Neste Oyj

OMXH:NESTE

Q3-2025 Earnings Call

[Anssi Tammilehto, executive]

Good noon, everybody. Welcome to discuss Neste's Q3 results that were published this morning. My name is Anssi Tammilehto. I'm SVP for Strategy, M&A and Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila.

We are referring to the presentation that was launched into our website early this morning. And the key highlights of the presentation include, for example, our Q3 financial performance and the status of our financial targets, including the performance improvement program and leverage, and they are actually progressing well. We are also talking about key regulatory developments and also key opportunities and uncertainties in the market. We are also having time for discussion with you all, and that's, of course, last but not least.

And as always, please pay attention to the disclaimer as we will be making forward-looking statements in this call.

And with these remarks, I would like to hand over to our President and CEO, Heikki.

[Heikki Malinen, executive]

Thank you very much. And good evening to you folks in Asia, and good morning to you in the U.S. Welcome to Neste's webcast. Nice to see you here again. Q3 in brief, let me state that it's actually now 1 year and -- 1 year and 2 weeks roughly, that I've been working for Neste in this role as CEO. It's been a very busy 1 year. I wanted to just take a few minutes and just reflect on this past year.

Obviously, I've had a chance to travel globally widely the company; meet our customers, our suppliers; understand the business; see how our refineries are performing. And I think overall, I really -- the more I -- longer I work here and the more I understand the company, I have come to a conclusion that Neste really is a rough diamond. We have a lot of potential to develop the company further. We have a great group of people here, and as I talked to the Neste folks, I really feel that there's good momentum inside the company and a strong commitment by our staff globally to move this company further. So maybe that sort of more as a context.

We will be discussing Q3 results here today. For me, personally, I'm actually pleased with the results. We're obviously not at the level of overall performance we want to be, but the direction of travel into Q3 is good. And if I look at what we have accomplished here, our refineries have been performing well. I'll talk about safety in a moment.

Sales has picked up. There's even some positive -- actually good momentum in the market and our performance improvement program is on schedule, maybe even a bit ahead of schedule. So these are also positive things that we're adding them up all together and even our fossil traditional Porvoo Oil products business did well. So it's a good basis to move into the -- into then '26.

Well, let's take a look at first safety because safety really is the fundamental of everything that we do. It's a license to operate unless we take good care of safety. We have no right to be making these products. On the left-hand side, you can see the data for our people safety, the total recordable in the incident frequency rate. It is heading gradually down. These numbers, just a reminder, since 2023, they include Mahoney, which is our UCO collection business in the United States, which is a very different type of activity.

But in any case, we need to bring that number down much more, and the team here has very clear plans on how to do that.

On the right-hand side, you can see our process safety figures for this year. So far, 2025 was actually gone, if I can say quite well. Of course, the trend has really fallen. We've had a number of months where we actually had no major incidences in the company on process side. I think it's too early to say how much of a trend this is.

But anyway, the direction of travel is good. And the discussion at least in Neste about process safety is continuous. And we have now, in Q3, launched with a 5-year roadmap journey to further improve our process safety and our ambition is to significantly bring that down even more. But as always, these take time, and it doesn't happen overnight. But anyway, we are systematically moving forward.

We have some major initiatives underway. You will hear more from Eeva about the performance improvement program. I just want to say it's on track. You'll see the curves in the moment, maybe we're slightly ahead of schedule. But even having said that, what's interesting and important to understand is the direction of travel towards the EUR 350 million, I think we can confirm that.

And then the more we do work around this program, the more evident it becomes that there is -- as I said, there are opportunities within the company to perform even better. And that for me as CEO, is of course, a very important piece of information. We have been driving down our costs, fixed costs, variable costs and the refinery performance is rising.

In the middle, you see then the Rotterdam capacity project. It is a significant undertaking. At the moment, having just recently visited the site, and I'm again going in some weeks' time back to Rotterdam. It is very busy. We have approximately 2,300 people from many, many different countries and nationalities working on the site, and the work continues.

But it's a big undertaking. And what I want to say separately is that we've also had very good performance on safety with all the folks on the site, it's very critical that we don't have any accidents and the team has done, and I'd say a really good job in working towards that goal every single day.

And then on the right-hand side, operational achievements. Actually, I think there are many, but we wanted to just highlight maybe two. One was that on subside, we had record high SAF sales volume. We are clearly -- the market is picking up, even though the mandates are still somewhat were clearly below our hope in Europe, 2% vis-a-vis 6%. And then as you can see, the market has become stronger and Neste has been successfully able to leverage the tailwind.

I want to highlight a couple of numbers from the third quarter over 1 million tons of renewable products sales volume of which SAF was about 244 produced tons. So year-to-date, we have produced about 741 tons of SAF. So the journey has clearly started. Our comparable sales margin in RP rose clearly to almost $500 per ton. What was also very positive and helped our result was that the total refining margin for Oil Products exceeded $15 per barrel. And that, of course, then helped the results.

