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Good day, and thank you for standing by. Welcome to the Q3 2022 Neste Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Juha-Pekka Kekäläinen. Please go ahead.
Thank you, and good afternoon, ladies and gentlemen, and welcome to this conference call to discuss Neste's third quarter results published this morning. I'm Juha-Pekka Kekäläinen, Head of Neste IR. And here with me on the call are President and CEO, Matti Lehmus; CFO, Martti Ala-Harkonen; and the business unit heads, Carl Nyberg of Renewables Platform; 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. As always, please pay attention to the disclaimer since we will be making forward-looking statements in this call. 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, Juha-Pekka, and a very good afternoon also on my behalf. It's great to have you all participating in this call. In the third quarter, the war in Ukraine continued to have a significant impact on international energy markets, leading to high oil product and natural gas prices in Europe. In this turbulent market environment, Neste's operational and financial performance was very good. I would like especially to thank the Neste personnel for making this happen.
Moving now to Page 4. Our strong performance continued in the exceptional third quarter markets. The group's comparable EBITDA was EUR 979 million compared to EUR 524 million last year. All of our businesses improved their comparable EBITDA compared to the corresponding period last year. Renewable products performed well despite the negative impact of margin hedging and some challenges in outbound logistics, which caused postponement of some product deliveries to October.
Our comparable sales margin averaged $756 per ton, which was higher than in the corresponding period last year, but slightly lower than our third quarter guidance. The demand for renewable products remained good, while our sales volumes were impacted by the logistical delays and the scheduled maintenance at the Singapore refinery. I'm very pleased that the share of waste and residue feedstock remained very high at 96% level.
Oil Products' strong result was driven by the exceptionally high oil product margins, and particularly diesel margin was high. A large shipment of Russian crude oil was received in July, and most of the natural gas has been replaced with propane and other alternatives. Utility costs remain high, but replacing natural gas with propane has been economically attractive. Also, our Marketing & Services segment performed very well in the third quarter, and we were able to gain market share and our unit margins increased. During the third quarter, we took many important steps in our strategy execution, and I will come back to this later in the presentation.
Turning then to our financial targets. I want to state that our financial position remains solid. We reached an after-tax ROACE of 27.6% on a rolling 12-month basis, while our target is 15%. At the end of September, our leverage ratio was 16.3%, well within the targeted 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 Martti to discuss the financials in more detail.
Thank you, Matti. The third quarter was indeed performed under exceptional market conditions. Let's now have a closer look into the group figures. Neste delivered another quarter of high revenue in the third quarter. Our third quarter revenue was almost EUR 6.6 billion versus EUR 4 billion a year ago. So revenue increased by about EUR 2.6 billion or 64% compared to the previous year. The revenue growth also, for its own part, describes the exceptional market of the quarter.
The revenue growth resulted from overall higher market as well as sales prices, which had a positive impact for about EUR 2.4 billion. The slightly lower sales volumes than last year had a negative impact of approximately EUR 200 million. And additionally, a stronger U.S. dollar had a positive impact of approximately EUR 400 million on the revenue compared to the same period last year.
Neste posted a strong comparable EBITDA of EUR 979 million versus EUR 524 million a year earlier, which is [ 80% ] up from the third quarter last year. This is actually the second highest comparable EBITDA ever recorded by Neste in a quarter following the all-time high result recorded in the second quarter earlier this year. Like Matti already mentioned, all our businesses improved their comparable EBITDA compared to last year. Particularly, our Oil Products performed strongly, contributing EUR 537 million to the group's total comparable EBITDA. Renewable Products also performed well with comparable EBITDA at EUR 389 million, up from EUR 357 million last year, considering the negative hedging result and logistical issues mentioned earlier.
At our pre-silent call, I mentioned that we were still targeting the guided sales margin range for renewable products for the third quarter. Now we fell slightly below that due to logistical terminal congestion issues, contributing to some 40 kilotons lower renewable sales volumes than anticipated at the end of September. And all this happened at the very end of September. These volumes were postponed past to October. As we postponed sales were also very high-margin sales. This, together with a negative hedging result resulted us in falling slightly below the guided margin range for the third quarter in Renewable Products.
But then to close up for -- regarding all our businesses, our Marketing & Services also had a strong performance in the third quarter with comparable EBITDA of EUR 38 million. This is actually an all-time high performance for Marketing & Services in a single quarter. Our free cash flow was slightly negative in the third quarter at EUR 18 million. We were able to release cash from the net working capital in the third quarter in total EUR 347 million, while the capital expenditure in the third quarter was high at EUR 870 million, particularly due to the closing of our [indiscernible] renewables transaction.
With regard to net working capital, I would also like to mention that the group's net working capital in days outstanding was 43.7 days versus 44.6 days a year earlier on a rolling 12-months' basis at the end of the third quarter. This means that the turn rate in our total working capital has actually slightly improved year-on-year. And I think this can be considered a good result in a volatile market environment. The increase in the net working capital during the first 9 months of the year is, by and large, attributable to prices on the asset side, particularly to the growth in our inventories, as well as in the case of Oil Products also to substantially higher sales volumes compared to last year.
