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Thank you, and good afternoon, ladies and gentlemen. And welcome to this conference call to discuss Neste’s second quarter and half year ‘22 results published earlier today. I’m Juha-Pekka Kekäläinen, Head of Neste IR. And here with me on the call are President and CEO, Matti Lehmus; CFO, Jyrki Mäki-Kala; and the business head unit head -- of Renewables platform. And also the business unit hedge, Markku Korvenranta of Oil Products; and Panu Kopra of Marketing & Services. We will be referring to the presentation that can be found on our website.
Please pay attention to the disclaimer since we will be making forward-looking statements in this call. And with these remarks, I would like to hand over to our President and CEO, Matti Lehmus to start with the presentation. Matti please go ahead.
Thank you JP, and a very good afternoon also on my behalf. It’s great to have you all participating in the call, which is my first in the role of president and CEO of Neste. I’ve been very pleased with my first three months in this new role, and really continue to be impressed by the passion and energy of the people all across Neste. This is something very special.
We are indeed living in unusual times and the world around us has changed in many ways. Apart from the human these threats, the war in Ukraine has had significant impacts on the international energy markets. Oil products and natural gas prices in Europe have been very volatile and exceptionally high. In this turbulent market environment Neste’s operational and financial performance was excellent in the second quarter.
I want to thank the Neste personnel for the great efforts taken to enable this performance while company continues to be in great shape and we are proceeding with our strategy to become a global leader in renewable and circular solutions. The need to combat climate change and to accelerate concrete actions to reduce Co2 emissions, both short and long term remains extremely urgent.
If I now move to Slide four, I want to have a look at the second quarter in brief. And we had excellent financial performance in the exceptional market conditions of the second quarter. Our comparable EBITDA was 1.085 billion Euros, which is a new quarterly record. All of our businesses improved comparable EBITDA compared to the first quarter and to the corresponding period last year. In the comparison, it is good to remember that in the second quarter of 2021, we implemented the major turnaround in [indiscernible].
Our renewable products had an excellent performance in the second quarter, which was one of its best quarters ever. Our comparable sales margin average record high $865 per ton. This outstanding achievement was supported by the exceptionally strong diesel market, our strong sales performance as well as more favorable feedstock prices than anticipated towards the end of the quarter. The demand for renewable products remained robust throughout the quarter, and our sales volumes were in good level of 808,000 tons, supported also by high utilization rates at oil production facilities. In feedstock sourcing, it’s worth noting the growth of waste and residue share to 96%.
Oil products strong result was driven by the exceptionally high diesel and gasoline margins, and our successful efforts to maintain high utilization at the Porvoo refinery ensuring safe and reliable operations while implementing all the changes related to crude slate a natural gas replacement was an excellent achievement by the team.
The last deliveries of Russian crude oil have now been received, and most of the natural gas has been replaced with propane and other alternatives. At the same time, utility costs remain very high. Also, our marketing services segment performed very well in the second quarter. Our unit margins were again supported by inventory gains driven by the increase in oil prices.
Overall, I’m very pleased with our efforts to ensure high reliability across our global operations. Our people have done really a great job in adapting very quickly to all the changes in the business environment,
A quick look at our financial targets. Our financial position remained solid. We reached an after tax ROACE of 24.6% on a rolling 12 month basis while our target is 15%. At the end of June, our leverage ratio was 15.5 well within the target area of below 40%. This solid financial position enables the implementation of our growth strategy going forward.
With these remarks, I’ll hand over to Markku to discuss the financials in more detail, please.
The second quarter was indeed performed under exceptionally turbulent market conditions. So let’s now have a closer look into the group figures. Neste delivered another record high quarterly revenue in the second quarter. Our second quarter revenue exceeding 7 billion Euros, which increased by about 4 billion, or 133% compared to the previous year of about 3 billion. The revenue growth for its own pot, in my view describes the exceptional market situation of the second quarter. The revenue growth resulted from overall higher market and sales prices which had a positive impact of approximately 1.4 billion and higher sales volumes which had a positive impact of approximately 2.4 billion.
It could yet be noted like Matti said that in the corresponding period last year, our oil product sales volumes were negatively impacted by the Porvoo refinery major turnaround. Additionally, a stronger U.S. dollar had a positive impact of approximately 200 million on the revenue side compared to the same period last year. Like Matti already mentioned, we posted an excellent comparable EBITDA of 1.085 billion that is 188% up from the second quarter last year, and also 88% up from the first quarter of this year. It’s also an all time high and a new quarterly record for Neste.
Both renewable products and other products performed strongly each contributing over 500 million Euros to the group’s total comparable EBITDA and also market and services like already mentioned how there’s strong performance in the quarter. We can be overall extremely satisfied with our smooth operational performance, which together with our sales performance and successful margin management has enabled us to capture the high market margins. We have had excellent safety, operational reliability, and high production operating rates at a time when margins are strong and while markets being highly volatile.
Then turning to free cash flow. Our free cash flow was slightly negative in the second quarter as it continued to be impacted by a significant increase in net working capital. The change in net working capital was about 1 billion Euros negative in the second quarter, mainly as a result of higher inventories and overall higher sales volumes and prices. The inventory growth is by far the main reason of the working capital components behind the net working capital growth and then also the impact of higher prices has been by far the main reason, an issue actually we cannot really affect.
