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Good day and thank you for standing by. Welcome to the Q4 2022 Neste Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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, [indiscernible]. Please go ahead.
Thank you and good afternoon ladies and gentlemen. Welcome to this conference call to discuss Neste's fourth quarter results published this morning. I am [indiscernible], Head of IR at Neste. And here with me on the call are President and CEO, Matti Lehmus; CFO, Martti Ala-Härkönen; and the business unit heads Carl Nyberg from Renewables Platform; Marko Covenant 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 and a very good afternoon also on my behalf. It's great to have you all participating in the call. Neste's strong performance continued in the fourth quarter. The war in Ukraine continued to have a significant impact on international energy markets leading to volatile oil products and natural gas prices in Europe.
In this turbulent market environment, Neste's operational and financial performance was very good in the fourth quarter and I would especially like to thank the Neste personnel for making this happen.
Moving now to the page four and the fourth quarter 2022 in brief. We had an excellent year in all our businesses as our strong performance continued in the exceptional fourth quarter markets. The group's comparable EBITDA was EUR894 million compared to EUR591 million last year.
Renewable Products performed well and we were able to continue optimizing our sales mix also towards the end of the year, while benefiting simultaneously from somewhat lower feed of costs.
Our comparable sales margin averaged $783 per tonne, which was higher than in the corresponding period last year and in line with our fourth quarter guidance. This was a good achievement as margin hedging continues to have a negative impact on the sales margin.
Sales volumes again reached a high level of 779 kilo-tonnes approximately at the same level as in the fourth quarter of 2021, despite the scheduled maintenance at the Rotterdam refinery. Rotterdam refinery also had an unplanned shutdown at the end of the quarter which did not impact the fourth quarter sales volumes.
The share of waste and residue feedstock remained very high at 96%. The Oil Products strong result was again driven by the exceptionally high Oil Product margins and particularly, diesel margin was high.
The use of Russian crude was 3% in the fourth quarter total input with all remaining inventories now used by the end of the quarter. Utility costs decreased towards the end of the year and we continue to optimize the use of propane. Sales volumes increased from the third quarter, but were on a lower level than in the fourth quarter of 2021.
Also our Marketing & Services segment performed very well in the fourth quarter and we were able to gain market share and our unit margins remain at a good level. During the fourth quarter, we took many important steps in our strategy execution and I will come back to that later in the presentation.
Let me then turn to slide five on safety. Safety performance continues to be the key focus area in Neste. During 2022, we were unable to improve our total recordable incident frequency as it increased from the 2021 level of 1.4 to 2.
In process safety, we were able to maintain the performance with a process safety event rate of 1.4. We continue our focused efforts to ensure a continuous improvement in our safety performance.
Then turning to the financial targets, I note that our financial position remains solid. We reached an after-tax ROACE of 30.1% on a rolling 12-month basis, while our target is 15% minimum. At the end of December, our leverage ratio was 13.9%, 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 fourth quarter was indeed performed in very volatile market conditions like the whole year of 2022. So let's now have a little bit closer look into the group figures and I will take some highlights from our fourth quarter and full year 2022 figures.
To start with, we delivered another high revenue quarter in the fourth quarter. Our fourth quarter revenue was €6.6 billion versus €5 billion a year earlier. That's a revenue increasing by about €1.6 billion or 32% compared to the previous year. The growth resulted mainly from higher market and sales prices which actually had a positive impact of actually the same amount approximately €1.6 billion on the revenue compared to the last year earlier.
Like Matti already mentioned, what's more important of course is that we posted a strong comparable EBITDA of €894 million in the fourth quarter. This is up by about 51% from the €591 million recorded a year earlier. Our renewable products continued to perform strongly with comparable EBITDA at €415 million. This was supported by a strong sales performance and an optimized sales mix.
Of notice also, that we were able to optimize our sales mix towards the end of the quarter, while benefiting simultaneously from somewhat lower feedstock costs, particularly at the very end of the year. Also our oil products continue to perform strongly, contributing €450 million to comparable EBITDA versus €168 million a year earlier.
Finally, our Marketing & Services continued its good performance with comparable EBITDA at €21 million, although impacted by inventory losses in line with falling oil product prices. After the full year results for 2022, Neste's revenue reached €25.7 billion versus €15.2 billion a year earlier, up by about 70% year-on-year. Higher market and sales prices contributed about €7.5 billion of the revenue increase, while higher sales volume of about €2.1 billion and a stronger US dollar about €1.2 billion.
The group's full year comparable EBITDA reached an all-time high of €3.54 billion compared to about €1.92 billion in 2021. This is an improvement by about 84%. It is worth highlighting that all our businesses improved their performance last year year-on-year and actually all also made an all-time high result. The comparable EBITDA of renewable products reached €1.76 billion versus €1.46 billion a year. A year earlier, there's an improvement by about 21% in a year of multiple scheduled plant shutdowns.
As to Oil Products, the main product margins improved significantly during the year and oil products comparable EBITDA reached €1.65 billion. Also, Marketing & Services posted a record year with comparable EBITDA at €126 million. And of note also, that the comparable return on net assets was very high in all our businesses.
A particular highlight of the fourth quarter was the clear improvement in our cash flow and the reduction in net working capital, compared to the previous quarters of last year. We generated free cash flow of €596 million in the fourth quarter, while succeeding well in releasing €601 million from net working capital, mainly with the tight optimization of our raw material and product cargoes and inventories towards the end of the year. This is visible in our balance sheet at the lower inventory level compared to the end of the third quarter last year.