Our comparable earnings per share, which is the basis for our dividend policy, was EUR 0.79 versus EUR 0.42 a year earlier per share in the third quarter, and EUR 2.21 versus EUR 1.04 a year earlier, cumulatively in the first 9 months of the year. So cumulative comparable EPS has more than doubled in the first 9 months of '22 compared to last year. That reflects our strong delivery, I think, in 2022. And the year-to-date comparable EPS of EUR 2.21 could also be compared to, for example, the full year comparable EPS figure of EUR 1.54 last year.
If we then turn and look at the third quarter comparison bridge by business, we can see that, like I said, all our businesses improved their performance year-on-year. Most of the improvement, EUR 420 million, came from Oil Products. This was the result of an exceptional refining market and also exceeded our own expectations. We are also pleased with the performance achieved at our Renewable Products and Marketing & Services businesses.
When we then, on the next page, look at the same comparison bridge by profit driver, we know that sales margin improvement contributed EUR 452 million to the performance improvement. On the renewables products side, we achieved a good sales margin, while Oil Products margins were driven by the exceptionally high diesel margin during the quarter. Our sales volumes were a bit below the third quarter level of last year. The stronger U.S. dollar, here we excluding the FX hedges, had a positive impact as a standalone of EUR 111 million on the comparable EBITDA year-on-year. Our fixed costs were EUR 62 million higher than in the third quarter of last year, mainly due to the preparations of growth in the renewables business.
And then moving to the next page. When we look at the first 9 months of the year bridge by driver, it is very much the same story. We have practically doubled the cumulative comparable EBITDA from EUR 1.3 billion last year to EUR 2.6 billion in the first 9 months of this year. Sales margin, foreign exchange changes and sales volumes were all driving this improvement. To summarize, all in all we are very pleased with both our financial as well as operational performance in the third quarter and in the first 9 months of the year. At the same time, we have made significant progress in the execution of our growth strategy, thus continuing our successful transformation. With these remarks, I'll hand over to Carl to discuss more closely our Renewable Products performance.
Thank you, Martti. So this is Carl, good morning, good afternoon, everyone, on the call. So let me take you through the RP figures. Looking at our overall achievement in the quarter, we had a solid performance, reaching an EBITDA of EUR 389 million, EUR 32 million, up from the third quarter in 2021. On the other hand, EBITDA came down from the record level posted in Q2 on the back of lower volumes as well as lower sales margins quarter-on-quarter.
The comparable sales margin was very healthy at $756 per metric ton, up more than [ $150 ] from third quarter in 2021. On the other hand, sales volumes came down partly due to the scheduled turnaround in Singapore, but also partly due to the shipping delays at the end of the quarter. We continue to execute our strategy in strengthening our waste and residue feedstock base and supply capabilities and the share of base in residues continues to be high at 96%, up from 91% 1 year back. Investments were high during the quarter, reaching EUR 827 million.
We reached all conditions and regulatory approvals for closing the transaction with Marathon Petroleum for the Martinez Renewables joint operation. The Martinez Renewables project continues to be on track, and we are bound to reach mechanical completion towards the end of this year and start up in the beginning of next year. Our net assets have grown over the past year by almost EUR 1.5 billion as we continue to execute our growth strategy, while our RONA remained strong at 28.7%.
If we then move to the next slide, let me take you through the EBITDA bridge between Q3 in 2021 and Q3 2022. So as mentioned, volumes were about 74 kilotons lower than 1 year back, which resulted in an EBITDA drop of EUR 50 million. On the other hand, the strong sales margins resulted in a EUR 39 million higher EBITDA compared to the 2021 margin. The strong dollar also had a positive impact on the margins as the FX impact was EUR 89 million, excluding the hedges year-on-year. Finally, fixed costs continued to increase as we continue to build our capabilities and organization ahead of our -- of the capacity growth in 2023 when both Singapore expansion and Martinez Renewables facilities flow start up. If we then turn to the feedstocks.
Let's look at how the market developed over the quarter. So we saw the drop in veg oil prices continue in the third quarter. on the back of far more weakness due to the weaker fundamentals and through increasing stocks. While the whole feedstock pool overall softened, the drop in veg oils was significantly heavier, dropping almost 40% quarter-on-quarter. [ Based on resi ] did follow the decline, although at a slower pace, posting a roughly 25% decrease quarter-on-quarter. So while palm oil prices seem to have stabilized for the time being around current levels, based on residue spreads to the veg oil complex are at historical high levels, and there are some signs of further softening of price of waste and residues. On the other hand, the waste and residue markets remain tight due to robust demand and increased R&D capacity coming online over the course of the coming months and year.
If you then turn to the next page and have a look at the U.S. credit prices. So here, we can see a bit of a divided story. While on one hand we have seen [indiscernible] prices remain firm over the course of the quarter, the credit price have been hovering around $1.70 per gallon on the back of wide bean oil heating oil spread, also indicating rather healthy SME margins. On the other hand, LCFS prices continued to weaken quarter-on-quarter as it dropped to $86 per metric ton from $104 in Q2 as low carbon credit generation continued to be robust and prospects of increased R&D capacity in the U.S. is factored into the values.
The LCFS prices have been continuing to trend further down in October and the lower LCFS values may over time also impact price spread to lower CI feedstocks. However, the carbon intensity target will continue to grow annually and will increase again next year from 10% this year to 11.25% 2023, underpinning the need for more low-carbon solutions.