At the same time it has also been a strategic decision for Neste to keep its inventory volume levels high in order to ensure business continuity in the exceptional market conditions as an example securing our new crude oil deliveries to replace Russian crude and the upcoming scheduled maintenance activities are thirsting for Rotterdam refineries on the renewable product side. And then of course, the significantly higher sales volumes and prices have in turn impacted our receivables.
Our comparable earnings per share, which is the basis for our dividend policy, as you certainly remember, was $0.96 per share in the second quarter, or 1.41 Euros cumulatively in the first half year. That reflects our strong delivery compared to for example, the full year EPS figure of one 1.54 Euros last year.
On the next slide look at the simple second quarter comparison bridge by business, we can see that all our businesses again improved their performance year-on-year. Most of the improvement 521 million Euros came from oil products, and almost 200 million Euros from renewable products. Of noticed particularly the significant increase in oil products year-on-year. As we stated in our updated outlook on 14th of June, the North European gasoline and diesel margins had increased to exceptionally high levels. In addition, our successful mitigation actions to replace Russian crude oil and natural gas enabled us to retain high utilization rates, like set up Porvoo refinery. But at the same time, we are very proud of the performance achieved at the renewals, products and marketing services businesses.
Then turning to the next page, looking at the same comparison bridge by profit driver. We know that sales margin contributed 545 million Euros to the performance improvement. On the renewables product side we achieved an excellent sales margin which is a new quarterly record. While oil products margins were driven by exceptionally high diesel and gasoline margins during the quarter. At the same time, higher sales volumes also contributed well improving our comparable EBITDA by 126 million while a stronger U.S. dollar by 92 million Euros. Our fixed costs were 25 million higher than in the second quarter of last year mainly due to preparing growth in the renewables business.
Then moving to the next stage. When we look at the first half of the year bridge by driver, it’s pretty much the same story. We have more than doubled the cumulative comparable EBITDA from 806 million Euros last year to 1.663 billion in the first six months of this year. Sales margin, foreign exchange chain sales and sales volumes were driving the improvement, and the most of that originated from the second quarter.
Now to summarize, all in all, we are very pleased with both the financial performance as well as operational performance in the second quarter as well as in the first half of the year. At the same time, we have made significant progress in the execution of our growth strategy.
And with these remarks, I’ll hand over to [indiscernible] to discuss more closely our renewable products performance.
And as has been said here in this call, we had an excellent quarter and renewables product with reaching a comparable EBIT of 538 million Euros. The retriggered comparable sales margin reaching $865 per metric ton up $59 metric coming from Q1 which were we already posted very strong margins. Demand remained robust over the quarter and sales volumes reached 808 kilotons with approximately 70% of the sales growing going to European by buyers and the backup of strong European margins.
Our strategy to move towards waste and residue continued and we reach 96% share of a waste and residue in our feedstock mix. Investments in Q1 were 203 million Euros underlying our continued strategy growth and our comparable return on net assets will remain about 30%.
If you move them to the bridge describing the results a bit more in detail, so the largest impact on the EBITDA for Q2,’22 compared to Q1 came for the stronger sales margin which increased a set by $59 per metric ton quarter-on-quarter. This was on the back of strong sales performance as well as on high diesel prices which outpaced the increasing feedstock prices. Volume increased as well in the quarter reaching about 800 kilotons increasing the EBITDA by 50 million Euros year-on-year. The effects change has had a positive impact on the results as well while fixed costs continue to increase as we continue to build our organization.
Let’s then move to the feedstock market. Feedstock markets remain tight and volatile over the quarter while digital was fundamental weekend towards the end of the quarter and waste and residue also slowly following trends. The fundamentals of the accommodation of the [indiscernible] markets remain uncertain and very much dependent on geopolitical weather and other geopolitical issues.
Western residue demand has remained strong while softening slightly on the following individual prices. And perhaps we then move over to the next slide and looking at the U.S. market.
So California and LCFS prices continue to come down during the quarter on the back of the credit bank continuing to build. We have seen lower petroleum demand in the quarter as well as higher credit generation coming from both renewable diesel and as well electricity and biomass maintain setting the sentiment of the market lower. Range remains strong on the back of higher than expected RVO demand and driving a stronger sentiment and driving also rather healthy SME margins with current values.
If you then look at the margins more closely so as mentioned, the strong ULSD market, as well as our strong sales performance did outpace the increasing fees of prizes in the quarter, driving a strong, comparable sales margin in the quarter and reaching $865 per metric ton. The high utilization rate based on safe and reliable operation was also contributing to a stronger margin as we reach that recession rate of 103%.
Furthermore we managed to optimize our utilization cost during the quarter well, despite increasing utility costs. Our sales of Neste reached slightly lower volumes at 24% in the quarter.
And that concludes the renewable products part. And I’ll hand it over to Markku for the oil product part.
So as oil products, we had a very strong quarter in a tight refining market. The comparable EBITDA was 529 million Euros compared to 8 million Euros the year before, and 137 million Euros in Q1 this year. And again note that in Q2 last year, we had a major slight turnaround in Porvoo so comparable to last year, are partially not very relevant. Sales volume was at 2.8 million tons up from 1.2 million tons the year before and 2.6 million tons Q1 this year. The total refining margin improved dramatically to $30 per barrel up from $20 per barrel, compared to both Q2 last year and Q1 this year.