Of note also, that the turn rate of the group's net working capital in days outstanding was 35.4 days on a rolling 12-month basis at the end of last year. This is also a clear improvement from 43.7 days from the end of the third quarter last year. Finally, our comparable earnings per share, which is the basis for our dividend policy was €0.84 per share in the fourth quarter and €3.04 for the full year of 2022. This is almost double compared to the €1.54 for the full year of 2021.
The Board proposes to the Annual General Meeting, a maximum dividend of €1.52 per share versus €0.82 per share year earlier, consisting of an ordinary dividend of €1.2 per share, an extraordinary dividend of €0.25 per share and a discretionary second extraordinary dividend of €0.25 per share total in a maximum of €1.167 million. That is almost €1.2 billion versus €630 million a year earlier.
When we then turn to and look at the fourth quarter comparison bridged by business, we can see that the comparable EBITDA increased year-on-year in the fourth quarter was driven by oil products, which had a €283 million positive impact. This was a result of the exceptional refining market. However, as I noted earlier, we are also very pleased with the performance achieved at both our Renewable Products and Marketing & Services businesses.
When we on the next page look at the same fourth quarter comparison bridge by profit driver, we note that our sales margin improvement contributed in total €310 million to our performance improvement in the fourth quarter. On the renewable products side, we achieved a good sales margin while oil products margins were driven by the high diesel margins during the quarter.
Our sales volumes in renewable products were a bit above last year's fourth quarter level at 779,000 tons and clearly above our third quarter sales volume of 698,000 tons as we had guided earlier. In oil products, our sales volume was somewhat lower than the previous year. The stronger US dollar excluding FX hedges had a positive impact of €96 million on the comparable EBITDA year-on-year. Our fixed costs were €96 million higher in the fourth quarter of last year, mainly due to our growth in capacity projects and ramp-up preparations at the renewables side of our business.
And then moving to the next page. When we look at the full year 2022 bridge by driver, it is very much the same story, particularly the sales margin improvement but also FX changes and for the full year with delight also sales volume improvement these factors were all driving the improvement in the group's comparable EBITDA, while on the other hand our growth strategy execution increased our fixed costs. Other items include also the divestment of our base oil business.
To summarize and close up from my side, we are overall very pleased with both our financial as well as operational performance in the fourth quarter as well as the full year of 2022. At the same time, we made significant progress in the execution of our growth strategy during the year, thus continuing our successful transformation. Despite the volatile market conditions prevailing into the current year this provides a very interesting starting point into this year 2023.
And with these remarks, I'll hand over to Carl to discuss more closely our renewable products performance.
Thank you, Martti. This is Carl. And good morning, good afternoon to everyone on the line. So let me take you through the RP figures. So 2022 was a record year for renewables products as we reached a comparable EBITDA of €1.762 billion.
I would really like to start by thanking all of our colleagues contributing towards the renewables business in reaching this excellent result. It's my belief that it's the result of our strong values enabling CMS cooperation across the organizations, as well as a very efficient end-to-end steering to drive value.
If we then move to -- on to look at the fourth quarter. We again had a strong quarter in RP reaching an EBITDA of €450 million, which was roughly the same as one year back and €26 million, up from the previous quarter's EBITDA of €389 million. The comparable sales margin was very strong at $783 per metric ton, slightly up from the margin one year back and in the upper part of the guided range of $700 to $800 per metric ton. This was achieved through successful feedstock optimization with a high share of waste residue and decreasing feed of market price, as well as a strong sales performance and optimization towards the end of the year.
Sales volumes were high at 779 kiloton, which corresponds to the volumes in the fourth quarter one year back, but on the other hand up by more than 80 kilotons quarter-on-quarter despite the long turnaround in Rotterdam. At the end of the quarter on the 22nd of December, we also had a fire at the Rotterdam refinery which resulted in Rotterdam being down for a month. The volume impact of this unplanned shutdown did not impact the fourth quarter, but has an impact on the first quarter volumes.
Investments came down quarter-on-quarter, which remain elevated at €370 million almost 75% up year-on-year as we continue to invest in growth. Our net assets have grown over the past year by almost €1.7 billion as we continue to execute our growth strategy, while RONA remained strong at 26.6%.
Our CapEx expenditure will remain high over the coming year as we continue to invest in our production capabilities and product flexibilities in Rotterdam, Singapore and Martinez.
If we then move to the next slide let me take you through the EBITDA -- between Q3 2021 and Q3 2022. So as mentioned volumes and margins improved marginally with the combined impact of approximately €4 million compared to result one year back as we continue to drive strong margin management.
The main changes from the result one year back is coming from the FX where the strong dollar contributed towards roughly €70 million stronger results year-on-year. On the other hand our fixed costs grew significantly year-on-year as we continue to scale up our business ahead of the Singapore expansion and Martinez renewables. So year-on-year our quarterly EBITDA ended up €3 million below the Q4 EBITDA in 2021 at €415 million.
If we then turn to the feedstocks, let's look at how the market developed over the quarter. So the big picture is that visible oils have come down substantially from the peaks seen in Q2 and the forward market structure has weakened. The market seems to have found good support at these levels and has been trading range bond.
Western residual spreads have softened over the course of the second half as the market stabilized after drop individual to complex. We however expect waste and residual markets to remain tight as demand growth continues to be robust, while spreads though likely will need to stay competitive compared to alternative feedstocks.
If we then turn to the next page and have a look at the US credit prices. So here we continue to see a divided story. So while the RFS before in prices remain relatively strong over the course of the quarter the LCFS prices have continued to weaken quarter-on-quarter.