Let's then go through the sales margin before handing over to Markku on Oil Products. So the comparable sales margin averaged at $756 per metric ton, up from $679 in the third quarter 2021. While we consider this margin to be a good achievement, the fact is that we slightly also missed the third quarter guided range. The 3 reason for this was, as mentioned, the delays in shipping at the end of the quarter as some high-value sales volumes moved to the fourth quarter. We also faced a significant negative impact in our margin hedging.
So while feedstock prices came off, the benefit from the wider spread between veg oils and diesel was balanced by losses in our margin hedges as well as very strong waste and residue premiums. In addition to the above, diesel prices also came off reaching an almost 10% decline quarter-on-quarter. However, weaker diesel prices were partly compensated by a strong sales performance and sales premiums, which increased by almost $50 per metric ton quarter-on-quarter.
Production costs had also a negative impact on the sales margins on the back of increasing energy costs. However, our utility hedging continued to partly mitigate increasing utility costs. You can also note that our 100% Neste mile renewable diesel sales were up in the quarter and reached 30% of our R&D sales as we continue to build our presence with the brand in the market to reach out towards the end customers. Our utilization was slightly down from 1 year back due to the maintenance at our Singapore refinery. Otherwise, our production was running smoothly and at high capacity.
So this concludes the renewable products part. Thanks on my behalf, and over to you, Markku.
Thank you, Carl and good afternoon. Now a quick update from Oil Products. Our first slide, we had, again, a very strong quarter in a tight refining market. The comparable EBITDA was EUR 537 million compared to EUR 125 million the year before, and EUR 529 million in Q2 this year. Sales volume was at 2.9 million tons, up from 2.7 million tons the year before and 2.8 million tons in Q2 this year. The total refining margin was at USD 28 per barrel, up from an up [ USD 19 ] per barrel compared to Q3 last year and down USD 2 per barrel compared to the previous quarter this year.
The average Ural's share of the feed was 9% in Q3 2022, reflecting our decision to stop making new contracts for Russian origin feedstocks. The last crude cargo was delivered to Porvoo in July this year. The expectation is that the Ural's processing will be finished latest November when the inventory is fully consumed. Comparable return on net assets increased from minus 0.8% to 38% compared to the previous 12-month period.
On the next slide, total refining margin, volume and FX changes contributed to the improved results compared to the Q3 last year, while fixed costs and other items had a negative effect. The others is mainly driven by the divested base oil business. The disruption caused by the war in Ukraine and the general supply/demand situation continued to drive prices and volatility of diesel up. In contrast, gasoline weakened, clearly during the quarter. Diesel margin was peaking at close to USD 70 per barrel, a very similar level we experienced at the second half of during the second quarter of this year. Heavy fuel oil margin continued on a downward trend after showing some strength in the middle of this past quarter.
After being stable for a good part of 2021 and the first quarter of this year at around USD 10 per barrel, the margin shot to USD 30 per barrel range in Q2 2022, and stayed there for the Q3 of this year. The average refinery utilization rate was 80% compared to 91% in the third quarter of 2021 and 89% in the previous quarter of this year. The utilization rate in this quarter was burdened by the planned unit turnarounds. Refinery production costs were USD 7.2 per barrel compared to USD 4.7 per barrel last year and USD 6.8 per barrel in Q2 2022. The volatility of production cost is mainly due to the cost of utilities.
With that, I conclude the Oil Products intro and hand over to Panu for Marketing & Services presentation.
Thank you, Markku. Hello to all, this is Panu speaking. Very strong financial performance continued in Marketing & Services in Q3, EUR 38 million EBITDA is our best-ever result in third quarter. Return on net assets increased over 41%, which is indeed high level in retail business. Our market shares, both in diesel and gasoline developed very well in Finland and moderately in Baltic countries. We were able to reach healthy margins by excellent network price. However, gasoline demand has been decreasing in August and September due to high pump prices.
This is clearly seen in Baltics where the inflation is peaking up more than 20%. [indiscernible] Volumes increased more than 35% compared to last year in Finland and the bunk care volumes continued healthy development as well. [ LFO ] volumes also increased by 30% compared to last year. We have expanded Neste MY availability at station network in Finland during the last 2 years. And this year, we have expanded in Baltics as well. And I'm happy that volumes have increased over 30% compared to last year.
In order to increase our share of wallet in B2B segment, we have launched new EV charging service for our fleet customers. And first, results are positive and promising. This was shortly about Marketing & Services, handing over back to Matti.
Thank you, Panu. Let's now move on to the current topics. First, a few words on our strategy execution during the first quarter as we continue to make good progress in many important areas. The Singapore renewables capacity expansion project is approaching mechanical completion and continues to be on schedule for start-up at the end of the first quarter 2023. The project's CapEx estimate has been increased from EUR 1.5 billion to EUR 1.65 billion due to recent changes in currency exchange rates and the cumulative cost impacts of implementation during the pandemic.
I'm very pleased to note that the Martinez Renewables transaction has been closed. The joint operation is expected to start up in early '23 with pretreatment capabilities expected for the second half of 2023, and full production capacity of 2.1 million tons per year by the end of 2023. In the initial phase, the main feedstock for Martinez Renewables is expected to be primarily sustainably sourced soybean oil, but the share of waste and residue raw materials is expected to increase after the pretreatment capabilities come online. In Neste's global feedstock supply, the share of waste and residue raw materials is expected to stay above 90% in the coming years. While in the longer term, the growth in novel vegetable oils' availability may increase the share of sustainably produced vegetable oils.