EBITDA EUR 531 million, heading in the right direction. Cash, I'll let Eeva talk about cash in a moment. But of course, that's something we monitor very carefully as we do when it comes to the 40% leverage ceiling if I want to use that word.

My final slide here before I hand it over to Eeva, and then I'll come back later, it's about the performance improvement program. This is -- for me, this is sort of more than just the performance program. It is very much a journey that will ultimately then move us into what I've called inside the company, a journey of continuous improvement, continuous development.

While we're doing this program, we're also building more systematic methods on performance management. We've reviewed all of our KPIs, and we continue to do that because, of course, you get what you measure. We have very systematic cadence on performance reviews. This whole approach, we've really pushed that forward harder, and we will continue to do that, bring it down deeper and deeper into the organization. So I see this is an important part of moving forward with this program.

We also track our various activities in this program very carefully. I personally participate in biweekly reviews of all the initiatives that we approved before they even get included in this calculation. So I think I have a good understanding of where the program is going, and I'm happy to say that I really like what I see. I see -- I really like what I'm seeing in the teams. So good work and big thanks to the team Neste on this one.

So we are heading well towards EUR 350 million, and so far, EUR 229 million annualized run rate improvement by the end of Q3. And with those words, I give it over to Eeva. So Eeva, please take it from here.

[Eeva Sipila, executive]

Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with the familiar reference margin of renewable diesel. And just as a reminder. So at least do note this is a gross margin. So it deducts only the feedstock cost and is hence different from the sales margin, we'll discuss later on.

But indeed, I think this trend line shows very well the strength and recovery we've seen in the European markets in the quarter. Then just to break down by segment are EUR 531 million of comparable EBITDA, so EUR 266 million coming from Renewable Products, EUR 232 million from Oil Products and then EUR 34 million for Marketing & Services. And I'll maybe comment the segments a bit more in detail in that -- very shortly.

As Heikki already said, so the performance improvement program is obviously an important part of our EUR 531 million result. We're very pleased with the run rate of EUR 229 million achieved at the end of Q3. And then this gives a year-to-date impact in our figures of EUR 84 million.

Now a few points on the EUR 229 million. So if we break it into cost reduction versus more margin volume optimization, it's roughly 80-20 split. And maybe also good to remind you that there is an element of lease costs here, especially on the logistics side, which then are actually not visible in the EBITDA rather in decreased depreciation as we have fewer leases. So roughly a bit more than 10% of the 229 is related to that.

Overall, the bigger categories are really around logistics, transportation in all forms and fashion, the optimization there and the lower discretionary spend across everything we do.

Moving then to the business segment commentary. So Renewable Products. We're very pleased with the reliability of the operations. We almost reached a similar sales volume, as you see from the left-hand side pillars as we did in Q2, and then the sales margin continued to tick up.

If we move to the right-hand side and look at the sort of comparison between our Q3 results versus Q2, you see that the big change really comes from the sales margin area. And naturally, the diesel price has supported as it had a positive impact on our margins to actually both of the two segments and also OP, but important here as well, we continue to see some headwind in the feedstock cost. But then we also had a more one-off positive, which comes from the SAF BTC, so the -- now expired tax credit program in the U.S. which was in place for SAF until September. And we actually booked the full EUR 27 million benefit of those credits in Q3 and that it may be worthwhile noting.

On the CFPC side, the continuing tax credit system, we continued on a similar path as in Q2. So looking EUR 27 million in there as well.

Then moving into the Oil Products side. So Here, the diesel crack clearly contributed a much better market environment than in Q2, but also, we had a better raw material or crude feed cost level in our Q3 and that supported the $15 per barrel margin as well. Overall, as Heikki already mentioned, so we're pleased with good utilization rate, very stable utilization across the quarters as you see well from the left-hand side.

And then really on the right-hand side, maybe in sort of additional point to note is indeed the utilization of 91 and also some fixed cost improvement in the figures.

Finally, on Marketing & Services, we had a good season, the Q2 driving season, supporting the results, but the team continues, it's very good and diligent work on the fixed cost side and supporting then the result.

Moving then to cash flow and profitability. So the CapEx continues at a very -- under sort of very tight control. We have upgraded now our annual guidance to a level that we expect the CapEx this year to be around EUR 1 billion, so slightly down from the earlier range. And this is really, really thanks to sort of a lot of good discipline across the segments.

Now we knew going into Q3 that we'll have a tougher quarter when it comes to cash flow due to the upcoming maintenance or now already started maintenance -- ongoing maintenance, should I say, in Rotterdam and upcoming maintenance in Singapore which meant that we had to build inventories during Q3 to be able to serve our customers during the Q4 period, and that obviously had some headwind on our working capital.

But I'm very happy that the total outcome was minus EUR 50 million for the quarter because this is the -- also the year-to-date number, and this obviously gives us confidence that we can deliver positive cash flow for the full year as we work to deliver those built up inventories to our customers in the coming months.

So as said, a slight headwind on the cash flow visible also in the leverage, but we're well below our 40% target and we're happy with that performance. So with that, I think Heikki it's back to you.