If you start by looking at the rent credit prices they reached an almost €200 per gallon during the quarter, but dropped deeply then on the back of the announcement from the renewed RVOs by the EPA as the market was disappointed with the change. However, the market then swiftly recovered and came back to €1.70 per gallon range.
The market seems relatively stable and supported these levels on the back of current been heating oil spreads and is currently trading around €160 per gallon. On the other hand LCFS prices continued to weaken quarter-on-quarter and dropped to $66 per metric ton from $86 in Q3.
Low carbon credit generation continued to be robust on the back of growing credit generation from renewable, natural gas and electricity as well as growing R&D capacity in the US.
The LCFS price seems to have stabilized now and are currently trading around $0.60 per gallon. The carbon intensity target in California bill however continued to grow annually and similar programs are being planned in several states currently underpinning the need for more low carbon solutions.
Let's then go to the sales margin before handing over to Markku and Oil Products. So the comparable sales margin average as mentioned at $783 per metric ton slightly up from $779 in the fourth quarter 2021. This was supported by a strong sales performance including an optimized sales mix as well as excellent performance in our feedstock supply. Also production cost has had a positive impact on sales margin as energy costs started trending down towards the end of last year.
On the other hand we also faced a significant negative impact in our margin hedging. So while feedstock prices came off, the benefit from the wider spread between [indiscernible] and diesel was balanced by losses in our margin hedges.
Our 100% Neste MEUR renewable lease offers were up in the quarter and reached 30% of our RD sales as we continue to build our brand in market to reach our -- reach out towards the end customers.
Then finally as previously mentioned the turnaround at our Rotterdam refinery in the early part of the quarter as well as the unplanned shutdown at the Rotterdam refinery due to the fire that occurred in December 22 drove down our utilization year-on-year. This concludes renewables products part.
Thanks on my behalf, and over to you Markku.
So thanks Carl. Good afternoon all. First, I would like to thank my Oil Products colleagues for making these all-time high annual results possible.
Let's look first at the comparable EBITDA development. We had again a strong quarter in the tight refining market. The comparable EBITDA was €450 million compared to €168 million the year before, and €537 million in Q3 2022.
Sales volume this quarter was three million tonnes, down from 3.5 million tonnes the year before, and up from 2.9 million tons in Q3. The total refining margin was US$23.5 per barrel up from US$10 per barrel compared to Q4 2021, and down US$4.5 per barrel from the previous quarter.
The average Urals’ share of the feed was 3% in Q4 2022, reflecting our decision to stop making new contracts for Russian origin feedstocks. The last Urals’ cargo was delivered in July 2022, and we have now consumed all remaining Urals’ barrels from the inventory and thus the share will be zero from now on. Comparable return on net asset increased from 3.2% to 48% compared to the previous 12-month period.
We take the second slide. Now over to the EBITDA bridge. Total refining margin and FX changes contributed to the improved result compared to the Q4 last year, while volume and fixed cost had a negative effect.
Moving over to the next slide. On this slide, you will see the development of the main market drivers. The disruption caused by the war in Ukraine and general supply and demand situation continued to drive volatility of all products.
Diesel margin peaked in October, after which is declined towards the year-end. Gasoline followed the same pattern with an uptick in December. Heavy fuel oil margin had a positive impact on total refining margin during Q4.
Moving over to the next slide. And then about the development of refining margin. After being stable for a good part of 2021 and the first quarter of 2022 at around US$10 per barrel, the margin shot up to US$30 per barrel range in Q2 and stayed there over the summer. Q4 was strong, but somewhat down from Q2, Q3 levels. The average refinery utilization rate was 78% compared to 93% in the fourth quarter of 2021, and 80% in the previous quarter.
The utilization rate in the last quarter of 2022 was burdened by the planned unit turnarounds. Refinery production costs were $8.8 per barrel compared to $6.2 per barrel in Q4 2021 and US$7.2 per barrel in comparison to the previous quarter. The volatility of production cost is mainly due to the cost of utilities.
With this I'm handing over to Panu for Marketing & Services presentation.
Thank you, Markku. Hello this is Panu Kopra. Solid financial performance continued in Marketing & Services in Q4. In spite of rapidly increasing supply prices, we were able to mitigate stock losses quite well and landed all almost a comparable year level. This was mainly due to excellent pricing both in network and B2B pricing segments. €126 million EBITDA is our best ever yearly result and return on net assets increased over four projects. Same time our market shares both in diesel and gasoline developed very well in Finland and moderately in Baltic countries as well.
However, gasoline demand has been decreasing in second half of the last year, mainly due to high pump prices and high inflation. Especially, in Baltic's demand was decreased due to very high inflation in all three countries.
Since day one volumes increased more than 35% compared to year before. LFO and bunker volumes continued healthy development as well.
We have expanded net availability at station network in Finland during the last two years. And last year, we expanded also in the Baltics and I'm happy that volumes have increased over 35% compared to last year.
Last time, I informed that we have launched new EV charging service for our fleet customers and first results are positive. In addition to it, we also opened in December one public high-power charging station in Mid-Finland and it was warmly welcomed by our private customers.
This was shortly about Q4 and last year in Marketing & Services. Handing back to Matti.
Thank you, Panu. So let's then move on to the current topics. First, a few words on our strategy execution during the fourth quarter, as we continue to make good progress in many important areas.
The Singapore renewables capacity expansion project reached mechanical completion by the end of 2022 and continues to be on schedule for start-up at the end of the first quarter 2023. The Rotterdam expansion project is progressing well. And also the SAF optionality project is on track for completion at the end of the year, increasing our SAF capacity by 0.5 million ton in the beginning of 2024.
