Neste Oyj

OMXH:NESTE

Q1-2025 Earnings Call

[Anssi Tammilehto, executive]

Good afternoon, everybody. Welcome to discuss Neste's Q1 '25 results that were published this morning. My name is Anssi Tammilehto. I'm the Senior Vice President, Strategy, M&A and Investor Relations. And here with me on the call today are our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila.

During this call, it's good to note that we will be making forward-looking statements in the presentation. So please make sure that you are familiar with the disclaimer also. And the agenda is as follows. First, we will go through the Q1 in brief, discussed by Heikki, then financial performance by Eeva Sipila. And then last but not least, the topicals and outlook by Heikki again. And finally, we will have also time for your questions and happy to have a discussion with all of you.

So with these remarks, happy to hand over to Heikki Malinen. Thank you.

[Heikki Malinen, executive]

Thank you Anssi, and good afternoon, good morning, everybody. Welcome also on my behalf to this call. First of all, let me thank Anssi for the great work he did as interim CFO, really appreciate Anssi jumping into this role at short notice and an excellent job he did. So thank you, Anssi. Very, very appreciated.

And it's also my pleasure to welcome Eeva, you will see her in a moment here. I'm very happy that is Eeva joining the team. And together, we will then work with you all to tell the Neste story and hopefully provide you with good perspective on the company and our business. Eeva is a great CFO. She's very smart. She's tough. She has a lot of relevant experience, and she will be a great addition to the Neste team.

So this is my first full quarter release, I started in mid-October, as you know. So it's a real pleasure to now start to tell you also the full story. Now let's go to the first slide. And at Neste, we start always our presentations with safety. If you look at this slide, it basically has two pieces of information, on the left-hand side you can see data on our total recordable incident frequency rate, it basically tells you about employee safety, what is happening on that side. And then on the right-hand side, you see process safety which is very relevant information when you look at refining industry.

A couple of observations. First of all, on the left-hand side, you can see this line has been going up. That is, of course, not good performance. The data actually includes two businesses. If we look at our businesses, we have the refining business, which is the bulk of Neste, but we also have feedstock sourcing collection in the United States, which is primarily Mahoney.

Mahoney is a logistics business, not refining. And the Mahoney data tweaked this number upwards. So if I just look at the refining side of the business, the figure was about 1.7 million for Q1, 1.7 billion is actually for refining, it's not great. First quarter outperformance would be much more in the 1.0, 1.2 area. So we have at Neste, a lot of work to do to improve not only bringing the whole curve down with the Mahoney included, but also then improve our refinery, people safety.

On the right-hand side, then you can see the data on process. This, of course, is really -- I'm very happy with the results. We ended up with 0. The way we track this is that if there are no Tier 1 or 2 incidents is then you basically get down to this level. Our refineries ran well in the first quarter, and we really did not have any major process incidents. So that was a -- from my standpoint, at least, it was a very good result indeed.

Then if we go to the numbers. So comparable EBITDA of EUR 210 million. I am, of course, not pleased with the overall level of profitability. It is not at all where it needs to be. And as you know, we are working very hard towards improving that. But we did have a number of things we did right. As I said, our operational production was solid in our refineries.

And I was pleased that our renewable sales volume increased. On the SAF side, I saw good momentum in our sales activities in the first quarter, and it gives me a good feeling for 2025 on SAF sales. And of course, we are being helped by the fact that in EU, the ReFuelEU legislation is now coming into force.

You have seen the data on the margins. Our sales margin went up to $310. It was helped by the fact that our refineries ran well and full, and we were able to get a bit of a lift of on our sales side. Also, as you know, we have started hard work on reducing our costs, and there is more coming from that end are usually seasonally cold winter up here in the north, disappointed.

So we were looking for some bitterly cold winter weather to sell our winter products, but unfortunately, it was very mild. And hence, both on the marketing and services side and on the oil product side, we did not succeed in selling as much winter grades as we had hoped to do.

The four things we're really working on here are shown here on this chart. So first of all, of course, the profit improvement program, which is sort of a build on the operational performance. I already talked about our refineries. We had a high level of utilization. Basically, I would say we were trying to run full in our refineries. And that is how we see the business from our standpoint. We have these refineries. We need to be low cost competitive and then run refineries and sell the volume. That is the way we look at our business.

But to support our competitiveness, of course, we have kicked off the performance improvement program. You heard a lot of the details in our capital markets update in February. That is very high on my agenda. We are very committed to this EUR 350 million run rate improvement, and I'll come back to that a bit later in my presentation. I was pleased that we were able to now officially get the SAF investment in Rotterdam line #1 complete, and we are now ready to supply EU-based production of SAF for our customers out of Rotterdam. So we are good to go and production has started.

And then, of course, the big thing at Neste is the new huge investment in Rotterdam to build the second line. You heard last time how the time line had to be changed and the costs have increased. But basically, we are now moving according to that revised schedule and budget according to plan. And I will say -- I'm staying very close to the project and monitoring it regularly and also visiting Rotterdam regularly to stay on top of that.

When I started at Neste, I talked about the importance of our customers and how critical it is that we have good reliability that when customers order that they can, for sure, get the products they have ordered. I'm happy to tell you briefly about one customer story. We have -- we're developing a good relationship with DHL. DHL is a great company. It's a world leader in global express parcel.

It's a fantastic business, and I'm very proud that DHL was -- has been ready to cooperate with Neste and we are joining together our forces to provide low carbon fuel for their fantastic company. So there is more information about this coming later, but anyway, this is the main story on DHL. And I hope to tell you more customer cases in the coming quarters.