The average overall share of the fee was 14% in Q2, 2022, reflecting our decision to stop making new contracts for Russian origin feed stocks. The last crude cargo as Matti was saying was delivered to Porvoo middle of this month, so the share will drop to zero as we consume the inventory. Comparable return on net assets increased from minus 1.3% to 25% over various 12 compared to the previous 12 month period.
We move over to the next slide. And this slide explaining, the walk explaining the drivers of the profit. Nearly 90% of the improvement compared to the first quarter of 2021 comes from the total refining margins. The rest is due to the increased sales volume and fixed costs.
Take the third slide. The disruption caused by the war in Ukraine continued to drive prices and volatility of both diesel and gasoline up. Diesel margin was peaking at close to $70 per federal before sharp correct and during the last days of June. The gasoline followed a similar pattern. Heavy fuel oil margin was weak throughout the quarter reaching the lows at the end of June.
Last slide, after a stable $10 per barrel refining margin over the last four quarters the market margin showed up to $30 per barrel in Q2, ‘22. The average refinery utilization rate was 89 compared to 92% during the first quarter of this year. Refinery production cost was $6.8 per barrel compared to $7.5 per barrel in the previous quarter of this year.
And with that I conclude the oil products for the presentation and hand over to Panu for marketing services.
Solid financial performance continuity marketing services in Q2, 35 million Euros EBITDA is our best ever results in second quarter. Return on net assets increased up to 42% which is indeed very healthy level in retail business. Our market share developed very well in Finland and more directly in Baltic countries as well. However, gasoline demand has been decreasing in May and June due to high pump prices, especially consumer segment has suffered in all our markets.
Since day one volumes almost doubled compared to last year in Finland. Volume was continuous health development as well. We have expanded nationwide availability of station network in Finland during last year. And this year, we expanded in Baltic as well. We have invested this year for marketing of [indiscernible] and I’m happy that volumes have increased over 45,000 compared to last year. We are widening our sustainable sources offering for our B2B customers in Finland, and launching of new EV charging service is important milestone for us. We have piloted EV adjusting service together with our B2B customers and feedback from first weeks is very promising. This was solely about Q2 and marketing services.
Handing over back to Mitti.
Thank you. Let’s now move on to the current topics. First, a few words on our strategy execution during the second quarter, as I’m very pleased that we continue to make good progress in several important areas. As announced in late June, we have made the final investment decision on the Rotterdam renewable products capacity expansion. This is a major milestone and an important enabler that supports continued business growth. The expansion will have a total capacity of 1.3 million tons a year of which up to 700,000 tons can be produced a sustainable aviation fuel. The flexibility in both feed stocks and products has been a core strategic driver of this project.
The CapEx for the project is estimated to be approximately 1.9 billion Euros with a higher CapEx compared to the Singapore expansion reflecting the inflation since end 2018 and the higher overall cost environment in Europe. The production is scheduled to start up during the first half of 2026.
The Singapore renewables capacity expansion project continues to be scheduled for startup by the end of the first quarter 2023 also the announced production joint venture with Marathon in Martinez, California is proceeding and we expect closing of the deal to take place within the next few months.
Two other highlights I want to make. Firstly, the renewable aviation and renewable polymers and chemicals businesses continue making new market openings, sales agreements and partnerships. This is an important basis as both businesses are expected to grow significantly during this decade. I also want to highlight the continuous focus on strengthening our global waste and residues sourcing platform. As part of this strategy I’m very pleased that we were able to announce earlier this week that we have acquired, agreed to acquire Walco Foods in Ireland, thereby strengthening our European animal fat sourcing capabilities. These are just a few examples of strategy execution that make us closer to becoming a global leader in renewable circles solutions.
Now moving to the outlook, as outlook for the third quarter we see the following. In renewable products, the sales volumes are expected to be slightly lower than in the previous quarter. The waste and residue markets are anticipated to remain tight. Our renewable sales margins are expected to be within the range of $775 to $850 per ton. Utilization rates of our renewable production facilities are forecast to remain high except for the scheduled six week maintenance turnaround at the Singapore refinery.
The negative result impact of the turnaround is currently estimated to be approximately 90 million Euros on the segment’s comparable EBITDA. Due to our mitigation actions by inventories, the sales volume and EBITDA impacts are spread over a period of several quarters. Oil products market is seen to be volatile and impacted by the war in Ukraine.
Based on the current forward market, oil product margins are expected to come down from the levels seen in the second quarter. Our third quarter total refining margin is expected to remain solid but lower than in the second quarter. Sales volumes are forecasted to be at about the same level seen in the previous quarter. And in marketing services, the sales volumes and unit margins are expected to follow the previous year’s seasonality pattern. The high price levels are expected to have some negative impact on demand particularly in the consumer segment.
We continue to execute our strategy and invest in our business. Our cash out capital expenditure is estimated to be approximately 1.9 billion Euros in 2022, including approximately 800 million for the Marathon joint venture that is still subject to closing. Other possible M&A is excluded from this figure.
As announced earlier, we have a scheduled seven week turnaround at the Rotterdam refinery in the fourth quarter. The negative impact of the turnaround is currently estimated to be approximately 100 million Euros on the segment’s comparable EBITDA. This concludes the presentation. And we would now be happy to take your questions. Please operator.
Thank you. This is the conference operator and we will now begin the question and answer session. [Operator Instructions] The first question is from Joshua Stone with Barclays. Please go ahead.