[Heikki Malinen, executive]

Thank you, Eeva. So a few words about topical matters and then the outlook. So as always, we need to discuss briefly what's happening on regulation. I think overall, our view is that the recent news and decisions are supporting the long-term renewables demand outlook whether you can say it's enough to say there's a long-term secular growth, not completely sure, but at least momentum is building.

Here in Europe was, of course, extremely important are the decisions related to implementation of RED III. And the Netherlands, Germany, Italy, France, all moving forward, waiting eagerly to see what happens with Germany. The preliminary information was that they are looking to increase the volumes potentially quite substantially, but still waiting for that decision, hopefully, by the end of the fourth quarter, we will know then which way the direction is in Germany. And then, of course, will the implementation start in '26 or '27. But anyway, it seems to be heading in the right direction, so but still need to be patient here some weeks.

On aviation, nothing really major to say other than that, maybe in Asia, South Korea, Singapore, of course, Japan has announced SAF mandates and then Indonesia is also looking at it. So gradually also those countries which have been maybe less advanced in moving forward with these mandates are starting to consider them and discuss them. So that's also a positive when it comes to SAF sales.

On the U.S. side, the summer was very busy with the Big Beautiful Bill. A lot of major decisions were made now with the U.S. government in the shutdown, we're waiting to see how the implementation then progresses. But as I said in the -- at the end of Q2, I think if I look at all of these regulatory changes in the U.S. I think for Neste, it's still sort of net positive, some things that are clearly positive, some are negative, but overall, net-net, more on the positive side. And I think that's the main news on regulation and I sit waiting then for Germany and their decisions.

The market, let's see. So in terms of opportunities and uncertainties, well, already discussed the German part. On the feedstock side, I think what's worth mentioning is that with the various changes in tariffs, we've now started to see some clear decline in animal prices -- animal fat prices, particularly in Asia, Australia.

So that is sort of impacting -- that's a potential a bit of a tailwind for our business. However one needs to always remember that some countries accept animal fats, in their renewable fuels and others don't, so we always need to match the feedstocks with the actual market requirements. But we're very good at that.

On the crude oil slate, we, of course, use a lot of crude oil in Porvoo refinery. As part of the performance improvement program, we really started to work systematically and try to see how can we diversify the crude oil slate even further. And we've done in an accelerated fashion, a lot of research here on the various technical limits by crude oil type and have actually been able to identify ways, how can we modify them and also then expand the number of crude oil options we have at our disposal.

So I'm very pleased with the results. There are actually quite a number of options we have to expand the crude oil supply. And that, of course, gives us then hopefully, some options to negotiate more favorable arrangements for the company.

We already talked about the performance improvement program and the potential even more beyond.

On the uncertainties, regulatory matters, of course, still uncertain geopolitics is still around. The whole question about what will happen to Russian refineries, Russian oil, global oil markets. I think the forecast -- the variance between the forecast is very broad. So it's very difficult to make any accurate predictions about that.

And maybe the last thing I want to mention briefly is China. China exports. So in the last weeks, we have seen news that China is considering permitting the export of SAF out of their country and remains now then to be seen how much and into what markets that Chinese SAF ultimately goes. So we are keeping a close eye on that as well as we head into 2026.

The market outlook pretty much as we have communicated, I would say earlier. And when it comes to the guidance, that guidance is also unchanged. So I wanted to accelerate here to make sure we have plenty of time for Q&A. So maybe with those words, I hand it over to the operator. Thank you very much.

[Operator]

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

[Alejandro Vigil, analyst]

Congratulations for the strong results. The first question is about the flow of products export/import in the Renewable Products division because as you mentioned before, now we could see China exporting SAF. And I'm also interested in your thoughts about the different regions, the U.S., Europe and Asia in terms of capacity and balance of export/imports. And the second question is about, what you mentioned about Germany, which is the potential volume upside coming from this RED III implementation in Germany? .

[Heikki Malinen, executive]

Thank you very much. So thank you, Alejandro for the questions. Yes, of course, the thing with these products, once you put them on a vessel, you can ship them in many directions. I think maybe the three things as far as Neste is concerned, so as we already discussed in the spring, so our exports from Singapore to the U.S. have been pretty much constrained. Nothing really has changed there. So as the incentives have gone away, so also our exports have been significantly diminished. That is the case still today. And unless the regulation changes, that will probably be the case also for the near midterm.

Then we feel like to --know where is that volume going? Volume has been coming to Europe. The European market has been able to absorb the Singapore refinery volume, and we've had actually reasonably good sales here in this market. Regarding China, it is not easy to get a good sense for what's actually happening there. So of course, we have to also rely on different sources here. But our sense still is that, of course, they have domestic UCO, quite substantial amounts of that. We've seen that UCO prices in that region have not declined as much as one would have expected.

So someone is buying that and producing. And now we will then have to wait and see how much tonnage actually comes out of China, and where does it ultimately land? So I think that we will probably be able to report more in the Q4 results once we see that situation evolving. Regarding Germany, yes, this is a very exciting news. I mean the numbers in terms of incremental demand have ranged anywhere from 1 million to 2 million tons.

