Earnings Transcript for NTOIY - Q1 Fiscal Year 2024

Operator:

Anssi Tammilehto: Thank you and good afternoon ladies and gentleman. Welcome to this Conference Call to discuss Neste's First Quarter Results published this morning. I am Anssi Tammilehto, Head of IR at Neste. Here with me on the call our President and CEO, Matti Lehmus, our CFO, Martti Ala-Harkonen; and the business unit heads Katja Wodjereck of Renewable Products, and Markku Korvenranta, Oil Products. We will be referring to the presentation that can be found on our website. And as always please pay attention to the disclaimer since we will be making forward-looking statements in this call. With these remarks, I would like to hand over to our President and CEO, Matti Lehmus to start with the presentation. Matti please go ahead.

Matti Lehmus: Thank you and a very good afternoon also on my behalf. It's great to have you all participating in the call. As we anticipated in our previous quarterly earnings call, the market in renewables was clearly more challenging in the first quarter, both in the U.S. and in Europe. In this weaker market environment, we have kept our focus on our resilience strategy and on our competitive advantages to different margins. So, moving to the first slide, our group comparable EBITDA was €551 million in the first quarter. This is one-third lower than last year, despite growth in renewable sales volume. One key driver for the lower result is the lower renewable sales margin of $562 per tonne, which compares to last year's average of $863 per tonne. The margin in the first quarter reflect the lower bioticket prices and renewable sales premiums versus last year, and also the renegotiated annual term contracts as the old contract expired at the end of the year. On year-on-year, the sales volumes grew in renewable products, but were slightly below the previous quarters level due to the SAF inventory build-up and preparation for upcoming maintenance turnarounds, and also the seasonally lower demand at the beginning of the year. In Oil Products, good operational performance and high utilization rates supported our performance, and we achieved a total refining margin of $20.4 per barrel in the first quarter. This is a good achievement, noting that refining margin was slightly higher than in the previous quarter. Our cash flow in the first quarter was impacted by the inventory buildup before the Porvoo refineries major turnaround in the second quarter and in renewables and was negative. During the first quarter, we also finalized the organization simplification and restructuring and we expect this to lead to a cost saving of €50 million annually going forward. I know that we have prepared for a more challenging market environment in the renewables are well-positioned to capture and to leverage our competitive advantages also in this market. We're looking at key market indicators, the change in the renewables market is well visible. In the U.S., the average green credit price weakened by 31% versus the previous quarter and versus one year ago, the change is 65%. Also Europe, renewable price premiums continued to weaken during the first quarter and are adequately lower level than last year. And note that on the feedstock side, the average feedstock prices weakened slightly approximately 2% on average. In Oil Products margin, gasoline strengthened versus the previous quarter, with inventory levels for both gasoline and diesel on a very low level. So, moving forward, I would state that we continue to actively pursue our strategic priorities and to support the business performance improvement through our own activities. Our strategy remains resilient also in the current renewables market built around, first of all, a strong position in the growing SAF market. Secondarily, creating value through our competitive advantage in feedstocks and global sales optimization. And finally, a strong positioning in all key market positioning as well for the long-term growth in the renewable and circular market. We also continue to focus on operational excellence and cost efficiency to strengthen our long-term competitiveness. With these words, I'm handing over to Katja Wodjereck who will go through the Renewable Products performance.

Katja Wodjereck: Thank you, Matti. Good afternoon also on my behalf. Let's go through the results and market updates for Renewable Products. 2024 has started in a challenging market environment. We have been preparing for this for the last 10 years already and strengthened our global platform both on the feedstock production, product optionality side. And secondly, by mastering world-class optimization on a continuous basis. Let's zoom into the first quarter. Comparable EBITDA was €242 million and below previous year's level. This result was mainly impacted by sales volume results at a year-over-year growth to 849 kt and a weaker market resulting in a sales margin of $562 per metric ton. Our sales volume were impacted by seasonally lower demand, the buildup of our SAF inventories and our preparation for the upcoming turnarounds in 2024. Our sales were quite evenly balanced between Europe and North America markets and we continued to optimize our full value chain in the weaker markets. Our sales margin is clearly at a lower level than what we saw last year. As we have highlighted for a long time already, the market has been impacted by the additional capacity, especially in the U.S., but also in Europe. In addition, the Martinez joint operation had a diluting impact on our margin also in the first quarter and we are working on several improvement areas to enhance the profitability. We move to the next slide, on our focus areas for 2024, they center on four pillars. Our end-to-end optimization, providing competitive advantage also in this market situation. Continuation of focus on growing our soft business, we see positive momentum building specifically towards the end of the year. Our focus on finalizing the ramp ups and new projects in our sites to Singapore water them and through our JV in the US and in addition execute on our cost and efficiency improvement plans. And every planner player in this business has to have both access and the capability to process feedstock. Last but not least, we have been seeing positive regulatory developments in The Netherlands, but also waiting the final decisions for example, in countries such as Germany. Our strategy remains, we've continued to grow in selected feedstocks and markets by various means. Thank you and over to Markku.