Then coming to our performance improvement program. The main message for you this quarter is that our annualized run rate improvement that we was achieved in the first quarter is EUR 52 million. Eeva will go through this in detail. And as we move forward, we will open more of the granularity of what we are achieving concretely so that you get a sense of what progress we're making. But anyway, if you make note of this EUR 52 million, the work has now started.

On the commercial side, we are downsizing and sharpening our terminal network. We're taking costs out. On the logistics side, we have done a number of, let's say, optimizations changing also some of our buying criteria to be able to be more competitive on the buying side that will yield results.

The refining area is, of course, a big potential area for value creation. We started the refinery piece a bit later than the rest. So we will be, I would say, a step further in Q2 to talk more about the specifics once the initial phase of that fairly comprehensive work has been finalized.

On the external cost side, we have a big spend bucket. We have now a good procurement team, and they are working hard to find alternative sources of procurement we become a better company at tendering and also looking for ways how we can also stop spending where the spending is not critical for the business as it stands today.

And then finally, on the organizational front, we did announce our employee negotiations in February to reduce our headcount. We have completed those negotiations. I feel that the negotiations were professionally run. They were done on time. And I want to thank especially our employee representatives for the good collaboration to get this fairly complicated matter done in a professional way.

So thank you to our shop stewards for their for their professional approach. Anyway, that is now done and the new organization comes into effect May 1. So that part of the performance improvement program can be noted as having been complete and closed.

Then it is time to move on to the financial performance, and this is where I would like to hand it over to Eeva. She will go through the figures, and then I will come back with some of my own commentary a bit about regulatory topics. I'll talk a bit about the markets a bit more broadly from a macro perspective, and then I will give you the outlook and we will take your questions afterwards. But Eeva, it's all yours.

[Eeva Sipila, executive]

Thank you, Heikki. Good afternoon on my behalf as well, and great to be a part of the Neste team and with you all today.

I'll start with this reference graph, it illustrates the development of the renewable diesel margins. And you see well that the Q1 was weak. This was especially driven by high feedstock costs at a time when the sales prices were under pressure. Now we were able to capture a margin of USD 310 per ton sales margin in our full renewables business, obviously, including both the renewable diesel and SAF. And this was really thanks to production running well, as Heikki mentioned, and a very successful optimization in the various fronts and from our team.

Now just a reminder that when you look at this reference margin, so do note that we have used as earlier, a fixed sales ratio between European Union and North American sales of 60-40, 60 for European Union. And the real sales distribution, be it for us or any other industry player will obviously vary between the quarters.

For the Q1, our group comparable EBITDA was EUR 210 million. Now the biggest contribution gain from Oil Products, EUR 120 million. Renewable Products delivered EUR 72 million and Marketing & Services, EUR 17 million. I'll come back to the segments more in detail shortly.

Our performance improvement plan is delivering its first results, even though it was just started a few months ago. And this is something we're obviously following very closely, and we'll be reporting to you all on a continuous basis.

As Heikki already mentioned, EUR 52 million of a run rate was achieved by the end of first quarter. Now good to understand that if you want to get a quarterly run rate or quarterly outcome of that, then you can divide that EUR 52 million by 4 and you get to EUR 13 million. In the first quarter, however, we only had a EUR 6 million outcome, not the EUR 13 million, and this is really due to the program starting only midway in the quarter.

Heikki also mentioned already the important milestone of the operating model simplification. And now that -- those savings will be delivered as of the Q2 onwards. EUR 65 million in total, I would say about a majority of them during Q2, but obviously, some of those savings will also come only into realization in the later months.

As the negotiations were concluded, we were able to book the one-off provision as restructuring in our end of March balance sheet, and this EUR 24 million is visible in the notes in the pack.

Moving then to the segments, so Renewable Products. The recovery of production volumes during the quarter was very important for us. And it's -- as you see, it supported very well, the recovery also in our sales margin. Now in an environment where the feedstock costs and sales prices are pressuring our margins from both sides, you see this on the right-hand side graph very well, going the full history from 2020 onwards, I'd clearly say that we did better than expected on our optimization to reach the EUR 310 million. We sold relatively low volumes in the U.S. as the European market was clearly more attractive. We mostly sold SAF in the U.S. market during the quarter.

Now overall, the SAF volumes, 130 kilotons were still on the light side. As expected, though. And this is driven by the annual mandate structure, which drives a more back-end loaded behavior from our customers. So we would expect to see sales volumes increase in the second half of the year.

Moving to Oil Products. Refining margins continue to normalize if you look at the sort of longer trend or year-over-year, compared to the previous quarter, there the main contributor to a decrease in the refining margin was really the mild winter, Heikki already mentioned.

So we missed good volumes from the middle distillates, be it then heating oil or winter grade diesel. Overall, sales volumes were also seasonally low. And this we, of course, expect to improve as we go into the busier driving season. Now that spring and summer are coming to our home markets. Utilization rate in our operations was solid also in this segment and an important achievement.

Then in Marketing & Services, our third segment. Main points are very similar to those of the Oil Products. Sales volumes were seasonally a bit on the low side and then combined with the mild winter, this had a negative mix impact on our margins.

Comparable EBITDA was EUR 70 million for the quarter. Now despite the lower market demand and certainly a competitive market environment, our performance in terms of market share was solid during the quarter.

Moving to cash flow. So our cash flow in the quarter was a negative EUR 225 million. Now we needed to normalize our inventories coming out of the outages in the fourth quarter and abnormally low inventory levels.