So I mean, whether it's on the low end or on the high end, I mean, it's still positive. And hopefully, the other European countries will then follow up. But Germany, of course, is the biggest market, and that's why it is so critical that, that decision would be positive. Hopefully -- we're hopeful.

[Operator]

The next question comes from Derrick Whitfield from Texas Capital.

[Derrick Whitfield, analyst]

Congrats on your results for the quarter. I have two questions for you. First, regarding the short-term market tightness you're referencing on Slide 10. Could you elaborate on this dynamic as we're generally seeing the drivers as being more secular versus short term in nature?

And then second, if you could elaborate on the trends you're seeing across the global waste feedstock markets. While you're referencing higher feedstock costs on Slide 13, Tallow and UCO spreads appear to be a bit more favorable for you for the quarter and seemingly have the potential to remain favorable as U.S. regulatory and tariff policy have taken U.S. producers out of the market.

[Heikki Malinen, executive]

Yes, it's a very big question. The short-term demand versus secular demand. I mean, ultimately, the whole matter of having -- moving to clean fuels, especially in SAF, I mean, there's no option. So I mean, logically, you would say that's really the direction of travel for us, of course, at Neste and that's more of a supply issue. It is the fact that we are moving forward with Rotterdam, second-line construction, the more I look at it, the more convinced I am that even though it's a quite formidable task, it is still the right thing to do.

And if everything goes well, we should be well positioned as we head into the latter part of this decade. If this RED III implementation goes in a positive way, that, of course, will then give quite a substantial boost in diesel. And don't forget, Neste has the ability to move its capacity fairly flexibly from SAF to RD. So -- and we will take advantage of that flexibility depending on how the market ebbs and flows.

Regarding feedstocks, yes, I have to say that it is clear that regulatory decisions on your side of the continent has -- have impacted that some of the buyers seem to have disappeared or at least procuded their procurement from Europe and from Asia. So hopefully, that will ultimately bring some price levels down. But I would say, so far, it's been more of an Asian phenomenon and maybe Australian phenomenon on the animal fat. UCO prices, of course, have, as I said earlier have been holding fairly well. And then I would say in the U.S., we saw this movement up in feedstock prices, but maybe the uncertainty around the implementation of these regulatory decisions is maybe taking a bit the air out.

But let's see once the decisions are clear, whether there's another momentum move upward. So Neste is one of the largest buyers of these feedstock, if not the largest buyer, and I think we have a good global setup. We have a good team. We're able to optimize that constantly. We can also trade internally inside the system, but also trade with third-party if we want. So I think we're well positioned for that. I think that's about all the key things I can share with you now. Thank you, Derrick.

[Operator]

The next question comes from Henri Patricot from UBS.

[Henri Patricot, analyst]

Two questions, please, both on the Renewable Products margin. The first one, I wanted to check if you can give us some indications as we think about the fourth quarter margins to what extent you're able to capture what seems to be very good spot margins in Europe? Or are you quite constrained because of the maintenance?

And then I wanted to also check on the -- on SAF. We've seen quite an increase in SAF prices. Are you able to give us some color on your margins on that side of the business. Have you seen as well an improvement in the SAF margins in the third quarter and in the fourth quarter as demand seems to have picked up?

[Eeva Sipila, executive]

Thanks, Henri. So I would say that we were somewhat constrained in the Q3 as well on taking advantage of really the spot market prices. I think they were relatively high. But obviously, we're very pleased that we were able to utilize even smaller pockets to end up to the $480 that we did. Now going into Q4. So I think the big impact you need to take into consideration is really the maintenance ongoing Rotterdam and coming up in Singapore. And if you look at sort of a year back when we had similar maintenance, be it in Q3, Q4, it is roughly $100 per ton impact.

So don't forget that. Otherwise, obviously, we are very much now selling what we have produced to inventory. If all goes well, we will push -- we will hope to be sort of ramping up well and having a bit more still volume to push out really to take into -- take the benefits of the current market, obviously, we are focused on that.

But I think we have sort of more limiting factors. And then obviously, please do remember that now in Q3, we had the BTC one-off that will not reappear in Q4 as that sort of legislation. This has now ceased or expired.

What comes then to SAF prices. I think the -- indeed, the market turned out to be a bit better than it looked in -- during the summertime when there was a period where one had to consider that whether it makes sense to produce SAF or just focus on renewable diesel, the end outcome was better. I think maybe partly also due to just sort of a bit of lack of product and very, very low exports into the European market, and that helps strengthen the market, and then we obviously took advantage. And like Heikki said, so we are very flexible between the renewable diesel and SAF, and we'll continue to sort of focus on that flexibility really to be to Q4 or '26 for that matter.

[Operator]

The next question comes from Matthew Blair from TPH.

[Matthew Blair, analyst]

Could you provide an update on your Martinez refinery? Is this plant EBITDA positive? Or -- are you actually seeing any export opportunities out of California into more attractive markets? And any sort of commentary on the feedstock slate. It looks like veg oils might be a little bit more attractive at certain points during the quarter than some of the low CI feeds.