The Rotterdam expansion project is on track, with the majority of the equipment purchase is already being done due to a successful front-end loading procurement. And finally, in Finland, we launched a strategic study on transitioning our Porvoo refinery to a renewable and circular sites and ending crude oil refining in the mid-2030s, through coprocessing and retrofitting of units and benefiting from available refining assets and know-how, we would have the potential to significantly grow our renewables and circular production in Porvoo in the long term. And these are just a few examples of strategy execution that make us closer to becoming the global leader in renewable circular solutions.
Let us then turn to the outlook for the fourth quarter. And there, we see the following: in Renewable Products, the sales volumes are expected to be higher than in the previous quarter; the waste and residue markets are anticipated to remain tight and volatile; and our renewable sales margin is expected to be within the range of $700 to $800 per ton. Utilization rates of our renewable production facilities are forecast to remain high, except for the scheduled 7-week maintenance turnaround at the Rotterdam refinery. The negative result impact of the turnaround is currently estimated to be approximately EUR 100 million on the segment's comparable EBITDA. Due to our mitigation actions via inventories, the sales volume and EBITDA impacts are, however, 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 markets, the fourth quarter total refining margin is expected to remain solid, but lower than in the third quarter. Sales volumes are forecast 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, and the high price levels are expected to have some negative impact on demand, particularly in the consumer segment.
So we continue to execute our strategy and invest in our business. Our cash out capital expenditure estimate for the year has not changed. We estimate approximately EUR 1.9 billion in CapEx, including about EUR 800 million for the Martinez Renewables joint operation. Other possible M&As excluded from this figure.
And this concludes the presentation, and we would now be happy to take any questions you may have. Operator, please.
[Operator Instructions] We will take our first question. Your question comes from the line of Joshua Stone from Barclays.
I have 3 questions, please. Firstly, just on the delayed sales volumes of 40,000 tons. What would your margin have been if that hadn't happened? And maybe just try and quantify that effect.
And then secondly, on the hedging. So just [ writing ] a lot of the issues you're having is the volatility of the [ Porvoo ] spread. It's a bit of an impact, it's perfect hedge now because you've got palm oil falling very dramatically and the waste business is not in the same way. So have you looked at other instruments to hedge your business, particularly for next year and maybe bean oil or maybe the U.K. contracts out there. And then lastly, just on Sweden. Have you got any line of sight to what's happening politically their risk of mandate cuts? And what are you planning around your sales allocation in the near term given that uncertainty?
This is Carl. So on the RP sales delay, so -- so we have not quantified that, but what we have indicated is that we would have been in the margin range that we had projected for the quarter if we wouldn't have missed those sales basically. So those were high-value sales that occurred in the end of the quarter due to these shipping delays.
But in terms of the hedging. So indeed, I think what we've seen here now in the third quarter is that when the palm oil market came off very quickly, we didn't see the rest of the feedstock pool react as quickly as the palm oil they had done. And that indeed led to the fact that it looks like a little bit of an unperfect hedge here. And this is something that we have been aware of. This is a proxy hedge, and only partly protects us from the market moves.
We have been also studying alternative ways of hedging our margin, and this is something that we constantly are looking at and considering. So definitely bean oil is one of the instruments that potentially could be also used in the future. Now for the Swedish situation. So there was, of course, a lot of talks around the elections around the mandate in Sweden Actually, for the time being, it seems that Sweden will maintain the current mandate levels and hence, we are not seeing any big changes for the time being. Of course, when we come into next year, there will be discussions on the mandate for '24.
But those will then be clarifying, let's say, in those discussions, and we'll have to keep in mind that there's still quite a lot of time before those decisions will be taken. And there's a lot of aspects of the overall [ red ] requirements that would have to be taken into account in those decisions for Sweden. Of course, as we are operating a global model, we look at optimizing this on a global basis and continue to drive also growth in other markets to diversify as well our position.
We will take our next question. And the question comes from the line of Mehdi Ennebati from Bank of America.
Thanks for the presentation. So 2 questions, please, on my side. First one, a follow-up regarding the hedging. I remember you telling us that you've hedged around 50%, 60% of your margin in the second half of 2022. And I wanted to know how much -- or let's say, what is the hedging ratio so far for 2023. Can you maybe tell us regarding Q1, regarding Q2, just for us to understand if there might be a reversal of that negative hedging impact from the beginning of next year?
And second question is about the Martinez refinery, which is about to start. You said that it will be using soybean oil. Should we expect that before the pretreatment [indiscernible] starts by mid-2023, the impact in terms of EBITDA will probably be marginal? If you can help us, that would be great.
And maybe just a small third question. Some other refiners are highlighting that so far, in Q3, in Q4, sorry, in October, refining margins are much higher than Q3. How can you explain that for you, this is not the case? Or maybe this has been the case regarding October, and you are extremely cautious for the remaining of the fourth quarter.
This is Martti. I can take the first one on the hedging. Indeed, what we have communicated in the past is that we have typically an average hedging ratio in the past of around 50%, and we had also communicated for the second half that it's somewhere in that 50% to 60% range. It was actually slightly over 60% in the third quarter, slightly under 60% in the fourth quarter, but that's exactly where we are now.