The joint operation with Martinez Renewables is expected to start up its Phase 1 in early 2023, so in the very near-term future 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.
I also note that in the execution of our feedstock strategy, we made an important step by closing the acquisition of sequential in January and thereby strengthening our used cooking oil collection platform in the United States. These are just a few examples of our strategy execution that makes us closer to becoming a global leader in renewable and circular solutions.
As an outlook for the first quarter we see the following. First of all, we expect volatility in the oil products and renewable feedstock markets to remain high making the forecasting of margins challenging in both renewable products and oil products.
In renewable products, the sales volumes are expected to be lower than in the previous quarter. The waste and residue markets are anticipated to remain tight and volatile. Our renewable sales margin is expected to be within the range of $825 to $925 per ton, supported by attractive waste and residue prices in the beginning of the year.
Utilization rates of our renewables production facilities are forecast to remain high, except for the one month downtime in Rotterdam. The Rotterdam downtime is expected to have a negative impact of approximately €85 million from the segment's full year comparable EBITDA, based on the estimated production losses and repair costs, mainly affecting the first quarter.
The market in oil products remains volatile and impacted by the war in Ukraine. Based on the current forward markets, our first quarter total refining margin is expected to remain solid, but somewhat lower compared to the fourth quarter of 2022. The first quarter sales volumes are forecast to be at approximately the same level as in the previous quarter.
In Marketing & Services the sales volumes and unit margins are expected to follow the previous year's seasonality pattern in the first quarter. The slowing economy is expected to have some negative impact on the overall demand.
Let me then turn to other topics for 2023. We continue to execute our strategy and to invest in our business growth and we estimate approximately €1.8 billion in CapEx. Possible M&A is excluded from this figure, which includes as a main contributor our growth projects in Singapore, in Martinez and in Rotterdam.
This concludes the presentation, and we would now be happy to take your questions.
Thank you. [Operator Instructions] We will take our first question, and the question comes from the line of Erwan Kerouredan from RBC. Please go ahead. Your line is open.
Hi. And thanks for taking my question and congratulations on the strong set of results this morning. I got two questions on margins and then one on CapEx, please. So on margins, so on the renewable product sales margin, the first quarter guidance slide in the presentation indicated includes Martinez, can you just clarify the upside or downside coming from the JV with Marathon and the ramp-up. Obviously, there's some impact on the feedstock side but are there other elements at play in this margin assumption from Martinez specifically?
And then maybe more broadly what are the biggest drivers of variation within the range of $8.25 to $925 per ton that you provided, does it have to do with feedstock uncertainty, hedging. That would be helpful. And then finally on CapEx – how much is inflation, especially in Singapore in the €1.8 billion CapEx figure that you've put forward for next year? These are my questions. Thank you.
Okay. Carl here. Thank you for your questions. So I'll start with the margin questions. And – and so if you look at the Q1 margin and the impact from the Martinez, so we are – Martinez will be starting up here in the Q1. But the volumes coming from Martinez are still rather small. So the impact will be quite limited in impacting our margins.
As such, as previously communicated as well, during this first phase, we will not have the pretreatment unit available. So we expect the margins to be rather modest compared to our margins and therefore having a diluting impact in this first quarter.
Then looking at the different drivers for the margin in Q1. So I would say that it is the traditional element. It's the feedstock pricing Western residue premiums over the veg oils. And of course, the differential between the veg oil complex and the petroleum complex has an impact. And then of course the diesel price in general as well has a significant impact on our margin here.
Then I would say over the course of the last few quarters, the production cost and the energy cost as such has been also a significant driver for our margin creator. So I would say that these are really the three main elements. So the feedstocks, the diesel price and then the cost of energy.
And I will take the second question, which was on the CapEx outlook for 2023. As a general comment, as you have followed Neste, you know that we have a number of ongoing growth investments. So the majority of that €1.8 billion CapEx is related to renewable products and especially the growth investments in that segment.
Within that you had a specific question on the Singapore expansion, the CapEx overall CapEx continues to be aligned with what we also disclosed at the previous quarter so €1.65 billion. The tail of that is of course one of the CapEx elements in this year's CapEx forecast. I also note two for example, other major projects that are included in this number. We have the Rotterdam capacity expansion which is a significant driver for CapEx in 2023 and also the Martinez Phase II and III which also then are included in this year's CapEx forecast. Of course, you will also find in the overall number than the normal maintenance for both renewable and all products...
Thanks very much. So I understand there's no inflation right taking into account in this €1.8 billion CapEx figure across all facilities.
This is basically our estimate at the moment of the full year's CapEx. It of course takes into account the CapEx forecast for this year. And in some projects, we have of course seen also the inflation. So that is included in the numbers.
Yes, it includes the inflation impact in the number provided.
Understood. Very helpful. Thank you.
Thank you. We will take our next question. And the question comes from the line of Pablo Cuadrado from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Good afternoon everyone. Just three quick questions from my side. The first one would be about -- you can share a little bit your views about the LCFS credits in California. I mean, you were explaining before and we have seen that clearly they have been reaching five-year lows recently. And my question is more link. If you have had an indication, if local authorities there that may be thinking to intervening in the market to limit the credit surplus or what's either be your view there?
Second question would be just quickly on the working capital. I reckon that Q4 was better as we were expecting with an inflow, but still overall 2022 was quite a relevant negative impact on working capital, €1.3 billion. So the question will be more on your expectation for this year still with ongoing investments on Singapore Martinez. And clearly, assuming that basically the commodity environment remains where we are right now, either your view on the working capital performance for 2023?