Thank you, and good afternoon, and congratulations on a great numbers. Two questions, please. Firstly, on the renewables business and the very high margin you’re printing, in particular, the revenue result was very, very strong, implied pricing very high, and that price increases up more than the diesel price went up. So is that the right observation to make?
And secondly, where are these price premiums coming from because as you described your RIM and LCFS prices are down in the U.S. and as far as I was aware, your prices were mainly fixed in Europe. So how are you able to achieve these higher price premiums will be my first question.
And then secondly, as you’re staying on the same subject, just thinking about hedges, and just remind us where the hedging sales ratio is. And, again, if I look at my screen that the Porvoo spread has inverted, all else equal would imply some fairly significant hedging losses. So maybe you can just walk us through the impact of hedges. Thank you.
Yes, thank you, Joshua. Indeed, the average sales price did increase in the second quarter, if you can comment on the two questions.
First of all, indeed, the ULSD did contribute to a very significant part to the high sales prices. In addition to that, of course, also our sales optimization was very strong and further contributed to the strong sales prices in the quarter, and if you look at the hedging. So our current hedging is roughly 60% for the third quarter, it was a bit above 60% here in the second quarter. The hedges we did occur a slight loss on them for the second quarter and the outlook is also that we would have a certain loss on the hedges for the third quarter. And this has taken into account in our margin guidance for Q2.
To be able to give any sort of numbers around the sort of size of the loss from the hedges in the guidance?
Unfortunately, we’re not able to get give any such guidance but we are, the loss Q3 will be slightly higher than the losses we had in Q2.
The next question is from Mehdi Ennebati from Bank of America. Please go ahead.
Hi, and congratulation to you Mathew for your new position and congratulation to the whole group of Neste for the extremely strong results. So two questions please on my side. First one regarding the maintenance that is scheduled -- can you explain us or tell us why you are doing such actively long maintenance at Provoo refinery? I was wondering myself if there is a link between the fact that you are using now as a feedstock and this might have changed a little bit let’s say that you might increase, shorten the cycle of maintenance at Provoo, because I’ve put my interest would like to understand there was enough such a high maintenance, such a long maintenance, and so on the question is related to the fixed costs.
So on your slide you show that the fixed costs are declining, and it seems it keeps declining since beginning of July quite significantly. I wanted to know why do you think the fixed cost that much? And would you say that the negative trends would continue for quite a while now that the world is slowing down the [indiscernible] and finally, if I may, there was a deal voted in the U.S. Green Deal act voted in the U.S. yesterday. Do you see some positives some negatives for --
Thanks for the question. So you refer to the production line for scheduled turnaround in September and October. So this has been planned since long time. It has nothing to do with the use of propane. Our hydrogen machine is part of that line and part of the turnover, but is independent of the propane use. And for the reference, the schedule, duration for the turnaround is 40 days.
Very good. Yes. Second question was a bit more detail on the feedstock price trends and wasted residues.
Thank you Mehdi for the question. So indeed, I mean, we have seen a very strong decline into individual prices here starting already in the second quarter and continuing in the third quarter. As we know, the waste and residues are not fully following the better prices, but there is a link and typically a bit of a delay. And we have been seeing that the waste and residue prices have been coming off as well since the beginning of the third quarter and are actually all related between the end of the second quarter.
Having said that, they still see that the market remains strong, the demand remains robust. And we believe that will be the case also going forward. But certainly they have been so easing a little bit here over the past month.
Thanks and perhaps I’ll take the third question. Maybe this is, you were asking on the very recent regulatory developments in North America. I believe you are alluding to the U.S. budget reconciliation bill that was in the news yesterday. It is a proposal called now the Inflation Reduction Act. Our understanding is the proposal includes an extension of the BTC through 2024. It would also include a new SAF BTC through 2024. And then after 2024, there’s a proposal for Clean Fuels production credits for local producers.
So basically it’s a proposal at the moment we are of course following also with great interest whether this will be confirmed and also about learning more details.
When you say good clean fuel production for local producer something which will replace, this is what you mean?
Like I said, this is high level what we have understood at the moment we are also looking forward to receiving more details.
The next question is from Erwan Kerouredan with RBC. Please go ahead.
Hi, there. Thanks for taking my question and congratulations on the very strong set of results. I’ve got a question on cash and then another question on feedstock. So on cash. Thanks for the incremental detail you provided on inventory build out. I guess the key question is how should we think about the second half of this year and [indiscernible] should we see similar kind of working capital trajectory? This is my first question.
And then I got a question on feedstock. So we’re nearing the point where a palm oil becomes basically 0% of your feedstock. I was just wondering if you plan on giving a split between animal fats and use cooking oil in your reporting for the next set of results and for this quarter can we assume that animal fats and use cooking oil represent roughly the same share of your waste and residue feedstock? These are my two questions. Thank you.
Thank you for the excellent question. So maybe the loan the second quarter impact first. So when we had the negative impact of 1 billion in the networking capital roughly 700 million of that came from inventories. And they’re the main component of 500 million came from prices. So looking forward, and also prices, like I mentioned, the main components on the receivables side.
So looking forward, of course, we don’t know about the price development. There are perhaps some anticipates and some of the forward curves, for instance, for crude oil, they are backward dated. So their anticipation is that prices might be somewhat lower towards the end of the year, but that we don’t know for sure. But there’s one issue that we’re going to take actions upon, and that is looking into the inventory volume levels.