So this obviously affected the net working capital part of the cash flow. Now we are at a level where we are more comfortable in being able to both optimize and serve our customers with a precision that they expect and we want to do.

Now good to note that working capital is part of our performance improvement program. So we will be looking at many ways on how we optimize our performance also in this area. Even though we more talk about the EBITDA side of the program, this will increasingly be part of our communication in the quarters to come.

Now related to cash flow after financing activities, I'd just like to highlight two main achievements in the quarter. We issued a new green bond of EUR 700 million in the quarter. The cash flow impact is slightly less as part of that -- those proceeds were used to pay back previous debt. Not visible in the cash flow or in the quarter as such, but coming just after the close of the quarter was then the refinancing of our revolving credit facility. We also raised the facility slightly to EUR 1.3 billion.

Then on the investment side. Now as communicated earlier, we are running Neste with very tight capital discipline. CapEx decreased in Q1 as planned and is expected to be as guided in February, around EUR 1.2 billion for the full year. The Rotterdam capacity growth investment is really the one main project we have ongoing this year and also in '26.

And thereafter, again, as communicated earlier, we expect to be focused on maintenance type of investments only. And that will obviously then ease the pressure on our cash flow and enable us to strengthen the balance sheet, which is a nice bridge to the financial targets. Again, nothing new on this slide, but just to reiterate our focus on delivering the performance improvement. EBITDA savings as well as we are focused on ensuring the leverage around 40%.

And with that, I'd like to hand it back to Heikki.

[Heikki Malinen, executive]

Thank you, Eeva. So let's go through a couple of topicals and outlook matters here. Let me first start with the combo comments on mandates. Obviously, in our RD business, regulatory issues, mandates are crucial for increasing the demand for renewable fuels. At Neste, of course, we welcome the fact that we have ReFuelEU coming now into effect. And the objective is, of course, that in 2030, we will go from 2% to 6%.

I think from Neste's standpoint, I just want to communicate, of course, Neste is investing heavily within the European Union to add SAF capacity. So we expect that European policymakers will work from their side to safeguard a level playing field and also ensure the competitiveness of European industrial companies. So we at Neste are doing our part, and of course, we welcome any efforts from the commission to do theirs. We really need a predictable operating environment to ensure these investments create value then also for our shareholders.

On the tariff side, a lot happened in the month of April, as we all know. I guess the main feeling at Neste here as we look at what we have read from different sources is simply that the direct impact of these tariffs are expected to be fairly limited for this company. RD, SAF and most of the oil products are actually exempt from the announced tariffs. Singapore has a free trade agreement with the United States. So I think these basically sort of set -- setup situation is actually pretty reasonable given the things that are ongoing.

On the feedstock side, what we are seeing is that the United States has implemented tariffs, which, of course, will impact, for example, UCO coming from China and going into the United States. So that does not impact our Singapore business negatively in the United States. In Martinez, of course, we have Neste's own Mahoney operations which can provide also feedstock from domestic sources.

From the standpoint of our operations, the U.S. market is open for Neste. So our decision whether we sell from Singapore to the West Coast, or into the Gulf area or even up into Canada, which, of course, is a separate market, not related to U.S. circumstances. But anyway, whether we ship to the East or whether we ship them from West is purely an economic question.

So we are constantly looking at the margin differentials. And then based on that, we will take our own commercial decisions very tactically and very agile, in an agile manner. So Singapore location is good in that respect.

If we then look at the opportunities and uncertainties in our business at the moment. So of course, the thing we're working on and where we would like to see progress is a decrease in the cost of feedstock.

We have seen some signs, especially on Chinese UCO coming down, maybe roughly 5%, but that is clearly not enough. In Indonesia, we see export restrictions on feedstock. So a combination of both of those are at the moment still keeping the feedstock prices too high vis-a-vis where the selling prices are.

The U.S. renewable fuel incentives and obligations are critical for anyone producing these products. Our view is that it is a gradual process. This -- we will see some of these incentives come back in different forms during the course of the year. So I think we're not terribly pessimistic about it. It's just a matter of time. Of course, the loss of the BTC per se, that is a fact, and we will probably not see that in its current form, replaced with anything else.

If we look at the European side, I want to just mention the way I look at the situation is that -- I mean, Germany, among others, is now basically borrowing EUR 1 trillion and investing in infrastructure and also defense. But these euros are ultimately also going to flow into logistics and into increasing investment and Germany being a large part of the European market and also a very important market for renewables. So that should be a longer-term positive boost, and then I already talked about the need for EU working on these SAF antidumping matters.

On the uncertainties, of course, as I already talked about a moment ago, there's a lot of uncertainty about the U.S. margins. So we need to constantly be agile in terms of where we ship from Singapore. The global macro situation is, of course, challenging. I think the base case, as we see it is a U.S. recession of some form is coming. Some parts of Europe have already been in recession for multiple quarters. We will then need to see whether the U.S. recession is a moderate and short one or something a bit longer, but time will tell.

And then finally, geopolitical tensions and unpredictable trade policies are creating their own challenges. But I think net-net, I think the outlook from our side is clearly weighted more towards the opportunity side than the uncertainty side in spite of all the news headlines you see out there.

Then on the market outlook. So the uncertainty in global trade and geopolitics and their impact on the global market outlook are causing volatility, markets for both renewable fuels and oil products are sensitive to oil price development and the market in renewable fuels is expected to remain oversupplied in 2025.