To your question on 2023, we have slightly evolved our hedging policy. We are now following a system where we try to look at the next 5 quarters and let's say, start with slightly higher hedging ratios and then reduce it quarter by quarter. We are currently somewhere under 20% for next year following this logic. And I would expect that with this, let's say, policy, we typically would end up somewhere in the 30% to 40% range for them as we go forward.
Yes. Maybe I can take the second question then around Martinez. So -- so indeed during the first half of the year, so before we have the pretreatment capacity coming on stream, we will -- the primary feedstock will be soybean oil. And at the same time, the volumes are not going to be as high before -- as we are ramping up. And then as you know, in the second half of the year towards the end of the year, we will get the Phase III where the capacity then will eventually grow. But directionally, of course, we aim to move towards waste and residues with the Martinez Renewables facility as well, and that way, then also continue to optimize our margins.
And on the refining, please. Refining margin.
So I'll take the refining margin question. So indeed, the diesel margin has been strong in early weeks of October. The market, however, is in backwardation. So when we put this together, that lead us into figures of -- of a strong, solid but lower than second quarter. Where we stand in today.
Yes. So if I continue from there, what has happened in the Oil Products side, the backwardation has sort of continued in the same way after 1 month after 1 month, but we don't know, of course, we cannot see into the crystal ball and into the future. So we base our assumptions on the current situation. On the backwardated curves looking at those.
Thank you. We will take our next question. And your next question comes from the line of Artem Beletski from SEB.
Also I have 3 to be asked. So the first one is relating to renewables and basically fixed cost outlook. So you're guiding for EUR 55 million increase in Q4 due to Martinez. So looking at the Q4 expectation, is it a good sort of run rate looking at next year [indiscernible] -- fixed costs? Then the second one is relating to oil products and actually looking at total margin, what you were able to achieve in Q3. So it didn't really come down as much compared to Q2. But at the same time, product margins, especially when it comes to gasoline have been coming down quite substantially. Could you maybe talk a bit more about relatively good development in Oil Products? And the last one, just in general, relating to term deal negotiations around -- for next year, basically. So have you started those ones and how situation looks like at this stage? .
Yes. This is Martti. I can first take the first one. The fixed cost color, will then comment on the term sales and Markku on the OP. On the fixed cost, like we -- like we pointed out, the fixed cost in renewables is expected to go up EUR 55 million in the fourth quarter. It's a combination of, indeed, the joint operation, Martinez, but also our preparations for the Singapore start-up and the general business growth. We are at the moment, of course, in the process of doing the planning for next year. Like you have seen, the fixed cost rate in renewables has been increasing during the year.
We, of course, have, at the same time, cost inflation ongoing, et cetera. So there may be some additional cost pressure, but this is something that we can then comment on in the following quarter. And then Markku, please on the...
I'll take the question on the strength of Q3 on oil products. So we basically benefit particularly and relatively to maybe some other players on the strength of the middle distillates, given the configuration in Porvoo that produces close to 50% of the overall mix in the Middle East late basket. So I think that will be the largest reason.
And secondly, we had a full benefit of the natural gas to propane transition in the third quarter. In the second quarter, we implemented the changes, but about half of -- half of the quarter, we still operated with natural gas heavy mix for the production of hydrogen. So with those 2 that explains the strong Q3.
Okay. And then if I come back to the term contract question. So if you look at the road transportation sector there, we have been concluding actually quite a few of our contracts in North America already. So those are mostly done. But then if you look at the European side, we are really in the midst of negotiating them. And we see very robust demand on -- also for term-based sales and looking to conclude term contracts very much in line with previous years as well.
Then of course, on the aviation side, we have been -- we have been concluding contracts already for some time now. And we also recently announced the long-term contracts with KLM and Air France. And so I mean the -- on the owned aviation side, things are progressing already very good for the coming year. But for the bulk of the volumes for Europe, we are still in the midst of the negotiations.
We will now take our next question. And your question comes from the line of Peter Low from Redburn.
The first one is on the logistical constraints and congestion issues you've talked about. Can you comment on where they occurred and what the risk is that they recur in future quarters? And then the second was on the Inflation Reduction Act in the U.S. So my understanding is that the blenders tax credit has been extended through to 2024, but then is potentially switching to be a producers tax credit after that. Can you comment on whether that's your understanding and how that would impact any volume you're exporting from Singapore or indeed Europe into the U.S. market?
Thanks, Peter. So Carl here. I'll try to answer the first question on the logistics. So we had some delays occur particularly in Rotterdam. And this is -- these things can happen, especially towards the end of quarter sometimes due -- especially when we have a backwardated market, that's what we were facing in the third quarter where there is a lot of volumes being delivered in -- towards the end of the quarter. At the same time, we typically -- we have been planning to -- planning our sales volumes to be more evenly distributed, and this is something that we are -- we are constantly following, and we will continue to try to avoid in coming quarters. But I would say that the delays we had in this quarter were exceptional in the size of magnitude.