Now when I look back into the second quarter, it was an exceptional quarter where we knew really wanted to secure our production running extremely well, because of the many changes in the landscape. And now we have entered a bit more stable situation with new suppliers, etc. So we can start optimizing on that. How much we can do that remains to be seen, but we have plans on that. So our overall target would be that we could reduce the negative impact from the negative one 2.3 combined in the first half of the year. But certainly, looking at the total estimate at the moment, it’s quite probable we will have some sort of minor -- for the full year. And it’s coming mainly from the pricing components anyway.
But the inventory volumes is the main effect we’re going to work upon. So if we can release, the impact on our cash flow naturally would be positive, more positive.
I can perhaps take the question on the reporting of feed stocks in the renewable segment. We have and we continue not to report details or breakdown of our feedstock mix. However, what we have said earlier is what continues to be valid that the three largest categories of feedstock are first of all animal fats, secondarily, use cooking oil. And then thirdly, residues of vegetable processing and this continues to be true. And we of course, are very proud that we have been able to increase that share of waste and residues to 96% and we continue at the same time optimizing that mix going forward.
The next question is from Artem Beletski with SEB. Please go ahead.
Yes. Hi. And also congratulations from my side on the record numbers in second quarter. I would like to ask, actually two questions. So the first one is actually relating to Rotterdam final investment decision and could you maybe talk about CapEx split for upcoming years and also confirm that it also includes some sort of a pretreatment investment within this 1.9 billion Euros and maybe just related to it could you say by the CapEx spent is basically mocked or not given the fact that it’s likely to happen that inflationary pressure could be seen in coming years and so on? So would it impact actually your CapEx for the project?
And the second question is related to all products and shift to propane and other sources? I think in Q1 you mentioned that it could be margin accretive has it been really the case and now let’s be experiencing. So the renewed surges in gas prices. I basically having no exposure to say high gas cost at the moment.
I can take the first question on the Rotterdam FIB and in general, I would say these type of investments if you think of that CapEx curve, they tend to follow a kind of S curve. And that is also the case here. I don’t have the exact split here, but that is how it would typically goes and indeed like you asked in your question, if you look at this, what’s the whole investment covers it does also cover pre-treatment. We are of course taking advantage of pre-treatment that is already in place through the acquisition of the Baneberry, but we’re also including additional pretreatment capacity.
So that is included in the CapEx numbers and in terms of how the inflationary pressures will follow the CapEx I think we have done a very thorough work in having a very robust CapEx estimate. And we obviously will continue to do as well as we can to see if there’s any opportunities to optimize during the project. But we continue to see that CapEx of 1.9 billion Euros being our best view of the CapEx.
Then there was a question on the value of the propane versus natural gas lease market. So rather, rather than sort of given a value difference, as such, everybody can see propane values versus TTF. What we have done is that during the course of second quarter, we have phased out the majority of our natural gas used and replace it with propane. And this will continue such that when we reach for second quarter next year, we would have created a capability to replace the entire natural gas use. Of course, the choice then depends on availability and the price differential. But you’re right today, in today’s market situation with crude at about 100 and TPF, 171 is quite favorable for us to use propane.
And maybe just like a quick clarification on this topic, so is it so that you’re still basically using some natural gas. So it’s just like low portion and completely been removed by next year.
That’s exactly true. So we have two hydrogen units in Provoo and the bigger one is operating mostly on propane and then the smaller one is still using natural gas.
The next question is from up Peter Low with Redburn. Please go ahead.
Hi, thanks for taking my questions. So the first was just an observation that you realize pricing and renewable products is now extremely high, especially when you convert it to dollar per barrel. I was wondering, is there a level at which you think demand will be negatively impacted or does the regulatory nature of demand mean that you can still retain additional pricing power here?
And then the second question was just on the balance and JV. Can you remind us when you expect the capacity to start up that joint venture and what the phasing of that ramp up might look like?
Thank you very much for those questions. I can answer them. So first of all on demand impact, I would say that that it will be a question of supply demand that is steering the prices of -- in the market. We are so far not seen any impact on the prices directly impacting our demand. But of course, we are in a very high price environment overall in the petroleum complex and we remain following this, but for the time being we are not seeing any such moment.
And perhaps I can just add the obvious obviously, there is a link to the fossil diesel demand in many regions. So obviously that’s something they’re closely following whether general fuel demand is being affected by the high prices. So impact of course, yes.
And then with regards to [indiscernible] the plan is to have a start up towards the end of this year. And basically that would then mean that we would have first production volumes reaching the markets in the beginning of next year. So that’s the current timeline.
And to clarify, will that be the full capacity of that project? Or will there kind of be some kind of cumulative unit starting up? How will it work?
So there is the completion of the first phase of the project. So if you come in coming steps and the full capacity is then expected to be online towards the end of 2023 actually.
The next question is from Matthew Blair with TPH. Please go ahead.
Thanks for taking my questions here. Oil products ran 12% year old could you talk about the realized pricing on those barrels? Do you realize those headlines $25, $30 per barrel discounts? Can you also talk about your outlook for the California to offer your best program and whether you think pricing might improve just given some recent statements from CARB that they’re looking to tighten up the program. And then finally, can you walk through a little bit more the FID on Rotterdam -- is pretty high relative to say even at the NPC JV that just come from increased SAF flexibility or what’s driving that high capital cost per gallon? Thank you.