And the last one, quickly, on the fixed cost you are guiding €10 million increase for the renewal product for Q1 versus Q4. So, that will hit some kind of €200 million of fixed growth for Q1. My question here, do you think that's let's say a good reference that we should assume for the next quarters look in 2023, assuming Singapore and Martinez, so indicating let's say €200 million per quarter fixed cost and €800 million on annual basis.
Hi Pablo, Carl here. I'll try to take the first question and then I think Martti and Matti will take the follow-on. So, with regards to LCFS credits, as mentioned, it seems for the time being that we might have found some kind of bottom here, but it remains of course to be seen how it develops. I think our understanding is that, there are discussions currently in California about the appropriate level of LCFS credits. We have seen a lot of different ways of generating credits now and impacting the values to a level that maybe had not been expected. So, we do not have any detailed information on that. But we know that there are some kind of discussions ongoing around this team at what is appropriate level for the LCFS credits. But as I said -- commented earlier as well, we see that the program is clear and it has a growing trajection and we are also seeing these other LCFS programs now being developed in other parts of the United States and Canada.
Thank you, Pablo for the question. I'll try to answer the net working capital question. First, starting with looking backwards based into 2022 and it's true, in the first half particularly, after the Ukraine War program, as we explained then we had to reinvent our supplies and logistics for the oil products raw material, for the oil product side. And we had to also pile up inventories for the Rotterdam and Singapore shutdowns. And at the same time, we saw a big increase in overall market prices. So those resulted.
So at the end of the first half of last year, we were at a negative about €2.3 billion. And then we started also -- of course, we knew that this was a fact of the circumstances, but we started a program to try and drive that downwards. And we succeeded quite well. I'm quite happy, 900 a bit north of €900 million, €948 million [ph], €347 million of release in the third quarter and €601 million in the fourth quarter. So we ended up nevertheless at a negative of €1.36 billion for last year which is a big figure of course.
Looking now into this year, and a little bit also to last year. So, a positive thing throughout the endeavor has been that, that's why I also highlighted the turn rates which we are following. So, considering also the volume increase in our sales and so forth, we have been able to keep the turn rates at previous year's level. And now, when I look into this year, we will be very much also following the turn rates.
But if I think of the absolute figures, we do forecast an increase in our net working capital, particularly in the early part of the year when we will ramping up our production and we will tie more into the inventories than we can realize yet in all the sales then in the second half, we will be fully ramped up with our new capacities and we have a better possibility to also drive the net working capital forward.
So once more to summarize, I do foresee that we will have an increased overall net working capital level this year, just because of our increased levels of production and capacity is coming alive and also some new business models particularly on the aviation side on the SAF side. However, we will try and drive it as carefully as possible optimizing our business models and looking into the turn rates and particularly in the second half of the year after the ramp-up period to stabilize that and possibly also reduce.
And then this is Martti. I'll take the third question Pablo, which was on fixed costs. And just in general I'll start with a comment that, obviously, fixed cost is one very big focus area. We have an operational excellence program. We are following very closely the fixed cost development. And at the same time, like, we have observed over 2022 especially in renewables it has been an area where we have built up also our capabilities as we are expecting our major growth projects to start up now also end of Q1 with both Singapore expansion and also the first phase of the Martinez joint operation.
So we are, obviously, not giving any exact guidance yet on how that will then pan out in RP. But let's say in general the emphasis on -- after this building up the capabilities also then to stabilize the trend going forward.
Thank you. We will take our next question. Please standby. Our next question comes from the line of Artem Beletski from SEB. Please ask your question.
Yes, hi. Thank you for taking my question. So the first one would be actually on term agreements and the outcome of negotiations basically I guess, which have been settled towards year-end. Could you maybe comment in general, how satisfied you have been with these new deals, and also whether there’s any meaningful impact on Q1 margin guidance?
Then the second one is relating to staff and basically volume outlook for this year. I guess, you should have quite good visibility on what is happening there. And maybe you could comment how big increase you are anticipating in terms of volumes versus last year?
And the final one is just a housekeeping question, what comes to maintenance CapEx for the group. How does it look like as you have basically ramped up, so, say gross investments what comes to Singapore markets and also water ramp during this year?
Okay. Thanks Artem. Carl here. So, I'll take the first question on the term agreement. So I would say that we reached our objectives, our targets for the term agreements and we have contracted a bit more than 75%. So very much in line with what we had expected and what we had planned. So we are going into the year with the portfolio that we had planned to have.
And then this is Matti. I can perhaps take the second one on the SAS. So, obviously, like I commented earlier, we are now targeting to start up our Singapore expansion end of the first quarter. This is an important milestone then also if you think of the aviation business, because it increases our capabilities then the flexibility to produce larger quantities of SAF.
Obviously then it will take time to ramp up the production to also fill the inventories, et cetera. So I would say then it's in particular in the second half of the year where we, of course, will target to grow the SAF sales. That's basically how we are looking at this year.
This is Martti. Maybe I try to answer the maintenance CapEx. So, of course, always in our capital allocation, first priority is to take good care of our existing assets. And last year our maintenance investments accounted to €249 million. It was down from 2021 of €411 million where we have particularly the large overall turnaround in increasing this.
If I look into this year, firstly, we haven't provided an exact figure but it will be somewhat higher than last year just for the fact that we will have a new facility for maintenance in Singapore. We are looking also of course into Martinez Phase I and Phase II and the shift in Rotterdam to come live. But on the other hand, we haven't scheduled any larger turnarounds for this year. So that could be taken up. So somewhat higher than last year, put it this way, no exact figure, but no bigger turnarounds.