And then if we look at our guidance, which basically is unchanged from the last quarter. So I won't now read it line by line because we have already -- it is basically unchanged. So I'll just leave it here for your attention.

So that in itself is our presentation, and I think it's now a good moment to go to Q&A. And please, let's get started.

[Operator]

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

[Alejandro Vigil, analyst]

The first question is about the company's leverage. It's now very close to the 40% threshold. And I'm wondering if you are planning any divestments or considering some joint ventures to reduce the burden of CapEx that you have for the next 1.5 years.

And the second question is about feedstock. If you are -- how you see in terms of demand supply, the access to feedstock, and particularly, you are considering new sources of supply, you can create new sources of supply to offset this inflation we are seeing in feedstock.

[Heikki Malinen, executive]

So maybe if I start with those, and then Eeva, please continue. So I think on leverage, as Eeva said, so we have that 40% target. As we said earlier, in February, of course, it's possible that for a short period of time, we may be going over that. I think that's not critical here.

The 40% is really critical in terms of the ceiling for us in general. We have a plan. We are working hard on delivering on the results, obviously, it's a fact that we have an attractive portfolio of assets, but we are not considering any divestments. We believe in our plan and we believe in our ability to take us through this phase here.

Now in terms of the demand, supply and feedstock in particular. So yes, we are working to look at other feedstocks besides, of course, UCO and animal fat. There are different types of novel vegetable oils. And there are also other micro pockets of feedstock that we are researching.

The reality, though, in this business, and I think this is where Neste has an advantage is that the more complexity you bring into the mix, the blend the feedstock the more challenging it is going to be for the pretreatment. And I urge you to understand that this is not a simple exercise of taking all this sort of the cocktail and mix of feedstocks and just putting them into the into the refinery process.

So there's a lot of value can be created by doing this, Neste is good, but it is not simple. I think for us, short term, of course, the big thing is we need to get the UCO price down. And hopefully, we will start seeing that during the course of 2025. Let's see. But Eeva, anything you would like to comment on the balance sheet subject.

[Eeva Sipila, executive]

No. I think you commented well. I think the quicker impact to ensure our leverage stays in the targeted zone is really the cost savings and the work we can do on the working capital.

[Operator]

The next question comes from Derrick Whitfield from Texas Capital.

[Derrick Whitfield, analyst]

So with my first, with respect to the performance program on Page 13 of your presentation, would you expect ratable improvements between now and 4Q '26? Or can we see a couple of periods with more pronounced step changes? My second, regarding your commentary on the oversupplied markets for 2025. How do the global supply-demand balances in your view projected to 2026 with the benefit of ReFuelEU and potentially a 5.25 billion gallon RVO in the U.S.?

[Heikki Malinen, executive]

So maybe if you want to take first the people, and how that flows through.

[Eeva Sipila, executive]

Sure. So Derrick, on the performance improvement. So indeed, I wouldn't say it necessarily is fully linear. I think we've seen some sort of low-hanging fruits coming into fruition now in the Q1. Now obviously, Q2 will be supported by the organizational change, which is rather even if it's not all the people necessarily leave immediately, it's obviously a big step, and that will support the Q2. There may be areas that we're kind of getting going -- takes a bit -- takes a bit longer, and hence, on that. But I think the target is so high on EUR 350 million that we need to sort of be pushing this in every quarter in a visible way.

[Heikki Malinen, executive]

Right. So Derrick, then in terms of your question about demand and supply, I think, of course, the oversupply for 2025 is sort of a fact making the forecast, as I said in the capital markets update is, of course, it is challenging. It's based on a lot of assumptions, but I think at least in our own planning, we are thinking that we will continue to see this oversupply being there for some time.

Ultimately, it will balance, but we don't think it's going to be disappearing just overnight. So I think it's a good assumption that going into '26, we will probably see something. But as I said, it all depends on the assumptions you make. We are focusing on the plan to get ourselves through that '26 period even if we have that oversupply there. But as I said, it depends on the assumptions, and I don't think we're going to say more about it at this stage.

[Operator]

The next question comes from Henri Patricot from UBS.

[Henri Patricot, analyst]

Two questions, please, from my side. The first one, I wanted to come back to the Renewable Products margin improvement quarter-on-quarter, because if I look at some of the macro drivers and the loss of the BTC that would seem to imply a fairly large drop quarter-on-quarter.

And despite that, we had only a small drop if we compare it to the adjusted number that you gave in Q4 because the actual margin was $240 per ton. But you mentioned at the time that the [indiscernible] had a negative impact of around $100 per ton. So just wondering, looking back, was that $100 per ton actually -- create negative in Q4? Or can you perhaps expand on some of the positive developments in the first quarter that we don't see on just looking at the macro drivers.

And then secondly, I wanted to come back on the SAF comments that you made because the sales volumes have improved year-on-year, but down quarter-on-quarter and you said that a lot of the sales actually went to the U.S. So just -- are you particularly expecting quite a sharp increase in European SAF demand over the rest of the year, but very limited sales for the time being, is that fair? And any comment you can make around how things are going in the second quarter so far.

[Heikki Malinen, executive]

So maybe you could start with the first one, the margin. I'll comment on the SAF.

[Eeva Sipila, executive]

Sure. So indeed, on the margin, I think it is a good idea to compare on the sort of Q4, without the outages gives you a more sort of stable trend. Now what I would say is that in this type of business, when we really sort of abruptly were running down the positive impact of now being able to have a solid quarter obviously was significant and sometimes these type of abrupt changes make a bit of a sort of -- we get a bit of -- it was kind of too bad in Q4 and now maybe a bit of an extra boost on that.