Yes, thanks, Matthew. I think Markku can answer the first question on the 12%.
So rather than going into the details of a pricing of our feedstock contracts, I would rather highlight that early on in March, we made a decision to phase out Russian crude oil and the last cargo arrived the middle of July, and from now on will be from our purchasing pattern fully non-Russian and the use of it will decline to zero as we consume that from the inventory. The last since I think already since May, we’ve been bringing in one cargo a month.
He can answer on the longer term outlook for the LCFS program. So the SAF price has decreased approximately $80 per metric ton in June, but now has now recovered and is around $90 to $95 metric ton. Over time, it’s a fundamental supply demand that will steer the LCFS credit program. It’s a transparent program of course, in the way that it’s a clear projection in what direction the credit targets are going.
And as you mentioned, there might, there has been talks about whether there should be some changes made to this market and that might be also the background why the market now has recovered slightly but it’s the fundamentals remain a key driver and the supply and demand enough of these different solutions that reduce the emissions in California will steer the value is there.
And perhaps just adding at the same time my understanding is there is a discussion ongoing whether this situation also enables them higher ambitions in the future. So it’s something we are of course following. Yes, following with interest. I can perhaps take the question on the Rotterdam FID and the fill on the higher CapEx compared to some other projects. So I think your observation is correct that comparing to some other projects, the per ton CapEx is higher, perhaps important to understand here is sort of the philosophy we have behind this Rotterdam investment. There is a couple of very important strategic features that we are investing in.
One is that we are maximizing the feedstock flexibility. So referring to the earlier question, we are indeed making sure that both from a logistics but also from a pretreatment capability all the newest technology solutions that we have are being incorporated. We feel this is important for the future.
And in a very similar way, we are also as you could hear that it includes for example, for sustainable aviation fuel that capability to produce up to several 700,000 tons of SAF we are also very clearly investing in that flexibility on the product side. Again, it’s of course about the production itself. But it’s very much also about the logistics capability to do that, and pass the third item, I would say we are also in a way, investing in ensuring we have streams available even though they’re smaller that can support renewable polymers and chemicals business and maximizing energy efficiency in all ways. So in that sense, it is a conscious choice that we want to invest in this flexibility in that approach.
The next question is from Iiris Theman with Carnegie. Please go ahead.
Hi, and thanks for taking my questions. So first one, do you expect or have you already seen any impact from bio-fuel mandate cuts in Finland? And if there are more mandate cuts in Europe, what kind of impact it could have on your demand?
And secondly, your high end of the sales margin guidance ranges below your key to sales marketing even though waste feedstock prices have started to decrease. So what kind of headwinds do you expect quarter-over-quarter?
And then thirdly, regarding your JV in the U.S. So what is the [indiscernible] going to be or let’s say next year, and or how much is the share of vegetable oils and how much is waste. And when we could start to see and improving feedstock i.e. more waste based feedstock? Thank you.
I can take the first question. And then hand it over to Kala. There was this question on the temporary bio-fuel mandate impact. And indeed, of course, if you take the example of Finland, where the decision was taken to temporarily reduce the volume mandate this year and next year, it obviously has an impact on the demand. At the same time, as the global demand has continued to be robust we have of course, also very proactively then started to plan the relocation of the volumes.
Of course, there have been a few countries who have had similar decisions. My understanding, for example, what we are Slovenia, we are of course, following the political debate whether there could be more temporary relaxations because of the high energy prices. What is perhaps important to note that the same time when I take the example of the Finish decision, it was also emphasized that the commitment to the long term targets remains very strong. And actually, there is also a debate whether then, towards the end of the decade, that growth of the mandate could be accelerated so that the climate impact is again, being taken into account.
So I think that’s also a very important message that this long term commitment to the mandate remains extremely strong in spite of some of these temporary measures taken. On the sales margin, that’s my high level of comment. I will let Kala to comment on it. Yes, you have, obviously, it’s something that the feedstock prices have a big impact. But it’s of course, good to note there are also other drivers. So for example, diesel prices is also an important driver and if we combine all these different drivers, the guidance we have given for the third quarter, which is indeed lower than what we were able to achieve in the exceptional second quarter, that’s sort of the combination of all these different drivers.
At the same time, we also highlighted the volatility has been exceptional. So, it is of course something that we will also keep monitoring very closely, but [indiscernible] any additions and then you can take the U.S. question.
No, indeed, I very much agree I agree with and to build on that, I mean, these are very, very volatile markets now and we have seen a very strong diesel market that has worked while supporting us strongly here in the second quarter, that is now has now been slightly weakening and it is of course, correlated towards the end of the year. So this is the current outlook that we have for the margins.
With regards to the JV production volume indeed, we will be using mostly soybean oil during the first phases before we have the pretreatment capabilities to utilize also waste and residue. So that will be the main feedstock used in the first phases. However, during the coming year, there will be pretreatment capabilities added and eventually Western residue will also be an important part of our feedstock in joint venture production unit.
The next question is from Raphaël DuBois from Societe Generale. Please go ahead.
Thank you for taking my question and congrats also for this very strong set of results. Two questions please. The first one is on your sales margin in Q2 which was way above what we were expecting 100 higher, I understand you won’t disclose within waste and residue animals such as cooking oil or other residues. Can you at least say our volatile is a split within this waste and residue bucket and especially in Q2?