Markku Korvenranta: Thanks Katja. Good afternoon all. A quick update from Oil Products. We had a solid performance with good operation on availability, while preparing for the turnaround, which started at the beginning of April. The quarter was also affected by the harsh winter conditions in January, and the [Indiscernible] strikes in February and March. In Q1 2024, gasoline and diesel cracks were stronger than longer term historical averages, driven mainly by geopolitical disruptions and effective refining capacity growth lagging behind the demand growth, contributing to the size of supply/demand. Now, let's look at the EBIDTA bridge comparing Q1 2024 to the year before. The EBITDA was €115 million lower at €278 million. The key driver was the sales volume with €73 million negative FX. The lower sales was caused by the combination of turnaround preparation and the strikes. Total refining margin was $20.4 per barrel compared to $21.8 of their barrels a year before. This drop resulted in a €25 million reduction in the EBITDA. Noteworthy however, is that the total refining margin was $1.5 per barrel, better than in the Q4 last year. This was driven by the strong gasoline margin. Finally, the combined effect of fixed costs FX and others is negative €80 million. Now, let's look at the Oil Products 2024 focus areas. The successful safe and finally executions of the major turnaround in April-May 2024 is the main priority to the Oil Products organization. The turnaround preparation and the start went well. The wintry weather conditions over the last couple of days did affects the mechanical works, but we are now fully up to speed again The value of operational performance and optimization excellence is highlighted in the current positive and volatile market environment. In Porvoo transformation, we are taking concrete steps forward. Green hydrogen production will be reached in final investment decision readiness during the year. Further, we are growing chemical recycling and coal processing capability. Finally, within Neste Excellence program, improvements in availability, networking capital, and cost efficiency continuing to be targeted. In particular, we see encouraging short-term energy efficiency improvement potential. Now, I'll hand it back to Matti.

Matti Lehmus: Yes, Thank you Markku and I will shortly cover the marketing at services, commenting that profitability realized that previous year's level at €23 million, comparable EBIDTA. And I also note that our market share remains at a high level, and sales volumes increased slightly year-on-year in spite of the strike in Finland, which had impact on the distribution. But with these short comments, I hand it to our CFO, Martti Ala-Harkonen to discuss the financial.

Martti Ala-Harkonen: Thank you, Matti. Let's now take a more detailed view of some of the key financials for the first quarter. First, a reminder to some of our focus areas from financial as well as financing perspective. I will start with efficiency improvement, which is an important profitability lever for this year as well as going forward. We continue on Neste Excellence program, which is targeting over €350 million of sustainable EBIT value creation by 2026 with the year 2022 acting as the baseline, and we are currently well on that track. Couple of examples of this. In March, we completed our organizational change program, a process which started last November with the introduction of our new sharpened organizational structure to enhance our long-term competitiveness. Through the new streamlined organization, we will achieve approximately €50 million of sustainable savings in fixed cost going forward. We will see this year our fixed cost growth rate leveling out. At the same time, we have continued to fine-tune our operating models across all our businesses to make them more optimized in cost as well as networking capital management, and overall also continued our working capital management program. I want to hear also highlight the work they continue to execute in the area of risk management. Successful risk management combined with our continuous focus on global optimization across feedstocks, products and markets continues to be a vital cornerstone of our strategy, and naturally so also of course in a more volatile market environment. Let's then turn into our first quarter result bridges by business segments as well as by business driver. When first looking at the first quarter comparison bridge by business segment on the left hand side, we can see that while our comparable EBITDA, like said reached a level of €551 million in the first quarter compared to €830 million. Last year the results decline year-on-year came mainly from renewable product sales margin, where market prices were weak, particularly in renewable diesel. In Oil Products, the total refining margin remained healthy and like Markku said it was up from the fourth quarter of last year. I like I said the Oil Products EBITDA decline year-on-year comes mainly from the sales volume side. There was an impact there both from the Porvoo major turnaround and somewhat also from the political strikes in Finland during the quarter. Looking at the comparison by driver year-on-year, on the right hand side, the impact from the lower Oil Products volumes were by and large offset by higher sales volumes in Renewable Products. However, the lower sales margin of Renewable Products is nevertheless the largest group level driver also in this graph. Then a short look at our financial targets at the end of March are comparable ROIC, calculated over the last 12 months was 20.1% and leveraged 27.9%, both of them well meeting our financial target levels. Our solid financial position enables the continued implementation of our strategy going forward. Then looking at our cash flow. I want to highlight that our first quarter cash flow was impacted by inventory buildup, mostly related to the upcoming maintenance turnarounds, as well as by the buildup of our SAF inventories like we had communicated. And more precisely, our inventories were up by about €700 million in the first quarter compared to the end of last year, impacting negatively on net working capital and cash flow. Good to know though that there was at the same time a positive impact from lower receivables by about €300 million. Our cash flow before financing activities was a negative €340 million in the first quarter compared to minus €102 million year-over-year. Our Cash South investments totaled about €300 million in the first quarter, main projects being for example our Rotterdam expansion project on our SAF project in Rotterdam. On a positive note, the group's net working capital in days outstanding was 33 days on a rolling 12 month basis at the end of the quarter lower than the level of 41 days at the end of last year. Finally, amidst of the current weak renewables market, it's important to highlight that our strategy remains resilient in a more challenging market environment. Our discipline growth CapEx is built around the following three pillars which you see in the graph, then being also sources of distinctive competitive advantage for Neste. First, we focus on the most high margin projects in renewable and circular solutions to create future value, that is SAF, chemical recycling, renewable polymers and chemicals, as well as highest return innovation opportunities. And this year, of course, of particular importance is the ramp up of our SAF sales volume. Our SAF sales are expected to increase from the second quarter onwards, growing toward the end of the year. Second, we will continue to grow in sustainable raw materials, increase our diversity in feedstocks, as well as the level of supply security. We have a particular emphasis on the use of renewable energy we will continue to grow in sustainable raw materials, increase our diversity in feedstocks, as well as the level of supply security. We have a particular emphasis on growing the so-called challenging, that is more difficult to process type of waste and residue feedstock base in renewable products. And third, in order to continuously strengthen our global competitive position, we continue to invest, for example, in our productivity, product optionality, and pretreatment capabilities. Then, combining our discipline growth CapEx with prioritized maintenance investments to ensure operational reliability and safety, our target is to continuously deliver attractive returns and achieve a strong cash conversion. A strong cash conversion is of course also a foundation for our dividend policy with a target to provide a competitive and over time growing dividend as well as for being able to further invest in profitable growth going forward. This ends the financial review and I will hand it back to our CEO. Matti, please.