Then again, sort of also good to note that, obviously, this is a business with optimization and not always the publicly known quotes are fully sort of comparable. There's a lot of things that go into the mix. And we did -- as I mentioned, we were we were sort of positive ourselves also on being able to exceed our own expectations in that front.

[Heikki Malinen, executive]

So on the SAF side, so we came into the year with fairly low inventory levels. Yes, in fact, the first volumes out of Singapore have been more skewed into the U.S. market. But Europe is very critical here. We have made a number of customer contracts for this year.

And we look forward to allocating more volume into the European market based on the mandates we now have, as I said earlier, Rotterdam now is producing at nameplate on a daily basis as of end of March.

So we will also now start getting then the annual capacity out of there is about 0.5 million. So all of that Rotterdam volume will then be also allocated into the EU. So from that standpoint, I would say we believe that all the tonnage we can now produce out of Neste, it would seem to be the case that we can sell that in terms of SAF.

[Operator]

The next question comes from Sasikanth Chilukuru from Morgan Stanley.

[Sasikanth Chilukuru, analyst]

I have two, please. The first was on the Renewable Products sales margin. This quarter, we've seen around [ $56 ] per ton premium over the reference margin. I was just wondering how we should be thinking about this premium. What are the key factors that have influenced it in 1Q. Is 1Q indicative of the premium that we should be thinking about going forward if the current market conditions were to persist.

The second was related to, again, the Singapore plants, if you could highlight what the utilization rate of the Singapore plant specifically was in 1Q if possible. You talked about the SAF sales, but I was just wondering if there was any other HVO sales also directed to the U.S. market in 1Q, and if so, whether they were margin accretive or dilutive?

[Heikki Malinen, executive]

So do you want to take the margin first, and I'll comment on the utilization?

[Eeva Sipila, executive]

Sure. Yes. So as mentioned, the premium was strong in the Q1 based on really that really sort of kind of incorporates the sort of full optimization value that we do in the company. With now the market situation being so dynamic as it is, I would be a bit cautious on the short term. I mean, obviously, we have high cost inventory on the feedstock side.

Basically, as Heikki mentioned earlier in the presentation, we've seen a very, very modest decrease so far and hopefully something to come, but I think that's more than a second half issue. So certainly, going into the Q2, I would be a bit cautious and then let's see if the world around us settles in one way or the other that it would be a bit easier to comment more on this.

[Heikki Malinen, executive]

In terms of Singapore utilization, we were on RP overall, we were just below 80%. You need to remember that when we produce SAF, our overall tonnage comes down a little bit because the there are some production losses due to the configuration of the manufacturing process.

So in terms of SAF, we get somewhat less volume. But anyway, we've now been running a so-called integration mode. We have two lines there and that basically allows us then to drive up and push the SAF volume to the max.

I'm sorry if I couldn't hear the end of your second question regarding the U.S. Could you repeat that, please?

[Sasikanth Chilukuru, analyst]

Just wondering, for the sales that have been directed to the U.S. market, if there were any in the -- on the renewable diesel side. And also, these sales to U.S. whether were they margin accretive or dilutive?

[Heikki Malinen, executive]

Yes, we don't sell anything if -- it has to be margin accretive. We don't sell anything at negative margins. So yes, we did sell some, but very modest levels. It is almost -- it is -- I mean, we have to be extremely agile and monitor when the ARBs are open. If they are open, we will take advantage of them. But the volumes are very, very small.

[Operator]

The next question comes from Artem Beletski from SEB.

[Artem Beletski, analyst]

I actually have three to be asked. So the first one is relating to RP and production outlook for Q2 and ahead I think looking at Q1 numbers were quite good, but you have been normalizing inventory. So is it a good proxy on what you are doing right now in terms of production.

The second one is relating to Martinez. So you have commented that margin was dilutive in Q1, I think that makes sense given quite tough market conditions in the U.S. during the quarter. But could you maybe comment on whether you have made some further progress what comes to feedstock and how you have been performing on that end?

And the last one is relating to U.S. opportunities to sell volumes from Singapore. I think looking at UCO prices, we have seen the Chinese prices are coming down but are going up in the U.S. So it should maybe provide some opportunities to you. How do you see the market and basically import opportunities?

[Heikki Malinen, executive]

So if I start -- thank you, Artem, for your three questions. So your first question was about the RP production outlook yes, indeed, obviously, as we discussed, our inventory levels were very low as we got into the first quarter. So we, of course, will be trying to run full in our refineries. That is the intention. We believe that we have competitive assets. They were built to produce product, and that is what we are doing. So I think the main question really is simply that how can we sort of get the maximum SAF out of it. And I said, like, for example, in Singapore, it requires this integration mode and there are some practical process issues we're working on. I can't give you an exact figure for Q2, unfortunately, but I think you were right with the -- that we had the low inventories.

Then on Martinez. So look, the way -- the thing is on Martinez, I mean, the refineries it's in a great place. It's in the middle of a very important market. And I think fundamentally, the regulatory outlook in California has been good. And we believe that the incentives that we have in that area will be gradually coming during the course of 2025.

We had our production issues in Martinez. It's my understanding that those have basically been solved. However, there is still potential in the refinery to become more efficient on the logistics side, even better in terms of feedstock utilization. So the management in the refinery have their work cut out.

On the matter of feedstock, so we are providing our share of feedstock supply. We own half of the refinery. We can provide feedstock out of Mahoney and other sources. Feedstock prices, of course, are going to be rising if the tariffs as they go up, and that is something that the business then has to manage locally.