Okay. This is very clear. Thank you.
Thank you. [Operator Instructions] We will take our next question and the question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead. Your line is open.
Hi, good afternoon. Thanks for taking my questions. I had three, please. The first was regarding the sales margin. The last guidance we got from the company on this was at the end of last year where it was highlighted that the comparable sales margin, was at the bottom half of the $700 to $800 per tonne, guidance range. I was wondering, what exactly changed? What was the key element that contributed to achieving this high $783 per tonne margin.
Also slightly related to this, I wanted to check if there was anything to be said, regarding the sales margin seen in the US versus those seen in Europe? Are they both comparable to this $783 per tonne level. Again, I wanted to see if one was distinctly different from the other.
The second question I had was, related to the UCO prices. It was highlighted in the earnings release that the UCO prices in Europe were impacted negatively by higher imports, from China especially, towards the end of the year. I was just wondering how you're seeing these imports from China into Europe right now especially, with the China reopening.
And the last one was, regarding this discretionary dividend. The -- I was just wondering, what the second extraordinary dividend was dependent on -- are there any risks for this dividend at all?
Thank you for the questions. This is Matti, because I think I was in the pre-silent call. So, first question that what sort of changed? I think, I told very clearly, in the pre-silent [ph] call nevertheless that outlook is fully still in force. I mean that was the main message. A little bit hypothetized, that it could be somewhat lower than the midpoint.
But having said that, I continued also saying that but that can very well also change still, always when we are at the pre-silent call we still have about a of one fixed of the quarter still to go. So what happened, which is also outlined in our text for instance in the CEO, comments?
So we were able to optimize our sales mix, very nicely at the very end of the year. And overall, we could nicely benefit from the lower feedstock costs. And also the feedstock spreads, when it comes to hedging move in our favor in the very latter part of December. And also actually the developed the production cost, they also were in our favor.
So all these elements together and maybe finally to say, that our sales volume, which also relates to the sales optimization, sales mix was somewhat higher than we anticipated. So all that played to our favor. And partly, that favoring is visible, if I continue now there was an earlier question on the guidance for the first quarter, where we are commenting now on the attractive. So things we are living in volatile markets and these issues do change.
So, perhaps, I didn't take the second. I can maybe first build, a little bit, because you also had a question around the sales margins in the US versus Europe. We are of course, continuously optimizing our sales between different regions. And the US or North American market has very different drivers to the European one. But -- but we are not really disclosing any further details on how the different margins are developing. But the European margins remained very attractive in the fourth quarter for us.
With regards to the UCO prices, so we are -- I would say that we saw towards the end of last year and also in the beginning of this year we've seen that the waste and residue premiums have been softening across the board. And I would not take a specific view on Chinese UCO impact on the European UCO markets.
But we are seeing that these waste and residues -- waste and residue markets are becoming more global in their nature and there are impacts on values in the different regions when we look at the arbitrage opportunities. So, we are seeing that these markets are developing as the markets are growing.
And this is Matti, I'll take the third question on the discretionary part of the dividend and perhaps indeed recapping like Martti explained the proposal to the AGM of the dividend indeed has these elements that there is an ordinary dividend of €1.02 per share. There is an extraordinary dividend of €0.25 per share and there is a discretionary extraordinary dividend of €0.25 per share.
And I think you will find in the release that sentence that the Board expects that this discretionary spec and the extraordinary dividend will be paid unless there is significant deterioration in the business environment during 2023.
And of course following the external environment, it's clear that we have at the moment macroeconomic geopolitical uncertainties for example, so this would be the type of business environment events that need to be then assessed by the Board if this proposal is approved.
Very helpful. Thank you very much.
Thank you. We will take our next question and our next question comes from the line of Matthew Blair from TPH. Please go ahead, your line is open.
Hey, good morning. Thank you for taking my questions. The first is on the hedging dynamics in Q1. Could you just provide a little bit more detail here from our modeling, it looks like that there should be a pretty considerable improvement on the hedging from Q1 versus Q4?
Second question is on -- just congrats on averting the strike potential strike at Porvoo. Can we expect that plant to run at full rates in Q1?
And then the third question is on the D4 RIN pricing in the US. On our modeling, it looks like the pricing is stronger than what it needs to be to keep that marginal biodiesel producer in the money just given the strength of diesel prices. Do you have any opinions on that? And do you expect D4 RINs to continue at these high levels? Thank you.
Okay. Thanks Matthew. So, maybe if I take the first one and then also the last one. So, starting with the hedging dynamics. So, indeed in Q4 we had a hedging ratio of approximately 56%. And now going into the Q1, we are approximately at 50%.
Having said that, these hedges that we have now for the first quarter have been done in a completely different margin environment as well and they are more reflective of the current value. So, your assumptions are very much correct in that sense.
Overall, we have -- as we communicated in the last quarterly call, we have changed our hedging policy towards more rolling hedging where we now currently are at approximately 30% level for the full year. So, the Q1 is around 50% and then it's being lowered quarter-on-quarter as we go further out.
Then perhaps if I take quickly the third question about the D4 RIN. So, we see that the current D4 RIN levels seem to be generating relatively attractive biodiesel margins as well currently and -- but seems to be very stable at this kind of level as well. So the market seems to be viewing that this is the appropriate level for the D4 ins as also previously commented. But of course, this is a dynamic environment and might change over time, but that seems to be the picture for the time being.