And this is Matti. I can take the second question on the Inflation Reduction Act. So this is also our understanding that what was part of the Inflation Reduction Act is that the BTC was extended for '23, '24 Also, there is an introduction of SAF BTC for '23, '24. But we also understand there is a switch to a producer's tax credit then after '24. So starting in '25. I think we still need to understand the criteria, how it exactly works, what the magnitude of that credit is. And we, of course, need to understand also all the other mechanisms that are in place that will then determine, of course, what the impact is for our global optimization. But this is the information we also have at the moment that there would be a switch to a [ PTC ] after '24.
Thank you. We will take our next question. Your question comes from the line of Zoe Clarke from Goldman Sachs.
I had 2 small questions, if I may. The first one is regarding SAF, and I appreciate this has been briefly touched on before, but we think about effectively coming onstream in just a couple of months' time. And with those new contracts and agreements now having been signed, can I confirm with you the prior statement that was made in the past, that is it would only pursue staff if the margins that it yields to you are at least the same or higher than what you make in renewable diesel. And presumably, you have some better visibility now with the first couple of contracts signed.
The second question is relating to your guidance for the Renewable Products margin. I understand that you're looking at forward diesel curves, which are in backwardation. But having said that, if we look at the midpoint of that guidance, it effectively implies flat quarter-on-quarter margin on a division which this quarter had higher feedstock costs, negative hedge impact, and logistical constraints, it appears really to be on the conservative side. I just want to better understand the logic behind it.
Thank you for the question. This is Matti. I can start with the SAF margin. We have not put in any rules that we could not do deals at a certain margin level. What we have stated that, that continues to be valid, that we expect longer term that this SAF margin is not dilutive. That, of course, we do not see why the reason why it should be dilutive and that is more expectation that we have in the longer run going forward.
With regards to the margins -- so Carl here. So as also commented for this quarter, these markets continue to be very volatile and the guidance in our -- we are being prudent with our guidance here. It is true that the diesel market is in backwardation and could imply a stronger potential margin if the strength rolls forward.
At the same time, we also have to keep in mind that feedstock markets are being very, very strong at the moment. And the tightness is assumed to continue for Western residues as we are seeing the additional capacity coming on stream. So there are a multiple of elements here that is affecting. And then, of course, a third element is also the utility costs that are being very strong and potential nat gas prices going up towards the Q4 as we approach the winter.
So there's -- markets are volatile and predicting at this moment is difficult and hence also the wider range.
Thank you. We will take our next question. Your question comes from the line of [ Danelle Geronimo ] from FactSet. As there seems to be no answer, are you happy to move on to the next question.
Yes, that's fine.
Please stand by. And the question comes from Erwan Kerouredan from RBC.
I've got 2, please. First on the delays. And then second on the -- on the renewable product sales margin guide. So thanks for the additional color on the logistical hurdles. Can you just clarify, please, what is in and out of Neste's control, especially regarding what happened in the port of Rotterdam? This is my first question.
And then the second question. So if we summarize, so we have a shift of high-margin sales from 3Q to 4Q, in addition to that, we have a softening in prices for waste and residues. Besides a potential negative hedging results lingering into 4Q, what are the additional negative factors that push you to guide to what looks like a conservative margin guide from $700 to $400 to $800 per ton for the fourth quarter. These are my 2 questions.
Thanks, Erwan. So Carl here. So the delay, I mean, we are operating through different terminals, some of which we control and some of which are commercial and -- and then when it comes to this kind of shipping delays, I mean, sometimes you have -- you have a lot of vessels approaching the terminal, and that may cause delays and this was exactly what happened now in the end of 3Q.
Then with regards to the sales margin. So I think I briefly went through the different elements that we are seeing. So -- so partly, it is the diesel price, which impacts it and the backwardation in the diesel. Then on the other hand, also the waste and residues and veg oil prices, which remain volatile. And although they have been coming down and waste and residue prices are softening, we also see a very sort of solid demand in the market. So that is definitely then impacting us here.
And then finally, of course, then also the concern around nat gas prices and potential impacts then on production costs in the fourth quarter as well. So these are the main elements, I would say.
And can you confirm you are expecting a negative hedging results into 4Q as well, if you can guide on that? And that's my last question.
We don't -- this is Martti, the CFO. We don't guide on that specifically, but maybe just commenting on the movement between diesel and palm oil after the end of the third quarter. So it has become a bit more negative. And when that happens, it's not good for our hedging results. Because we have earlier made hedges at higher levels. So when they come to realize, they produce a negative. So at the moment, anticipation based on those movements is that it will be a negative impact in the fourth quarter.
We will take our next question. The question comes from the line of Iiris Theman from Carnegie.
This is Iiris Theman from Carnegie. So firstly, related to your U.S. JV. So is your pretreatment definitely going to be used already in early Q3?
And then secondly, related to global renewable diesel supply. So are you seeing any delays in investments, especially in the U.S. given lower California credit price?
And my last question is related to depreciations in renewable products. Those were some EUR 20 million higher in Q3. So is that a good run rate for Q4? And can you comment anything about Q1 level?
Perhaps thank you, Iiris, for the questions. This is Matti, I can start with the first one on the U.S. JV. What we have said is that the ramp-up happens in phases. The first phase is beginning of '23, which is then without pretreatment, we have then said that the pretreatment would start during the second half of the year. And then by the end of the year, we would target to reach that full nameplate capacity, our share 1 million tons. So these are the phases. We haven't yet detailed when exactly that pretreatment comes on stream in the second half.
