we can see that the market is balancing and of course, the margin, if you look at the spot margins, they are moving in the right direction. And now that we have the Martinez turnaround behind us, we should be good to go and get that volume out. In terms of your question about optimizing volumes. 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 the margin levels vary. So the U.S. is a large market, but we'll just have to see 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 [ 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 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 [ UCO ], fairly stable European market has an overall quite -- I think you don't subdue the word, but fairly stable. And as you know, we also have a ring from Brazil that -- 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 accepted. And 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, that will be a net positive and give us more tools to play as we optimize our own production. So overall, I think we really -- I think we're well positioned, if I may say it that way.

The next question comes from Paul Redman from BNP Paribas.

Two questions. The first one is on the renewable fuel margin. I know you put up a chart that kind of implies that margins at the end of 1Q 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 degearing, -- it dropped from 40%, roughly 40% in 3Q '25 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? Can you just kind of talk about your early thoughts on capital allocation?

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

Yes. 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 conflict ongoing, but that's kind of -- has been, in that sense, a healthy start for the quarter. And then to the balance sheet.

Yes. 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 Eeva shares it is that we are very much on the deleveraging category or deleveraging camp. I personally believe that if a business is this volatile in terms of earnings profile, the balance sheet should be fairly robust. And so if you ask me about priorities, how we use this money, I would very much vote for deleveraging. Going then forward, longer term, your question about where are we going to use incremental funds 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 are, of course, looking through our whole system, if there are any more debottlenecking 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, that is not a question we're spending the team Neste spending much time on. I think about it and Eeva will -- but I think our focus is now on getting everything we have out of our existing system, getting Rotterdam to up and running. And then we'll just have to see what the world looks like. And then what is then 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 to the levels we want them to be. How is that?

Yes. I fully agree. And I think, obviously, it's an exciting time to be in the energy space. And we definitely 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 Artem Beletski from SEB.

I have two to be asked. So the first one is relating to renewable sales margin and it indeed jumped to almost USD 400 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 then the other topic what you highlighted was higher 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 relating to regulation, and you did mention Red II 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 what comes to Germany and the smaller market where Red II has been approved is Netherlands. So what is the impact from regulatory changes on that front?

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

Sure. Yes. So the term contract impact is the one I would highlight like we indicated in February, I believe we talked about the significant step change in them. You are right 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 margin as well. I'd say this gas oil impact came -- it was pretty much the last of the last weeks of the quarter. So yes, obviously, an impact but I think a bigger pack 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 1.5 million to 2 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 I want to just mention 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 here in the Nordics in our domestic markets, some pullback in end consumer fuel consumption, maybe, let's say, 6%, 7%, but it's still very early days. It's such a short amount of data from about 4 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 of that would then impact RD 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 Nestenow.

An art 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 100, 200 kilotons and the Netherlands would be in that camp.

The next question comes from Sasikanth Chilukuru from Jefferies.

First two, please. The first, I wanted to get, again, a little bit clarity, I suppose, on the current renewable product sales margins. Of course, we ported we see a very strong start to the quarter, European and U.S. renewable diesel prices, defaulting prices and fossil diesel prices are all at pretty much 3-year highs and you've referenced very renew particular gross margins of around $1,200 per ton. All these factors kind of suggest that the current sales margin is also at similar, if not more than these gross margin levels. I was just wondering if you thought this was a fair interpretation. You did mention healthy volume -- healthy margins, but 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 in between middle distillates and gasoline and fuel oil. Your message on Neste being a middle distillate gate company is pretty clear. I was just wondering how much flexibility do you have to optimize your refining system further towards higher middle distillate yields? What operational or perhaps configurational levers can you use to maximize middle distillate production? And how much more can you add?

Yes. I think you had a sort of a 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 -- 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 the turnaround and that -- that will probably give us a bit more additional than 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 the -- 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.

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

The next question comes from Kate [indiscernible] from Citi.

So following up on your answer to Paul's question, with the backdrop of renewable fuels margins back at high seen in early 2023, at 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.