Then to your question about U.S. exports out of Singapore. Yes, as you mentioned, UCO prices have fallen a bit, whereas the U.S. prices have gone up. So the spread is widening. As I mentioned earlier, if there is a positive enough ARB, we will sell, and that is almost a day-to-day situation.

So our salespeople are following that, and we will lock that in. At the moment, there is opportunity. If the spread continues to widen, there will hopefully be a bit more upside sales volume also going in RD. But as I said, our primary focus still for Singapore is to ramp up the SAF side because that is still ultimately the future and the spearhead of Neste. Hopefully, that gave you enough color, Artem about where we are. Thank you.

[Operator]

The next question comes from Matthew Blair from TPH.

[Matthew Blair, analyst]

And I have three questions here. The first, maybe sticking on Martinez, could you talk about the 45Z capture at Martinez in Q1. Some other companies have mentioned that because the standards came out in the middle of January, the things weren't really optimized for Q1 and things should look better for Q2. Does that hold for Martinez?

Second question is, do you have a view on the implementation date for the new California LCFS targets? Do you think they'll be backdated to the start of 2025, or is this looking more likely a January 1, 2026 start? And then finally, you mentioned that U.S. sales in the quarter were mostly SAF, could you talk about just your overall netbacks by region here? Is the U.S. a more attractive market for SAF at the moment than Europe?

[Heikki Malinen, executive]

Okay. So first of all, in terms of the Martinez situation and the tax incentives. So basically, there was nothing much to book home for Q1. So unfortunately, that there was nothing there, hopefully later. On the LCFS, we believe it is going to be coming. It could be more shifted towards the end of the year, maybe early '26, but we believe it is coming.

So we'll just have to now be patient with that. And then in terms of U.S. SAF, European SAF comparison. So how should I put it? I think both markets are strategically important to us. We are trying to serve both markets. And we are not -- I would say we're not taking sort of at this stage, strategically, big sort of strategic decisions regarding is it U.S. or Europe, we want to serve all of our customers and ramp up our production as rapidly up as we can and especially.

But we also -- don't forget, we will, in '27, we will be getting a huge amount of new capacity from Rotterdam #2. So we already now need to be building the space then for ourselves when Rotterdam 2 comes online. So both markets are important. We need to have multiple customers to take on this volume.

[Matthew Blair, analyst]

The next question comes from Peter Low from Redburn Atlantic -- the next question comes from Adnan Dhanani from RBC.

[Adnan Dhanani, analyst]

Two for me, please. Just on the first one on ReFuelEU. A number of airlines recently pushed back against the mandates. So I just wanted to get your thoughts on that. And if you think there's any risk of a rollback or using it in those mandates, particularly given the broader macro environment.

And the second one on the CSPC credit. I understand that you put the contingent assets for the credit this quarter. Just what is your latest understanding on the guidelines there? And what do you need to see from the regulators to have more conviction in including that in your results? And just any thoughts on timing of that?

[Heikki Malinen, executive]

So if I take the ReFuel first, and then if Eeva, you take the EUR 40 million. So yes, it is -- you are correct that a couple of airlines have, let's say, raised the question about the timing or magnitude of the 2030 mandate. That is the 6%. Our -- Neste's view is very clear. Climate change needs to be mitigated. The European Union has been very clear as well as member states with their intention to decarbonize air travel. We have over 360 million ton kerosene market. SAF market is just a drop in the bucket in big sense.

So we are going to make a very strong argument that, that mandate holds, and we will also continue to argue for a linear progression into 2030. So we are happy to work with our customers to solve their climate change problems or challenges, but we are definitely of the view that the 2030 will hold. That is what we are working towards.

[Eeva Sipila, executive]

And then regarding the CSPC. So indeed, we didn't book any benefit from that, although we do think that we would be eligible with -- based on sort of today's knowledge with a sort of EUR 30 million to EUR 40 million size of the value.

And then how will we proceed? Well, I think it's really around clarity on the let's say, the sort of details in a way that we obviously don't want to be going back and forth. I'd rather wait and let's see if we sort of get a bit more clarity during Q2 and then we'd obviously sort of act on that. And if not, then we, as said, rather wait into Q3.

[Heikki Malinen, executive]

I still have to come back to you, if I may, just on this SAF matter and ReFuel. So you also need to recognize that we have customers who are also looking at voluntary buying. So even last year, and we're going to come into this year, not all buying is only mandated.

So there is also a voluntary buying. So I think that there are many of the large customers are very committed to making sure that they are gradually reducing their emissions. So yes, a couple of airlines might have made some comments, but we believe that the movement is definitely upward in terms of volume growth.

[Operator]

The next question comes from Peter Low from Redburn Atlantic.

[Peter Low, analyst]

The first one was there's been a lot of volatility in oil or diesel prices this quarter, which could flow through to your term contract sales. Can you talk at all about kind of your hedging position, to what extent could protect you against that? .

And then the second was just a clarifying question on the renewable products utilization rate. Should we assume that, that kind of 79% utilization rate, is it at that level because that's the extent of the volumes that you're able to profitably place it to the market? Or were there any other operational reasons that it was not higher?

[Heikki Malinen, executive]

Okay. Do you want to first comment on the hedging?

[Eeva Sipila, executive]

Sure. So indeed, as we sort of raised in the quarterly report, the volatility in the oil markets is obviously something that has an impact on us. We haven't changed our hedging per se. So we do take continue in a way to hedge. But of course, with all this volatility it doesn't -- so it's not a guarantee that way that we would be sort of protected on that.