Iiris, this is Carl. So maybe if I comment on the investments. So we do not really comment on investments made by our companies. But directionally, of course, we see that there are some elements in the market that is also probably affecting these investments to some extent now. And I think the weakening of [ CFS ] prices might impact this over the -- over the coming months as well. So -- but again, no further comments on other investments.
In general, what we have stated earlier that remains valid, is that we do expect supply to grow last -- next year quite significantly. We are, of course, part of it. Neste is growing its capacity, but also other players. So we do see quite a lot of projects coming on stream next year.
And on the depreciation, it could be a good estimate also going forward.
We will take our next question. The question comes from the line of Henry Tarr from Berenberg.
Just a couple. So the sort of lost volume, I guess, in Q3, is that going to be made up in Q4? So we should expect above average sales volumes in Q4? Or is this sort of somehow sort of lost volume?
And then on Singapore, this start-up of the facility end of Q1. Is it fair to assume -- I think you've suggested that the SAF agreements will be -- you've already made some -- so those are largely going to be met from Singapore. So already the volumes coming out of the extension or expansion are largely sold? So I'm just trying to get a sort of a ramp-up for Singapore at this point.
So thanks, Henry. This is Carl. So I would not classify this as lost volumes. It was a shift of volume from Q3 to Q4 here and our annual sales plan remaining intact as per plan. Of course, important to note here in the second half overall is that we had maintenance both in Singapore in Q3, and we are having currently maintenance in Rotterdam, which is impacting, of course, our production volumes and hence, also our sales volumes over the second half of the year. But this is a shift of volumes from Q3 to Q4.
And this is Matti, I can take the second question on SAF. So it is correct. If we just look currently, our production capacity is around 100,000 tons. And it is then only next year that we are growing our capabilities for SAF. Singapore expansion is an important part. After the unit has started up, we expect to reach a capability up to 1 million ton per year for SAF. And then as you will remember, at the end of the year, we expect to complete also the Rotterdam optionality project, which will then help after '23 with more capabilities on SAF. We have started making some contracts.
You have seen some of our announcements, like we this week announced a contract with Air France, KLM, a long-term one. But that work, of course, continues. So we are also here in the middle of doing different type of term negotiations. You will also remember our whole business model is then based on optionality. So we can then also flexibly choose whether we produce renewable diesel or SAF within the boundaries that we have for those SAF capabilities.
That's great. If I may, just squeeze one more in. On the sales discussions that you're having currently in Europe, I guess they focus largely on volume. But is there any sort of price element in there as well? I know there's lots of other moving parts with diesel feedstock prices, hedging, et cetera. But is there -- are the sales discussions going positively from a pricing standpoint? Or is it neutral? Or can you comment on that?
Thanks, Henry. Unfortunately, I cannot comment on any price discussions with our customers. But I mean, this is -- our commercial discussions where volumes and prices are definitely a central part of the discussions. But the bigger picture, as I mentioned earlier, is that we see that there is robust demand and for these term volumes in Europe.
We would take our next question. The question comes from the line of Matt Lofting from JPMorgan.
Just to follow up to this stage, if I could please. Firstly, just coming back to the deferred volumes from the end of the third quarter. Can you just confirm that you expect a full catch-up reversal of that in the fourth quarter and the issues underlying a fully transitory rather than structural? If there are any sort of structural elements in there, if you could explain them?
And then secondly, on sales allocation. I mean, you've talked at different points on the call around the sort of the optionality that the business is based around feedstock as well as sales allocations. Could you just talk about progress you're making in terms of enhancing that optionality through new growth markets into '23 and beyond? I know just in particular, a press release from the company a few weeks ago around Germany.
Thanks, Matt. So Carl here. Yes. No, I can confirm they were delayed these volumes only. So the full year volumes remain intact. And as I said, we are seeing that the demand for products remains robust currently. So in that sense, it's only about the delay.
This is Martti. I also want to confirm and actually, we did a very thorough check on the issue, of course, ourselves that -- would this be of any indication of market softness, and we have come to conclude that no. So those volumes have been now fast and postponed to the fourth quarter, like has been said many times. So just confirming that it was -- you could call it a negative surprise the congestion for ourselves regarding our earlier guidance, like I said on my behalf as well. And things like this do happen in this business at various terminals and ports. And some of the issues are really beyond our control.
And then coming back to your question on the sales allocation. And I mean, this is -- this is something, of course, that we have continuously been driving in our model to drive further flexibility and optionality. We are doing that, of course, in the road market, but of course, also the aviation and polymers and chemicals are important drivers for driving further flexibility and optionality.
And part of that is then, of course, also building a presence -- stronger presence in new markets and, for instance, in Germany. Now we have introduced the go-to-market where we are introducing the brand, which I believe you alluded to. So this is part of the strategy.
And then also what I was commenting earlier on Sweden. So I think this is an important element overall that we continue to drive, drive and build our presence in a wider scope also in the road markets.
We will take our next question. The question comes from the line of Henri Patricot from UBS.
I want to ask you about -- a couple of follow-ups and one more longer term. Just in the near term for next year, I wanted to check when it comes to the SAF production capacity, do you store away up to 1 million tons? Or is there a bit of a ramp-up period over the course of next year? And then secondly, again, for 2023, what's your best estimate at this point around the sales volumes for SAF for next year based on the contract that you've signed and discussions -- of the discussions that you may be having at the moment?