Did you change it in a way that could explain also partly why you surprised so much in terms of sales margin and still on those sales margin you mentioned earlier sales optimization for achieving those sales margins. Can you maybe quantify a little bit and maybe give us an example of what sales optimization actually means? Is this that there are some buyers out there well disparate for products that you can sell at much higher price than usual? That will be very helpful.
And my second question is related to the acquisition you announced earlier this week. Can we have an update with this acquisition on the level of regression that you have for waste and residue compared to what you need today and what you will need with the strong rules that you have add a few. Thank you.
Thank you for the questions. And Kala I think you can give some more comments to the Q2 sales margin please.
Yes. So, I would say that the sales margining in Q2 also surprised us or slightly on the upside as the feedstock market started to come off towards the end of the quarter more than we had anticipated and I think that this is a key element here on the higher margin, and then of course, a very, very strong ULSD which we already have been commenting. Then with regards to the sales optimization, I would describe it so that we, of course, do an end to end optimization.
And as we look at this on a global basis, so it’s much more about the feed stocks and about the different markets and how do we, how we optimize between the different markets, between the different feed stocks, that is then driving the value creation that we are able to drive in the sales optimization. So I would describe it more around that then specific customer group. So we are looking at different markets, and different feed stocks and then optimizing the whole chain across them.
And just adding on the margin. I mean, it’s good to note the big picture that feed stocks, waste and residues did still increase on average close to 10% in the second quarter, so we have quite a steep increase during most of the quarter. And then it’s really the strength of the diesel that helped that exceptional margin. If I can briefly comment perhaps on this question around the acquisition of Walco and the level of integration that’s putting it in deep in the big picture.
As we have discussed also, in this course, our waste and residue feedstock strategy, we are indeed looking for opportunities, not only to grow geographically, but also to move upstream in the value chain. And there have been very different ways. We have examples where it’s really moving all the way to the source, you could say like we had with acquisition of Mahoney going into us cooking oil collection in the United States some years ago. But then we have also these examples where also the acquisition fits in where it’s really about trading, aggregation capability. And here indeed, we had earlier in the U.S. we announced the acquisition of Agri trading. And now we have also here in Ireland announced this agreement to acquire Walco which indeed is a very strong trader in Ireland for animal fats in particular.
The third element in this strategy is of moving upstream. It’s also it can be about logistics. You will remember from the past that we have also for example, in Europe, in Holland acquire terminals that we considered particularly important for our aggregation. So because it’s so different things, it’s a bit hard to put any numbers around it, but in a way strategically we are of course, working hard to make sure that as large part as possible of our supply would be also something where we have security access longer term.
The next question is from Kate O’Sullivan with Citi. Please go ahead.
Hi, thanks for taking my questions and congratulations. So firstly, just to follow up on the Marathon JV questions. Do you expect to see any impacts on timeline or otherwise related to environmental organizations in California? The challenging conversion of refineries and all that projects, pretreatment capacity, any further comments you have on the regulatory approval process specifically for the pretreatment facility? Is that ongoing?
Secondly, apologies if I missed, are you able to give any indication on current renewable product sales might have been in relation to the guidance range given that diesel prices and feedstock prices are weakening. Thanks.
Yes that’s a high level comment first. And comment first Marathon joint venture. So indeed, like we said in our outlook, the closing is still pending, we are expecting that to happen in the next couple of months. And it’s, of course, indeed the process, the time it takes to go through all these regulatory processes. It’s, of course, always something where we cannot predict the timeline, we are following it as closely as possible, and of course, supporting if there are any questions, but it has, from our perspective proceeded in a way according to the normal procedure. Kala any additional comments?
Not really, as I said, they’d be expended closing within the next few months. And there have been no showstoppers so far. And the actual project timeline is intact and according to the plan.
On the second question, sorry, I didn’t quite catch the question. Could you repeat what additional sales margin guidance you were looking for?
Yes, it was just really on the spot environment, really, of your renewable product sales margin. I know you can’t give specific figures, but it within relation to your guidance range that you’ve definitely for three quarters? Is it trending to towards [indiscernible] gudiance range at the moment?
In general, like I will just answer that we have, like also in the past, only given guidance for the following quarter. It’s been extremely volatile like we have seen in the second quarter. And I think it just like we discussed earlier reflects our best view at the moment. And of course, we are just then also following it, how exactly the tightness in the feedstock market is going to be reflected.
We are following also general fuel demand development, macro economics, all of these things can of course, then also have impacts also longer term, but for the very short term for the third quarter I think it represents our best view what we get.
The next question is from Zoe Clarke with Goldman Sachs. Please go ahead.
Thank you very much for taking my question and congratulations on brilliant results. My question is more about the medium term. And I appreciate there may not be a very clear answer here. But clearly, Neste is progressing with its expansion itself. And you’ve signed a couple of agreements and contracts on that trend. Do you have any early visibility on how the margins of that business may evolve? Is it fair to assume it will be more margin accretive than your existing renewable products business on the diesel side too early to tell? I don’t know any color that will be useful.
And the second thing related to that was clearly seen a lot of sustainable aviation fuel capacity, addition announcements from big oil, refineries across the world. I think even that, if you will you need some targets are now looking to conservative or too easy to achieve. Any thoughts on how the competitive landscape evolves there? Thank you very much.