Then there was -- this is Markku. Then there was a question about the potential strike impact on the operations in Porvoo. So I can report that there is an agreement being reached with the main labor union for the contract for the next two years and therefore the strike from that side has been avoided. We did have a production upset 19th of January in one of our hydrogen production units which had an impact on the operations for the moment. But now when the strike rate has gone away we are in a start-up mode and expect to run at normal operating rates until the end of the quarter and beyond.
Great. Thank you very much.
Thank you. We will take our next question. Our next question comes from the line of Joshua Stone from Barclays. Please go ahead. Your line is open.
Thanks. Good afternoon and congratulations on the strong results. Two questions please. First is on the cash conversion in the quarter, it looked quite weak particularly on operating cash flow ex lacking capital. Are there any notable one-offs in there that you'd like to highlight? And in particular I looked at the cash tax looked especially high in the fourth quarter. Just tell us, what that relates to and what that should go to going forward?
And then second question on the sales volumes. It looks like you released a lot of inventory during the fourth quarter for renewable fuel. You talked about building inventory in the first half of the year. So has that been some levels around how much you think you'll build during the first half? And are you to be a bit more specific on the volume guide? Are we talking 700,000 tonnes higher or lower than that for the first quarter? Thank you.
Perhaps I can start on the cash conversion and Martti can comment on the tax question then. So just in general I mean like Martti commented in an earlier question we paid a lot of attention during the entire year and especially second half of the year on working capital management and also we're very happy overall in reaching then our target levels and releasing working capital during the fourth quarter. If you look at it from a business-by-business perspective, it's of course good to note that in renewables in particular, we at the same time need to prepare also for the planned start-up of our major growth projects. So from that angle, we also had the need to for example on the feedstock side prepare some inventories for the upcoming start-ups. So that's sort of the dynamics that you have behind. But in all the businesses, we are of course steering very carefully towards the optimum inventory levels. That's on the tax Martti you can...
Yeah. Maybe trace your question is also more into the cash conversion net cash operating activities against the EBITDA sort of. So maybe if you look into the cash flow statement so there is always the other adjustment which is a non-cash item in the cash flow from operations. And that's mainly from the change in derivatives, which we of course eliminate all the non-cash accruals from our EBITDA. And they happen to be quite large in the fourth quarter totaling €304 million. And the other topic you mentioned is the income tax is paid €298 million. Basically, we paid our advanced taxes in Finland.
If you look in the P&L and our effective tax rate, it totaled 17% and that's mainly a factor that most of our earnings before tax came last year a large part of that from Finland where we have tax at 20% and we had earlier in a year not paid full advanced taxes corresponding the higher EBIT from our product side. But we did that at the end of the fourth quarter. So that's why you have a higher payment for income taxes particularly in the fourth quarter in last year's cash flow statement.
Joshua, Carl here. So I'll briefly talk about the sales volume. So indeed we had a high sales volume in Q4. It was partly the result of the delayed volumes from the third quarter that we then eventually sold in the fourth quarter. But we also managed to reach very -- or optimize ourselves towards the end of the year and reach the target that we had had for ourselves.
Now taking into account the fire in Rotterdam and then lost production of approximately 130 kilotonnes, it is clear that we need to build back some of the inventories now to have more sustainable inventories as well in our system. So this will of course impact then now mainly the Q1 volumes. And at the same time we are also of course preparing them to take on stream Singapore and we will also get the first volumes from Martinez already now in the first quarter.
Okay. Thank you.
Thank you. We will take our next question. Please standby. Our next question comes from the line of Matt Lofting from JP Morgan. Please go ahead. Your line is open.
Yes, afternoon. Thanks for having me on the call. Two quick questions if I could please. First on waste and residue feedstock markets. I think you highlighted in the outlook more favorable pricing dynamics recently and at the same time alluded to an expectation that markets remain tight and those two statements, obviously, appear a bit contradictory at face value. So could you talk a bit more about that? And what investors should look to through the coming weeks and months as indications of how those markets trend going forward?
And then secondly, on the US JV side, how quickly do you think or expect to ramp up waste and residue feedstock contributions into that asset once the pretreatment facilities come online in the second half? Thanks.
Thanks Matt, Carl here. So, first on the waste and residue, so I said we -- the sentiment was quite negative on the waste and residue spreads towards the end of the year and here in the beginning of the year, they have remained relatively weak. And I think it's a result of a stabilizing veto complex. So we came down with the red prices quite significantly during the second part of last year and the waste and residue spreads were slowly coming after. So we had quite wide spreads.
Now looking at the waste and residue markets overall, it remains very constructive. We see increased investments going into the sector and we will have a good demand for waste and residue in the coming months and years. At the same time though, I think, it's important to also reflect that the spreads will need to stay competitive also compared them to other feedstocks. And I think one such element is of course the LCFS values now being relatively low. So that will probably keep some kind of led on the spreads going forward.
Then with regards to the JV ramp-up, so we are of course now starting off the first phase here in Q1. And then when we come towards the summer, we will get the pretreatment unit and our expectations are then that during late in the third quarter we would be able to ramp up quite a significant share of waste and residues. We do not know exactly yet how big that share will be. But certainly targeting a significant share of the overall feed to be waste and residue based. And then of course in the third phase in the fourth quarter is when the volume substantially then ramps up and volumes are increasing.
Thanks very much.
Thank you.
Thank you. We will take our next question. Our next question comes from the line of Anish Kapadia from Palissy Advisors. Please go ahead. Your line is open.
Hi. Good afternoon. I had a question about the wider market for renewable diesel. There's a lot of planned capacity in North America. We're seeing more in Europe as well conversions of some existing refineries. I just wanted to get your take on how you see the supply-demand balance over the remainder of this year and into next year? And then how that impacts in terms of your thoughts on future expansion projects or growing your renewable diesel portfolio in the future. Thank you.