Yes. Thank you, Kate. A big question, but it's much too early to discuss that. really. I think 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 EUR 1.9 billion. We're now at EUR 2.5 billion. It's a year delay. So -- 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, how do we think we will look at the 30s, what type of technology do we really want to employ. We've mentioned that we have the work on [ Ligna ]. How will that progress? Is that that's 1 sort of route. Another is to out with the current feedstocks that we use, was the 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 debottlenecks. So I would earn on the side of just saying that Rotterdam, let's get the evidence that the Rotterdam is generating the cash. Let's look at the any debottlenecking opportunities within what we have. and then make smart decisions regarding where, when and how we then invest. So -- 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's 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 will need to base our sort of thoughts also on what happens around us. I mean, 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 [ investors ] globally.

Maybe one thing which we need to get more better clarity on soft mandate for 2030. So 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 how much of the demand as we head into 2030 and into '40 will be sort of skewed into R&D, how much of [ soft ] -- 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 the Iran crisis. So will we start seeing some pivot into renewables, for example, Australia, a big market not using renewables at all. So we are 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 I said, Rotterdam and debottlenecking priority number one.

Just a follow-up. Your comments about whether the rand 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 SaaS given today's pricing mechanics there largely referenced to so [ diesel ] crack plus a green premium. Given your feedstock input animal fat, so 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 the structures, and I really don't want to go into that at this stage. What I want to say, though, is regarding [ soft ] 1 could make the statement, well, stuff is expensive. The airlines can't afford it. If current high-bred fuel prices are painful for airlines and how could they pay for I think we're going to -- I don't believe that is a strong argument. I think there are other drivers for decarbonization beyond just looking at costs. And if we -- the reality is that if we look at, for example, the B2B segment in software, we have also cargo customers who want to reduce their Scope 3 emissions. So clearly can see that the market is absorbing the per ton or per parcel cost relatively easy. And if you translate then the cost of [ staff ] into the airline ticket, ultimately, it is not a -- on an airline ticket basis, it's not that huge number. So I think we're going in the airline business, we're going through a transition. -- stuff will be adopted. It takes its time. The market will grow into the -- and stuff will become more common, but it will take its own time. And some companies will be faster to adopt others. But yes, so maybe that's all I have to say.

The next question comes from Alice Winograd from Morgan Stanley.

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 even though for memory inventory levels were reported to be quite low at the start of the year. I wanted to ask, to what degree are you comfortable with current inventory levels and whether we should expect some production be saved for inventory in the next couple of quarters looking at, of course, the heavy main 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 other assets running harder.

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 financially so not a very 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 will 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 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 volume side. So we are stretching every single production line we have in renewables looking to -- looking for any way we could increase [ fee ] rates. We made some good progress here last year and this year. They're not huge improvements, but still the focus is every single ton we can get out safely we try to do.

The next question comes from Nash Cui from Barclays.

I have two, please. The first one is on your inventory impact. I wonder if you 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 800,000 ton biorefineries near Rotterdam. I wonder how Neste thinks about this and as -- and on the [ flip ] side, if another company bought ag, how will you deal with competition, not only on product sales, but also our supply chain.

Well, if I take the first one on Heikki. So Nash, when it comes to sort of inventory valuation gains or losses, so in OP and RP, we have the comparable EBITDA, which kind of cleans out that impact. So that would be typically the difference between comparable EBITDA and then the IFRS EBITDA and really in a way to provide you with a clean number. Now in Marketing & Services, where I mentioned that it's -- the logic is slightly different because, of course, the sort of inventory cycle is very short. We talk about 1 to 2 weeks and it's part of the sort of how we run the business. So there sort of gains are included in the comparable EBITDA. But again, if it was purely a sort of a valuation at the end of the quarter, it's also a 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 refer 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 we need -- 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 European supply and not sort of -- we 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 yes, that's really all I have to say about that particular case.

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

Sure, sure. Okay. Yes. So yes. No, I was thinking of sort of the inventory valuation part. But indeed, from that sense that like I tried to explain on that slide. So just to 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 was that came into the system at a lower price. And then in that sense, gave us a higher margin when the product price is then very, very swiftly jump that you see in the refining margin. But that obviously, as I mentioned, has already balanced out because the cycle is relatively short, less than 2 months. So.

The next question comes from Iiris Theman from DNB Carnegie.

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

Maybe I'll take both of them. So yes, Iiris, 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, I was referring to this total refining margin of [ 23% ], which was boosted by the exceptional circumstances in March. So we would guide you for lower total refining margin in Q2 than the [ 23 ].

Okay. And a follow-up question on [ Obisparging ] 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 -- there's no real trend, and I think we're all -- we can all read from what [ happens ] in 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.

The next question comes from Henry Tarr from Berenberg.