And then lastly, I wanted to ask more longer term. So we've seen these new contracts that you signed, and we've seen others from competitors seems to be clearly good traction, very good interesting SAF. So have your expectations on the pace of growth for SAF in the next few years change recently, and we see more potential there?
Thanks, Henry. This is Matti, I can perhaps answer. So briefly on the short term like for any product, obviously, there will need to be a ramp up. First of all, the unit needs to be ramped up, but also the supply chain needs to be ramped up, all the commercial agreements need to be ramped up. So I think that's exactly one of our focus areas next year, whether it's for road transportation, whether it's for aviation or of course, for polymers and chemicals.
At this point in time, we don't have an exact volume target for SAF. Of course, we will do our best to ramp up as quickly as we can. On the longer term, I think in a way, it's a good observation that there is clearly interest. I mean, for example, this week, there was another announcement for a long-term target by the international commercial aviation organization to target net zero aviation in 2050. So that's a very long-term target.
But we also see, of course, regulatory development. There is at the moment, discussion, for example, in Europe about introducing an EU-wide mandate for aviation starting in 2025. That would then start growing, first a small level, probably the proposal is, I think, 2%, but then starting to grow. And of course, we also see the type of voluntary demand, which is not linked to regulation. There is many airline companies who have their own targets. So in general, we look at it as a market which we expect to develop over the coming years.
We will take our next question. And your question comes from Kate O'Sullivan from Citi.
So finally, just a follow-up on Martinez. Could you indicate the scale of volumes that the pretreatment will cover from mid next year or rather what proportion of feedstock could be sourced from waste and residues? And are there any difference in specifications on the feedstock type and quality that will be supplied by Neste and Marathon from this point, considering Neste have a robust waste and residue sourcing network? And then just secondly, have you any update on the Walco integration since the closure of the deal in the quarter. Thanks very much.
Okay. So thanks, Katy. So on the Martinez, Martinez pretreatment facility, so as I said, that will come on stream in Q3 and the target is then to create much more flexibility in terms of the feedstock base and then it's more of a commercial decision then that what is the -- what are the feedstocks that will be used. And -- but of course, I mean, the pretreatment facility will enable a much more wider feedstock pool for the facility. So -- so in that sense, it will give more flexibility and also being in line with the direction we have been going towards more waste and residues.
And with regards to the Walco integration, that is proceeding according to our plans. And being part of our feedstock platform in Europe. And yes, all things going well on that side.
This is Martti. On the feedstock, maybe just adding what Matti already said in the beginning in his opening. So the -- we are now saying that our global feedstock supply, the share of waste and residue raw materials is expected to stay at above 90% in the coming years. And this takes into account also the pretreatment, and the Martinez JV. So I think it shows a very high commitment to the waste and residue side.
We will take our next question. And the question comes from the line of Jason Gabelman from Cowen.
This is Jason Gabelman from Cowen. I guess I wanted to ask you a kind of start-up profile for the Singapore project. When do you expect that to get to a level where it's -- or I guess I should say how long does it take to get to a level where it's kind of lined out and generating earnings in line with long-term expectations?
And then my second question is just sales mix between the U.S. and Europe. Is that changing at all in 4Q relative to what you've historically done just given weakness in some of the environmental credits in the U.S.?
Thank you, Jason. This is Matti. I'll start with the first question on Singapore, so Singapore expansion ramp-up profile. In general, there is, of course, 2 things. One is the technical startup that takes its time for a large and complex facility. It can be 1 quarter, 2 quarters, somewhere in that range. But I think more importantly than also, of course, the whole commercial ramp-up of ramping up the supply chains and the sales.
We can't give, of course any, let's say, pre-estimate of what that is our target is, of course, to do that as quickly as possible. And certainly, that's our focus area to do that ramp up during next year.
Jason, so this is Carl. So thanks for the question on the sales mix. So we continue to optimize our sales mix and allocation of volumes. And although the LCFS credits have been coming down in the U.S., the RIMS have been very, very supportive. And from our perspective, of course, we look at it on an end-to-end basis. So optimizing based on the feedstock cost and the end product sales. So looking at the North American situation currently, so we have been actually selling a bit more here in the third quarter, and we still -- we also see a very robust demand in North America also for the fourth quarter.
Maybe as a general comment on markets under development, we are seeing that overall, the legislation is now advancing actually at a faster pace in North America. So we had some moves from Canada on federal mandates. And also the demand in U.S. is ramping up and maybe even overtaking the demand in Europe on a little bit more longer-term perspective. But this is, of course, something that we are constantly optimizing in our S&OP.
Thank you. There seems to be no further questions. So I'll hand back to the speakers for any closing remarks.
Thank you. This is Matti, and thank you for very good questions, active participation. As we have discussed, conditions in the energy market have been exceptional in the third quarter, and it is likely that the volatility will continue with both geopolitics and decreased macroeconomic challenges, and continue to create -- at the same time, I'm confident that we will be able to navigate successfully also through upcoming challenges and continue creating value for our customers, employees and shareholders. So thank you, and stay safe.
This concludes today's conference call. Thank you for participating. You may now disconnect.