Thanks for the question. Perhaps, I can take this. It's Matti. So indeed thinking of the wider market, I would start from two angles. On one hand, we would expect the demand -- the global demand for renewable diesel and stuff to continue growing, especially in North America, we feel, in 2023 could be a growth driver. So order of magnitude, it could be around 2 million tonnes, that the growth is this year.
At the same time, we note, like, we are starting up a number of projects. There is also other projects. So the supply growth will be significant. It will be clearly larger than the 2 million ton during the year. And, of course, it then comes more to, let's say, looking at it, the need also over the coming years. So the supply-demand balance will evolve, as we have this combination of growing demand, but it's a fair observation that the supply growth is significant in 2023.
Our strategy perhaps, just -- I mean, obviously, we have a number of growth projects ongoing. They also phased over time, like, you know that the Rotterdam growth project is targeting 2026. For us, an important part of our strategy is that, we work on the feedstock flexibility, growing the feedstock pool and at the same time the flexibility, also, to serve different markets and the buildup of new markets. And we feel that these are important parts of the strategy in a very competitive market.
Thank you. [Operator Instructions] We will take our next question. And the question comes from the line of Raphaël DuBois from Societe Generale. Please, go ahead. Your line is open.
Thank you very much. Good afternoon and congratulations for the results. Two quick questions. First one is on hedging. You mentioned that the negative impact was significant in 4Q. The guidance for the sales margin, looking at midpoint, is roughly $100 per ton higher in Q1 2023 versus Q4 2022. Can you help us better understand what is coming from adding no more legacy hedging positions and what comes from the drop in utility and feed costs? That would be my first question.
And the second one is on Annex A and B qualifying feedstocks. I understand the European Union has opened a consultation period in December. I wanted to know if you think that would those new feedstocks be added to Annex A and B? How much of an impact it would have on your accessible pool of waste and residue. Thank you, very much.
Okay. Thanks -- thank you. Carl here. So let me first talk about the hedging. So I would say that, we would not maybe quantify exactly, but the hedging impact now in Q1 is very different from what we saw in the fourth quarter obviously.
I mean, if you look at the bed oil and petroleum market differentials, they have stabilized relatively well at these current levels and we are not foreseeing really the hedging to have a huge impact in Q1. So, I would say, a significant part of the uptick in the margin here is related to the hedging actually.
Overall, I would say that, on the energy prices side, so we saw basically the net gas price half between Q3 and Q4. Going into the first quarter, also these prices seem to be a little bit more stabilized. So there is still a potential upside there as well, as we are moving out of the winter season in Europe and nat gas prices might reduce further.
But I would like to just echo on the hedging side as it came a second time a question that, if we look back to last year I mean, we -- it's clear we saw unprecedented moves in the prices of diesel gasoline as well as our feedstocks. And we have communicated there has been and there was a negative impact from hedging overall in both the third quarter and the fourth quarter.
I can echo from there. We haven't quantified it. If I look into this year, I covered, what Carl was saying. So I think we are in a balanced position and you mentioned earlier are there any more sort of legacy hedging positions. So if you think from that perspective, of course, we are doing it on a continuous basis, but it's a very different balance situation now.
And perhaps I can take the second question which was on the Annex IX A and B consultation. And indeed, it's correct the EU Commission published in December a draft delegated act where it proposes some additions to the Annex IX A list and also some move to the Annex IX B list.
And perhaps, I mean, our observation on this proposal is that yes there are some additions to the Annex IX A list. But it's also perhaps important to note that it's proposed that some feedstocks are being moved from Annex IX A to IX B like brown grease or there is also now the intermediary, crops there.
So it's perhaps -- rather than looking at it as a huge overall impact on the volume. It's also interesting, then just to see that it's a proposal for this reclassification. And that is of course something that now industry players and others are commenting on.
Thank you very much.
Thank you. We will take our next question -- our next question comes from the line of Pasi Väisänen from Nordea. Please go ahead. Your line is open.
Great. Thanks. This is Pasi from Nordea. If I hear right you actually said that California will actually dilute your sales margin, when it's up and running before going to used cooking oil from the soybean oil. So could you actually please also comment, what is going to be the case when Singapore is up and running? So is it a positive or negative for the sales margins? Thanks.
Thanks Pasi, so Carl here. So I would say that, I would not draw any parallels between Martinez and Singapore now. If you look at Singapore, so we have a pretreatment unit at Singapore from the startup and actually it's a new and enhanced pretreatment technology that we are now taking into use in Singapore.
So we expect to have very strong capabilities when it comes to process different western residues and difficult feedstock. So from that perspective, we do not see a dilutive impact on the Singapore expansion.
And with regards to the Martinez ramp up now we are talking about the first phase only. So before we are having the capability to process waste and residues the margins will not simply be at the same level as we are currently having in our own production system.
Great. Thank you. That was very helpful. Thanks, Carl.
Thank you, Pasi.
Thank you.
[Operator Instructions] There seems to be no further questions at this time. Please continue.
Thank you. And thank you for the very good questions and the active participation. As we have discussed, conditions in the energy market have been exceptional. And we are pleased with Neste's performance in the fourth quarter.
And while it's likely that the volatility will continue, and there are uncertainties related to the macroeconomic growth outlook, I'm also very confident that we will be able to navigate successfully in this environment and continue creating value for our customers, employees and shareholders.
So with these words, I thank you for your participation. And stay safe. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.