And then on the Oil Products side, could you expand a little bit more on the opportunities on the crude slate. It sounds like you're able to implement a little bit more flexibility. Do you have any examples of crude that you've been switching to and switching away from?

[Heikki Malinen, executive]

Thank you, Matthew. So if I take a stab and then Eeva can continue. So obviously, our Martinez is important. Don't forget, we have a joint venture. Marathon is the operating partner, and we, of course, are actively contributing, but they are the operating partner. So they run the operations day-to-day.

I think overall, the refinery is now -- has been running quite well. I would call it from Neste angle that we've come out of the project phase and we're now moving into the more continuous operating phase. And having just some time ago, visited Martinez, so I really feel that they have a really good team on location in California running this. But still, it's early days in this journey of making these renewable fuels even for that team.

On the export opportunities, I think the -- I think this is a general comment that with all the different regimes globally, the cost of feedstocks, I don't sort of at least at the moment, I think it's very much focusing on domestic sales. That is kind of where the opportunity aligns at least in the short to medium term.

On the feedstock side, I think it's been quite volatile recently, both of the partners supply feedstocks. And then, of course, the refinery can buy whoever they want. So this is -- I don't really -- I can't comment on what the actual substance of the feedstock mixes due to the structure of the joint venture.

On the Oil Products side, yes, the crude slate is really interesting because, of course, we buy a lot of it. We have -- our primary sources, the North Sea, has been. And we know we've had a good relationship, getting feedstocks out of there. But -- I'm sorry, a crude out of there. But of course, in the spirit of trying to make more money and improve our performance, we have to look at options.

And the only thing I can say is over the last three quarters, our engineers and chemists in Porvoo have really looked at a very, very broad set of options. And out of that, they're now narrowed it down to let's say, a shorter list, but there are some very interesting things, and we're testing them in production level mode to see how they perform.

But anyway, the options are evident, and we will continue to work. I think we'll be able to report more as we head into 2026. But I'm very pleased with the work they've done on this crude side.

[Operator]

The next question comes from Peter Low from Rothschild.

[Peter Low, analyst]

The first was just on perhaps your term contract negotiations for 2026. I think those usually take place around this time of year. Can you comment at all on how those negotiations are progressing? And whether the current tightness in the spot market confers on your degree of pricing power?

And then the second question was on the outstanding BTC, which you recognized as a contingent asset in the first quarter, but I don't think you booked in the underlying results. I think that was EUR 30 million to EUR 40 million, as you said at the time. Can you give us any update on when do you expect you might be able to formally recognize that?

[Heikki Malinen, executive]

So if I -- thanks, Peter. Thanks for your two questions. If I take the first one and then Eeva will take the second. Yes, this is indeed the time of the year when it is a term contract time, so to speak. I think last year, we said that for 2025, I think we said about 2/3 of the volume had been termed -- yes, about 2/3.

I think, of course, the market has changed quite a lot. We also have the SAF market is now active with the mandates. What I would like to say here is that we will always term some volume, but I think at the moment, we're a little bit monitoring the situation. We're in no rush to make any decisions here. Let's see how the weeks now move forward. We will term some, but I will then report to you probably in Q4 how these things ended. But at the moment, we're in no rush.

[Eeva Sipila, executive]

And regarding, Peter, the Q1 CFPC credit. So we're working on a deal to monetize all of the '25 credits and targeting to be successful during the fourth quarter, and that would then probably be the trigger for us to recognize the Q1 as well.

[Operator]

The next question comes from Adnan Dhanani from RBC.

[Adnan Dhanani, analyst]

Two for me, please. First, as it relates to your operated production facilities, utilization rates have been around the 80% mark in recent quarters. How do you see that evolving in the coming quarters? And are there any hurdles there to materially increasing it beyond that 80%? And then secondly, on the opportunity you mentioned from the lower animal fat prices. Can you just provide some color on the current split you have in your operated refineries between UCO and animal fats? And where that could go to take advantage of that opportunity?

[Heikki Malinen, executive]

So the first one, Eeva, on utilization, I think 80% has been sort of a good number for modeling, would you not agree?

[Eeva Sipila, executive]

Yes. Yes. I would say, Adnan, that whilst, of course, it's not necessarily an indication that we're satisfied with the 80%, but just realistically thinking of where we are. I would use that as the right -- as the number also going forward into '26. Now we have identified quite some bottlenecks in our processes, which we are working on to improve the number, but some of them are also tied to maintenance and CapEx, and hence, the sort of progress will not be sort of massive in -- going into '26. So that's a good number for you to use.

[Heikki Malinen, executive]

I would agree. And I think Neste has a -- might if I look at the last decade, Neste actually has quite a good history in debottlenecking these lines, both Singapore Line 1 and Rotterdam Line 1, both have been able to get beyond the nameplate capacity. So we are constantly working -- I mean, under the performance improvement program, we're very systematically turning every corner in those refineries to see how can we get more tonnage.