Yes. Thank you for the question. And perhaps I can answer in general, like, we have at the moment, quite a limited volume of 100,000 tons of production capacity for [indiscernible] but we are very much looking forward to next year when we are then growing that volume by the end of the year, according to our projects, both in Singapore expansion and in Rotterdam to 1.5 million tons. And we continue to see that just like in road transportation also an aviation there’s a clear need for decarburization solutions. We are, of course, internally working on making their supply chain once we have that larger capacity in place to be efficient.
And therefore, we continue to expect that once we have a global supply chain, we have reached these larger volume levels that also from a margin perspective, this evaluation fuel would not be diluted, let’s say towards growth application that is clearly our target. If I didn’t look at it more the other part of the question from the competitive landscape, perhaps two comment on this one.
So first of all, I think it’s again very natural, it’s needed that there is also supply as there is clearly if you look at 2030 or beyond, there is a clear ambition to grow the share of sustainable aviation fuel in the kerosene pool which is of course very large and also from a supply security perspective, natural that it is important. There are a number of sources. Our approach to it is of course we continue to follow was on our own efficiency of our global setup.
And at the same time, it’s an important part of our business concept that we have that flexibility. We have the optionality to switch between different products which is also an important part of the concept. But we do remain if I look at the very long term, we do believe that navigation fuel is a segment where the growth will continue also beyond 2030, and hence, we do see it as a segment where we also expect attractive margin levels.
Next question is from Jason Gabelman with Cowen. Please go ahead.
I just wanted to ask on the Rotterdam project. So you mentioned that you’re investing more pretreatment process a wide variety of feed stocks. Can you discuss if there are any new feed stocks that you’re going to be processing at Rotterdam that you’re not currently processing today?
And then the other question is just on the US wind pricing dynamics, you mentioned, things have strengthened quite a bit. I think after the RVO were released, the rent prices actually weakened. And then they kind of started to move higher a few days later. So I was wondering if you think it’s related to that RVO release or if there’s something else going on?
Yes. Perhaps I can briefly take the first question. Kala will take the second one. In general, I refer to our general feedstock strategy. I mean, apart from the geographical expansion and the vertical integration we talked about earlier the third pillar of our feedstock strategy is that we’re continuously looking for new feedstock sources, lower qualities, challenging feed stocks, and we don’t have any specifics at the moment. I think it’s more about creating that capability and pushing, of course, to widen the window of different types of feed stocks that we can use. So hopefully a topic then in the future, we can give more color on when we are at the point, but Kala to add on.
With regards to the green market. So indeed, as mentioned, the sentiment has been rather strong in the market with the higher RVOs being announced. However, as mentioned, as well, the SME margins have looked rather healthy currently. And considering the current soybean oil, we believe that there might be a bit of pressure as well on the winds at current levels. But that remains, those certainly margins remain a key element in driving wind values going forward.
The last question is from Henry Tarr with Berenberg. Please go ahead.
Hi, there, and thanks for taking my question. One is just at the moment. Do you have access to feedstock that you’re not using in your operations today? So for example, in the U.S. etc and if there is that access, and presumably you’re sort of selling that, are the sales of this feedstock profitable or material and where is the profit recognized? So that’s a question.
And then the second question will just be on diesel margins in the oil products business. As you look out to the end of this year and then into 2023 Europe is still seeing a lot of Russian diesel imports today. If they dry up with the embargo, does that create a tailwind for diesel margins do you think 2023. Thank you.
Thank you for the excellent question. So as part of our feedstock strategy, of course, we are seeking new feedstock sources and we are identifying feedstock supply opportunities which are beyond our current needs. And so we do have access to the feedstock streams, which we aren’t currently not utilizing in our own production. And we are also partly optimizing through trading some of these volumes and those that remain rather small in the overall picture or and the result of that is part of our financial results in the renewable.
Diesel cracks going into 2023. So this is a complex situation. There is many drivers some pushing higher some lower, when I look at the cracks for the rest of this year or next year, it is in backwardation. So we expect slight weakening from today’s situation, let alone from the end of June where we were at 70. The time will tell how much the embargo itself will impact the market. So basically we look at for our own guidance, we look at the futures. That’s what we keep an eye on.
And perhaps if I may add at the same time, it’s good to remember when talking about diesel, it’s a global market, the macro economic outlook plays a huge role. And like you all know, there is a lot of question marks at the moment about the growth rate inflation. So I think that’s also important to look at it. It’s very much driven also more about the macro development, apart from this local.
Indeed a lot of macro economical impacts as well. One of those sort of pushes one direction while there’s a couple of others push into another direction. So difficult to read.
And if I may be cheeky just in July then the renewable and then sorry to ask you another question. But the renewable sales margin was within the guidance range for Q3. It is it fair to assume this?
Perhaps just a thing, we are actually not commenting on individual quarterly. Outlook is already in a very volatile market difficult enough. So.
Mr. Kekäläinen. That was the last question. So I turn the conference back to you for the closing remarks.
I would like to make some concluding remarks. Thank you first of all, very good questions, active participation. And as we have discussed, the conditions in the energy markets have been exceptional. And it’s clear that the volatility will continue with both geopolitics but also the decreased macro economic growth outlook affecting the development. I am at the same time confident that we will be able to navigate successfully also through upcoming challenges and continue creating value for our customers, employees and shareholders. We will continue to be focused in systematically progressing our growth strategy in renewable and circular solutions to reach our ambitious targets. Thank you. Stay safe, stay healthy.