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 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 in the 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?

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 may be -- 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 the sort of feedstock goes in a very different direction. We're not sort of -- I wouldn't say that it's 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 balance 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 sort of we think that has proven served us pretty well.

The next question comes from Yulia Bocharnikova from Goldman Sachs.

I have a couple, please. So first thing, just to clarify on Q2 volumes in Renewable Products. You mentioned say you would optimize production and probably sell everything without 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 [ fettish ] and than we will see pick up in second half of the year? And then on refining [ quotes ] as well given there is a Porvoo turnaround in Q3, how should we think about refining coal sales volumes versus production? Is there going to be any inventory build ahead of maintenance, so you would just sell everything because there is a very, very strong margin.

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 1 month on one line in Singapore in -- now here in April. So that, of course, it's up some of it. But still, I think the overall is positive. And then what 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 support our customers who have a need for the product.

The next question comes from Matti Kaurola from OP.

First question actually regarding the maintenance taking place in Singapore and Martinez. So if you could get a little bit more open up the increased production costs or what kind of sales margin impact you are [ speaking ] of? And then the second one is actually regarding your term contracts. So if I'm calculating the [indiscernible] premiums you've been looking during the March -- sorry, November, December time line. So I think you've been giving some of the discount compared to the spot levels. Is that the court 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 -- but as said, it's, of course, a fair point that when you have production issues. And of course, just the sort of fact that we had sort of big turnarounds and ramping up and all that, that, of course, eats up on the margin. So I think that's a 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. So -- but of course, it has to be a commercial decision that makes sense for both parties that we do end up end up turning. And as you remember, we did end up turning more than we thought. So we thought that we saw the sort of commercial value in turning slightly more without the sort of commenting more specifically on the market price. We have said earlier as well that, of course, the market prices sometimes can be a bit misleading. It's a very [indiscernible] markets are 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.

Maybe one follow-up question recording regulatory environment. So what are the top three things or [ PAT ] is right now working kind of the most right now? Or what are the key things that you are focusing on?

Right. Well, the agenda is very broad. I think, of course, the most important thing is now to make sure RED III gets implemented across Europe. So as the German decision gets hopefully now finalized, there are still some open areas. Another interesting area for us, I think, longer term is the whole question of Asia, starting all the way from Japan to Australia. I think if you think about how many people live there and how much amputation, there is -- one, of course, would like to see the mandates 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 important, although I'm sure they will come back here once the run crisis is over. So those are the three things.

Maybe one more question. I'll just throw a headline that there is a strike in Martinez [indiscernible] got in 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.

Yes. 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. Steel Workers Union, USW. And those conversations are going well in a constructive manner. And my understanding is that -- at the moment, the refinery operating pretty close to normal.

Yes, production is running there as we speak.

The next question comes from Christopher Kuplent from BofA.

I've only got one question left and maybe for you ever to sort of talk to us about U.S. tax crypts. You were calling out quite a significant number in which seems to have dropped. Is that a quarter-on-quarter headwind that I think maybe around EUR 50 million that's hidden in your sales margin. When I look at your variation shots, which slightly on [ affordable ] products on Page 14, that 400 number is that inclusive of this time around in Q1, receiving less help from these CFBC credits? So just a clarification, please.

Sure. Yes. So I was just checking the release that in data, we had a lot less credits because of the turnaround in Martinez. So we stated in the release that we booked EUR 13 million 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.

The next question comes from Matt Lofting from JPM.

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 feed into the realized margins including the capture of that in the margin chart that you showed, I think, on Slide 11.

I think overall, this pertains primarily now given our situation to volume coming out of Asia, both feedstock and final product into Europe. Everything is going through around Africa. So you have the extra 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.

Yes, 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, do 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 or for many of us.

I would, though, say that in terms of our performance improvement program, and I think we commented on this. I think we've made very good progress across the whole sort of expenditure base also looking at logistics costs in terms of better consolidation of freight and better negotiating of terms would 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 I mentioned on that.

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

So thank you very much. As a very quick summary after this long and colorful and good discussion. So I said, I think both Eeva and I are pleased that we were able to manage our way through a fairly volatile quarter. So -- 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 cyclical 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 2 years. I'm very happy with that. You saw in the chart we have a bigger number. We still see more opportunity across Neste. 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 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, is 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 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. Eeva and I will then return back to you after the end of the second quarter. Have a very good day. Thank you.