But as Eeva said, a number of these things, they require some investments, not massive, but some money and some of these investments, you can only do when you have a bigger turnaround. So that really creates the delay. But I'm actually very pleased also with the work the engineers are doing. Then on the animal fat, the blending -- I don't want to go into the detail of the blends. It is a bit sensitive.

And obviously, UCO plays a big role as does animal fat. What I can say to you, though, is that Neste has invested a lot in pretreatment technology. We have heat treatment. We have pretreatment technologies. We're able to clean up a lot of the bad stuff, if I may use that term from the feed.

So it doesn't go into the refinery. And constantly, we're trying to optimize within the technical limits to get as much of the cheap stuff or cheaper stuff in there as we can. But I want to still mention that in some European countries, for example, animal fats are not really allowed. And that does, to some degree, restrict the potential. But I'm pleased anyway with the direction of travel on animal fat prices. That is a good thing.

[Operator]

The next question comes from Artem Beletski from SEB.

[Artem Beletski, analyst]

So I would like to ask two relating to European regulation. And the first one is relating to RED III implementation. So you have been discussing about Germany and the impact on the demand for next year. But maybe could you talk about some other markets which are also doing RED III transposition and increasing targets in 2026?

What are interesting opportunities you see there? And the second question is relating to some discussions out there when it comes to product certification and some actions or plans to make more strict approach in some markets like Germany or Netherlands. How much is this actually visible when it comes to our customers' behavior? And maybe what comes to preferring U.S. supplier on European market?

[Heikki Malinen, executive]

So thank you very much. So of course, for us, what's very important is what happens here in the Nordics, both Finland and Sweden, very -- Sweden, very critical. Remember, Sweden actually dropped the mandate quite a lot here some years ago. We believe we're going to see gradual movement of the percentages as we head into '27 and '28 and even towards '30.

So it's gradual because, of course, people are worried about inflation and so forth. But I think that's all positive. In Central Europe, of course, Germany is just a very big thing. Other markets, we are looking closely at is, Italy is interesting. The Netherlands. And then small markets like Portugal, but volume-wise, Portugal, Spain, are small.

I would say, Italy, Germany, Netherlands and then Nordics are critical. And I think overall direction at the moment looks positive. On product certification, this is a really critical thing because -- this is, of course, a trust-based system. The value of the certificates, the biocredits fundamentally related to the fact that the feedstock you procure and use is really the stuff it's supposed to be, and that you have very good tracking. And Neste spends a lot of time and money to make sure that we track with our business partners resources and that we are using the right feedstocks.

I can't comment on other industry players. Only to say that I do think that at least the savvy customers are aware of the importance of this, and then they've recognized, that Neste is a reliable partner. I think that's what I would -- that's all I would say. And I think the German legislation, if it goes forward, we'll sort of further heighten the importance that the feedstock needs to be the right kind and from a reliable source or acceptable source if I use that word. So that would be good for us as well.

[Operator]

The next question comes from Nash Cui from Barclays. .

[Naisheng Cui, analyst]

Two questions from me, please. The first one is on the Q4 margin impact. I think you provided a very helpful comment earlier talking about $100 per ton impact from similar maintenance previously but we are having two major maintenance this quarter, including Singapore for half of December, I think. So I wonder, could we see more impact over there because there are two plants of in Q4. Then my next question is on inventory. So I wonder if you have built enough inventory to sustain a run rate sale about 1 million to 1.1 million ton in Q4?

[Eeva Sipila, executive]

Sure. Thanks, Nash. So you're right to highlight that there is indeed two breaks. But obviously, the Rotterdam is the sizable because it's full for the quarter, and it's really the start of the Singapore shutdown that impacts this quarter, a bigger bulk actually goes into Q1. So I think the reference is not sort of -- is a pretty good one.

Of course, it depends on also how the maintenance breaks go. And a part of this industry is such that when you stop and you open certain things, you sometimes do have surprises. So obviously, the syndication is assuming that we don't have big surprises. And more importantly, that we have very organized and speedy ramp-up in Rotterdam.

So it is not meant to be sort of exact guidance, but I just thought it's helpful because it indeed the magnitude is such that if you ignore it, your models will probably lead you to a too high number. Then when it comes to the inventory, I think we are well provided with what we produced into inventory to serve our customers as per our customer promises.

It's more than a question of really on our ramp-up time in Rotterdam that the faster we are, we may have some excess to sell in the quarter. And if we then have any issues, we might miss that opportunity to really tap on the spot market.

[Naisheng Cui, analyst]

I just wonder if we put margin aside, is there any color you can give on the absolute cost side of this on the two maintenance? Can you say on EBITDA? What is the absolute cost? .

[Eeva Sipila, executive]

Well, we haven't really given such numbers, this per ton is what I think is -- gives you a helpful indication of the impact in the quarter.

[Operator]

The next question comes from Alice Winograd from Morgan Stanley.

[Alice Bergier Winograd, analyst]

Two questions from me please. First, looking to 2026, what do you think are the key building blocks of supply growth and demand growth for HVO, for instance, you mentioned Germany, adding some 1 million or 2 million tons in demand. And what else is on your radar that you can maybe quantify from a fundamental perspective? And the second question is on FX. I believe you printed EUR 109 million of FX this quarter? And when do you expect to see the current spot rates to fully show in the P&L because there's quite a gap there?