So it is certainly a risk that you are right to raise because -- and that's a bit in a way what we have obviously seen also in the Q1, so not a new topic per se, but yes, let's see sort of where the sort of oil market goes in the coming months.

[Heikki Malinen, executive]

On your question about the utilization levels. So I mean basically, we have the refining piece in the performance improvement program. we see opportunity further to extract more value out of these refineries, very sort of granular stuff around becoming even better at risk-based maintenance, predictive maintenance, little things, but big things when they add up in terms of volume.

So I'm actually of the view that we have more upside potential in terms of how much volume we can get out of these refineries. But I don't want to give you a number yet until we get the refinery work complete, and then we get some concreteness on that.

But as I said, I thought it was a good quarter given the performance of 2024, but we need to get more out of the refineries. And that's the objective for the rest of the year and into '26. So stay tuned.

[Operator]

The next question comes from Paul Redman from BNP Paribas.

[Paul Redman, analyst]

Two questions from me. The first one is just on sales volumes and margins in 2Q '25. So I just wanted to ask, of your sales volume this year, how much was on pre-agreed contracts versus sold on a spot basis. And just following on from that, you're talking about being cautious about 2Q '25 margins.

Could you just give me a few of the moving parts that might raise that caution? Is there anything in this quarter that may not be booked next quarter, for example. And then secondly, just on Mahoney, is there way you could give us some guidance on this business, kind of EBITDA generation or how it supports margin generation. So we can kind of understand this business a little bit more. And I'm assuming in a tighter feedstock market, this business is even better performer.

[Heikki Malinen, executive]

So if I take questions one and three and you talk about Q2 margins. So let me do one and three and then you do two. So in terms of the sales for '25, so you could roughly say that maybe 2/3 our term and 1/3 is spot. Usually, we would have had -- historically, it's my understanding, the term piece would have been higher. But at the moment, for 2025, it seems about 2/3 term, 1/3 spot.

And then in terms of the question about Mahoney, we haven't really disclosed any financial figures basically, it is a business where we collect different types of molecules from 90,000 kitchens in the United States. It's a logistics business obviously, when feedstock prices rise, it will be accretive to the results of that business.

But I think there's also a broader role and that is a strategic role of having this feedstock collection pool because it gives us longer-term strategic optionality whatever that Neste might do in the future. So that is another angle, which is more strategic rather than short-term financial.

Would you like to comment on the second question, which was about Q2 margins and...

[Eeva Sipila, executive]

Yes. Yes. So sure, Paul. I think the sort of cautiousness mainly comes on the fact that the feedstock prices, we haven't really seen material change there. And obviously, as I said, we would hope and in a way, expect one, but just realistically, we don't want to sort of give you a too optimistic view on that. I think the other moving piece is obviously then related to the tax credits in the U.S.

As I said we didn't book anything. And as I replied to a previous question there, there is a possibility that we would have more clarity already during Q2. And obviously, that would be -- could have a positive impact, then we will, of course, report that then separately, so you can kind of see the underlying. But those are maybe the sort of two main things and then just otherwise referring to the sort of very dynamic environment around on that we need to. So they'll just be able to align and be very agile on this. We have a good team optimizing, but it's certainly sort of a challenging environment.

[Operator]

The next question comes from Pasi Väisänen from Nordea.

[Pasi Väisänen, analyst]

This is Pasi from Nordea. When looking at your comparable margin of EUR 310 million and then in the first quarter. What actually was the positive effect coming from hedging which was included to this margin? And secondly, where you're now selling more to Sweden than before and was the sales to Sweden actually the reason for your improved sales optimization during the first quarter?

And maybe lastly, when looking at the kind of the global supply-demand balance, so what will be the sustainable margins for the industry for the Neste, when the global balance has been reached. So for example, something like [ EUR 500 million or EUR 550 million ] in terms of margin.

[Heikki Malinen, executive]

So let me just -- maybe I'll start with the last one, which is easy to answer at this stage because I'm not going to give you an answer simply at this stage. I don't think we can for sure say what is a sustainable margin long term. And from what point. So if we have a point of view on that, that we want to share then we'll come back to that.

In terms of the Swedish market, so yes, of course, the Nordics is important for us. We do business in Finland and the Baltics, but we also sell into Sweden. So without going into more detail, let me just say that Swedish market is important. We have a lot of big customers there, and we did have some opportunities in Q1 to sell more to those, but I won't really go into the detail. On the hedging, would you like to comment on the hedging?

[Eeva Sipila, executive]

Yes, I was looking at it in our report because I think you can find the numbers as such on that. So we had a slight positive on the inventory valuation, then against currency was negative. So not a big impact, really, if you look at it those two net. And there is indeed that there is a table it's mainly related to renewables, that table information.

[Operator]

The next question comes from Nash Cui from Barclays.

[Naisheng Cui, analyst]

May I ask two questions as well, please. The number one is on feedstock. I wonder if you could give the feedstock mix for this quarter, please, in terms of UCO, fat and the PFAD. And also relating to feedstock, I wonder if you can let us know your hedging position for both Q1 and also going into Q2, please?

Then my second question is on gearing. I think, Heikki, you mentioned that you are not too concerned for the gearing to pass or go beyond 40% temporarily because you have a plan. Just wonder if you could expand that? And how does this 40% set? Is that arbitrary? Or does it relate to credit?