[Heikki Malinen, executive]

Do you want to take the FX first?

[Eeva Sipila, executive]

Yes, sure. So indeed, the bigger FX move started or the appreciation of the euro started more -- during the quarter, so to say. So the -- as we are hedged, it comes with a delay. We'll start to -- now that levels are obviously kind of, I would say, stabilized at least to some extent to these current levels. So that will start coming through in the Q4. We typically don't have a super long hedging when it comes to FX, but obviously, some going also into next year.

[Heikki Malinen, executive]

Yes, of course, 2026, that goes into the department of forecasting, which has not been easy in this business. I think on a very high level, I think three things. Of course, the macro situation. Europe, as you know, has been overall quite weak here for a number of years on macro. Some minor signs of improvement as we head into next year, but still very early to say.

I think the big thing is really regulation because that, of course, will create instant demand. And then when you look at the overall level of how the market is behaving, now looking more at the fossil diesel because that, of course, impacts then the renewables market as well. What is happening with this whole Ukraine-Russia matter?

How are these refined products being moved around? That may also have some impact. Inventory levels have been overall quite low here. As we came out of the summer, that's also been supported. So maybe that will a little bit boost as you head into the new year. But for me, really the big thing is what's going to happen in the coming years. And I think it's very much about RED III.

[Operator]

The next question comes from Matt Lofting from JPMorgan.

[Matthew Lofting, analyst]

Two, if I could, please. First, Slide 10 in your deck shows the improvement through recent months in the gross renewable diesel margin. It sounds like you're sort of saying at least to this point that feedstock costs have been relatively sort of high or stable. So I just wondered if you could disaggregate roughly sort of how much of the improvement in the gross margin you think is indexed to the strength in fossil fuel diesel market versus being driven by underlying improvement in the renewable fuels market?

And then secondly, I noticed that you mentioned listed trade policy, unpredictability in your list of uncertainties. To this point in the year, sort of what have you seen from that perspective in terms of any impact on the business and the market. Just wondering how much of a, let's say, base case versus sort of tail risk you see there?

[Heikki Malinen, executive]

Do you want to do the feedstock,? I'll come to trade.

[Eeva Sipila, executive]

Yes, it was Matt -- your question on the unpredictably really around the feedstock, did I get it right?

[Matthew Lofting, analyst]

Yes, yes.

[Eeva Sipila, executive]

Yes. So well, I think considering how volatile the feedstock market has been this year and I think it's prudent to sort of assume that there's some unpredictability into that. Now of course, as the year draws to a close, what we have and now either at the production facilities or close by, obviously, it starts to be more predictable.

The -- but it's really these sort of trade barriers that have now been a sort of big area of causing this sort of unpredictability. And I think now the animal fat, where the price has decreased, which is in our favor, is a prime example because it really comes mainly from the fact that we see less U.S. buying and less buyers, hence, around whereas then the UCO has been moving a lot less because actually, the sort of the Chinese buyers have been picking up if there was anything sort of left unpicked from U.S.

But as we've all seen, these trade topics change on a daily basis. They're dynamic to say the least. So many things can happen. And then, of course, when it comes to our inventory valuations and those type of things, then the sort of it matters what the prices are at the year-end. And hence, we want to sort of highlight that as a real uncertainty. But I don't think I can really provide any more clarity unfortunately, on the topic.

[Heikki Malinen, executive]

Maybe to your question about trade policy. I mean, of course, there's a lot of stuff, but if I raise two uncertainties. One is regarding the U.S. importation of foreign feedstocks in the RIN 50. Obviously, I think not all industry participants are necessarily of the view that, that is the right thing.

So the debate, I think, we didn't have visibility on the debate, how will that ultimately then end? Will it go forward as proposed or will it change? But as I said, my understanding is there are different views on what is the right way forward. So we'll just have to see. And then I think from the European standpoint, Neste, we, of course -- as I referred to the Chinese SAF, the European Commission at the moment is monitoring the SAF situation.

And then we'll have to see in '26 or '27, depending on now what happens, what will happen on -- as you know, on renewable diesel, we have antidumping duties. But on SAF at the moment, it's monitoring is what's being done. So that will be some uncertainty. That's worth understanding and noting.

[Operator]

The next question comes from Paul Redmond from BNP Paribas.

[Paul Redman, analyst]

My question was just about in preparation for Q4, you have been building inventories. I just wanted to confirm where the focus of that build was. Was it on sustainable aviation fuel or renewable diesel? And then secondly, just a question about CapEx. You reduced your CapEx. If we could just get some insight on what the key drivers are of that? Is it phasing or a true reduction in CapEx? And you were forecasting to a similar spend in 2026. Should we think there's any change there?