[Heikki Malinen, executive]

So thank you for your questions. There's a lot of insightful questions you had there. Now, I need to -- I'm not exactly sure how much detail we gave out in terms of the feedstock mix. Do you have that, can you?

[Eeva Sipila, executive]

Yes. Well, we have the sort of share of waste and residues reported separately in the report, and that was 97%. So basically, almost all of the feedstock was that. So somewhat up from the fourth quarter.

[Heikki Malinen, executive]

But if I can -- I mean in terms of the actual mix of UCO animal fat, novel vegetable oils, Obviously, when you look at the -- just so more as a context for those who don't follow this industry. So ultimately, when we run these refineries, it is a blend usually of different things.

And when you blend these feedstocks, there are certain chemical limits or operating parameters that you need to focus on or achieve. And that is sort of setting the right balance between UCO and novel vegetable or animal fat. So it is not only a cost optimization question on what feedstock is cheaper and expensive, it's also a chemistry question that you need to factor in.

So -- but of course, UCO is a big part and then you have animal fat, novel vegetable usually is -- the other are very, very small parts. So UCO is the bulk usually.

Then in terms of the gearing, so maybe I hand it over to the CFO, who can comment on the gearing, the 40% and our plan. And if you would like to elaborate anything else beyond what we have said earlier on the funding, I guess, or the credit question.

[Eeva Sipila, executive]

Sure. So the leverage target we have is to have leverage below 40%. We are quite close to that target as you see. And obviously, in this environment where our financial performance is still weak combined with the Rotterdam investment, there is no quick way to improve that ratio. We are focused on delivering on the performance improvement. So of course, every million saved on the EBITDA helps. And then as I mentioned earlier in my presentation, the working capital is obviously part of our overall optimization.

Just to give you an example of something that saves both cost and inventories as we are looking into our terminal network whether we need all of them. We don't think we do. And just in reducing the amount of terminals, we obviously reduce our lease costs but also then reduce the inventory by definition.

So those actions, are very important. And then I think we wanted to be proactive and early in the year on the funding needs and have successfully completed the bond as well as the RCF. So in that sense, we're rather comfortable certainly from a liquidity point of view going forward.

[Operator]

The next question comes from Yulia Bocharnikova from Goldman Sachs.

[Yulia Bocharnikova, analyst]

I have two. First is on Singapore plant. Can you give any comments on utilization rate of Singapore renewable diesel line specifically in Q1 and whether these volumes were redirected to Europe?

And second one is on Red III directives. I wonder if you've seen any developments in terms of transposition of Red III into national regulation of EU countries as formal deadline is May 21.

[Heikki Malinen, executive]

So on the Singapore, as I mentioned earlier, so on the utilization, or on the production of RD. So the volumes to the United States were very limited. The European market for RD is short, and so that volume that we have produced, it has been coming to the European Union. However, I want to come back that SAF is the primary thing we're focusing on and any residual capacity we have been. And it's coming from the line #1 in Singapore will be then directed either into the United States or Europe depending on what is more economically sensible. So that is the case.

And then on the Red III, so I don't have really anything new to report on that. We will continue our public advocacy work. We've actually done good work on that area, and I will hopefully be able to report something on that after Q2. My own personal focus has been very much in Q1 now to get these programs underway and get rapid execution, and I haven't really spent personally much time on PA, but it is obviously important that we'll be higher on my agenda, as I see just the performance improvement program start generating results here. Good. Thank you.

[Operator]

The next question comes from [ Kai Ye Loh ] from Jefferies.

[Unknown Analyst]

So just one quickly. You mentioned you are going to resume your export only if the offices reopened in the U.S. from your Singapore facility? So my quick question is, do you mind remind us on the economics of the exports into the U.S.? And also, do you see any pressure by exporting the volumes that are not exported to the U.S. into the Europe? And how would it involve going into 2Q?

[Heikki Malinen, executive]

Yes. So thank you very much. So obviously, the I think there was one of your colleagues asked about, are they accretive, definitely, I mean, we don't -- we don't sell at a negative margin. So the -- I mean, of course, the more margin we have there, of course, the U.S. market in California is a huge market. So it does absorb these volumes. There is a market for the product. So the volume can be sold. It's purely a matter of do we make the reasonable profit on that. So yes, we will sell if the margin is bigger than it was in the past.

Now in terms of Europe, again, as I said, Europe is short. We have been able to find a lot of customers here, more customers. We've added new customers, but the focus is on SAF and then the RD is really residual to fill up the refinery. I can't really -- there's nothing really more I can add at this stage, unfortunately.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Heikki Malinen, executive]

So thank you very much for your attention today. It's been a good conversation. You always challenge us with your good questions. So thank you for the time that you've taken to focus on Neste today.

As a summary, really from my standpoint as CEO of the company. So the three things we're focusing on here predominantly now is delivering on the performance improvement program. I'm really happy with the start. I mean I'm very close to it myself. So I think we've had a good start, and I'm very happy that we were able to get the people part of that, the fourth module pretty much complete very quickly in 6 weeks.

And so that part is now done, and we can move on with the new organization. Then on Rotterdam, of course, the expansion progress. The program continues. Staying very close to that. We are on schedule and on budget based on the revised information we gave you. And then I said on SAF, we can sell the volume we now have and our salespeople are actively finding new customers. And I'm happy also with the start on SAF in 2025.

So with those words and with Eeva, we will then come back to you again at the end of the second quarter, and I wish you all a very, very good May 1 celebration if you are into that kind of stuff. Thank you very much.

[Eeva Sipila, executive]

Thank you.