[Eeva Sipila, executive]

Yes, I can certainly start with the CapEx. So I would say that Obviously, when the guidance was given, it was very sort of quickly after Heikki started, and we've done a lot of work on reviewing really the amount of CapEx spend that it drives and fulfills our return requirements. And hence, there's been a real reduction of scope in -- but then what comes to the bigger bulk of the CapEx, obviously, related to Rotterdam that has moved, and we expect that to sort of be the bulk of next year as well.

So there's really no -- I wouldn't -- we're not expecting a change to the earlier view on next year. But of course, the more you work on, there's always areas of cost efficiency that can be applied and tighter and better procurement, and we're obviously trying to sort of make sure the organization is really alert on all of those topics. But yes -- and then on the Q4 preparation. Well, we obviously know our commitments and have balanced both. So there is an inventory on both RD and SAF. But of course, volume-wise, the RD is much bigger.

[Heikki Malinen, executive]

Maybe if I can just build on that. I remember our conversation after Q1 and after Q4 of last year was very much about, okay, so how will the SAF procurement actually take place in Europe in 2025? And this is the first year when we have the mandate. And coming into this year, we really didn't know exactly, is there going to be seasonality around the summer. Will there be buying later in the year?

Or will there be buying equal amounts through the year?

So it's been a bit difficult also to plan the inventory when we don't really exactly have any data on the buying behavior and the buying profile. But as we have this year's data and next year's, then we'll probably become also smarter on how do we sort of build our own inventories as the market develops. So just more as a context, remembering those discussions in the spring of this year.

[Operator]

The next question comes from [ Matti Carola ] from OP Corporate Bank.

[Unknown Analyst]

First one regarding the performance improvement program. Could you a little bit elaborate the impact on the variable cost and how much is visible already in the sales margin you have right now? So I mean, the big part is, of course, big part of the headcount reduction, but if you could give a color about this impact on sales margin.

Then the second one is about the SAF next year. How do you see SAF market going as the Netherlands opt in this is done and also the U.S. reduction is a little bit killing the exports from Singapore. So do you see potential for RD -- or how do you see the market?

[Heikki Malinen, executive]

You do the first one?

[Eeva Sipila, executive]

Yes, I can comment on the performance improvement. So -- well, the headcount is important, it for regulatory reasons, obviously, it comes a bit in phases that there's still people have certain tenures that we need to respect and hence, not all the savings are in.

So actually, I would say that the biggest impact in the P&L is really around the overall procurement, spending less and spending more wisely. And that's by far the biggest. Then the logistics side is important, but part of those savings obviously land into reduced leases and hence in the depreciation role, but still significant also in the P&L.

[Heikki Malinen, executive]

That's your question, I'm trying to recall exactly the wording on the Dutch opt in clause, whether that actually -- I mean, that has, of course, been favorable for SAF, but now if it is going away it could be not exactly sure how much -- yes, I'm not exactly sure how much of a hit that will really mean. On the U.S. side, of course, the fact that you have this equalization from the incentives regarding SAF and RD, of course, that, of course, then reduces in some ways the attractiveness, if I may use our competitiveness coming out of Singapore. So that will be sort of a net negative, I would say.

[Operator]

The next question comes from Christopher Kuplent from BofA.

[Christopher Kuplent, analyst]

I've got really only ones remaining on Rotterdam. Could you tell us how much of the project CapEx is still left to be spent? And slightly related to that, what that will do to your depreciation charges running through the RP line? I mean, we're sort of at EUR 140 million, EUR 150 million per quarter right now. Where is that going to pan out once Rotterdam is fully ramped up into '27?

[Eeva Sipila, executive]

Sure. So Christopher, what we are expecting in Rotterdam as CapEx next year is around EUR 700 million. And then now the '27 number on top of my head is obviously a lot lower because there's -- by that time, everything will be built up, but there are some tails 100-ish, if I remember right, in '27.

So then that all kind of adds to the depreciation. Obviously, there is a relatively long depreciation time for -- because the asset will be around for decades. So the imminent increases is, of course, visible but based on that, if we can come back to a more exact number, but that would be the number to use on top of what you're seeing today.

[Christopher Kuplent, analyst]

Okay. And just to confirm, you're not fully depreciating the asset until it's ramped up, right? So even the CapEx spend to date is not in your quarterly charge yet?

[Eeva Sipila, executive]

Correct. We have the -- what we call sort of comparability in use. So as it is a site in progress, so to say, asset under construction. So yes, that's very true.

[Operator]

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

[Heikki Malinen, executive]

Once again, it was a pleasure to spend this hour with you. Summary, I wanted to touch on the four key points. As I've said, I think we're making really good progress on the performance improvement program. You see the numbers. We will continue to report on that, actually see there is more potential. And I think that we will continue to work on this going forward.

Regulatory developments very much focused now in Germany. Let's keep our thumbs up, if I can use that word. There is positive momentum in the market. Let's see how much that holds into '26. And then on the balance sheet, which we maybe didn't have to discuss this much this time. So we are below the 40% leverage number. And that, of course, is something we've aspired to do with the help of these initiatives.

So with those words, let me thank you, on Eeva's and on my behalf and wish you all well. And to the Americans, Happy Halloween. And we will then see you again in February. Take care.