Matti Lehmus: Thank you, Martti. So, let's take a look at our outlook for the full year 2024. In general, we expect the geopolitical situation to result in continued volatility. In the renewables, we expect the average sales margin for the full year to be in the range of $600 to $800 per tonne. And for SAF we expect the sales volume to increase from the second quarter onwards and to grow quarter by quarter toward the end of the year. We expect the annual SAF sales volume to be in the range of half a million ton to one million ton. There are no changes in our scheduled maintenance in 2024 and for the Singapore new line full capacity is expected to be reached after the scheduled turnaround in the first quarter as we expect to remove the remaining capacity limitations during this turnaround. In Martinez the unit is currently operating at slightly under 50% utilization rate and work is ongoing to prepare repairs and to ensure safe and reliable operations. Looking then at the longer-term picture, as we noted in our Analyst Day in March, the long-term outlook, demand outlook in renewable and circular solutions has strengthened compared to our view a year ago. We expect the renewable diesel, SAF and NAFTA demands to grow to more than 50 million tonnes by 2030, with sustainable aviation fuel leading the long-term growth. The long-term demand development is supported by recent regulatory developments. For example, in the European Union, the Renewable Energy Directive 3 and the Refuel Aviation Directive were passed last autumn. As European demand growth is expected to pick up again next year, we would also expect global utilization rates to start gradually increasing after this year. So I want to conclude that our strategy remains extremely clear and we continue to focus on profitable growth with a focus on feedstock and most attractive market and in parallel on continuous efficiency improvement. This ends the presentation and we are now ready to take your questions. Thank you.

Operator: Thank you, sir. [Operator Instructions] Thank you. We are now going to proceed with our first question. And the questions come from the line of Erwan Kerouredan from RBC. Please ask your question. Your line is opened.

Erwan Kerouredan: Hi. Thanks for taking my questions. I've got three, please. First, on the RP sales mix. So the share going to Europe went down. So it's 51% now versus 61% last quarter. How much of that is redirected to Sweden volumes? That's my first question. Second question is on the premia. So the European premia, significantly lower year-on-year. Are these premia now fixed given the term negotiations, or is it just a 1Q thing? And then the last question I have is really on hedging can you confirm that there's no obvious impact on the first quarter and should we expect a positive contribution in the next in the next quarters. So these are my three questions. Thank you.

Matti Lehmus: Yes. Thank you, and perhaps I can start and Katja please then add to my comment. So I'll start with your question on the renewable products. Sales mix, it's a correct observation that our share of sales to North America has grown. It was at 51%. And in a way, we are, of course, after, let's say, the process of renegotiating our terms and allocating our sales, we have looked for the best mix of different markets. And as a result, we expect indeed the share of sales to the U.S. to be somewhat higher this year. You will also note, if you look at it from a market demand growth perspective, that the North American market is the market this year where the growth is the strongest. In Europe, the growth is lower because of the Swedish decision for example On the question on the renewable product sales premia in Europe, it is correct that these premia have come down, if you look at the different market indicators clearly from last year's level. When we look at this year we have, of course, also termed up a share of our sales for the renewable diesel. This is relatively high this share, close to 80%, but at the same time there, of course, also remains then an exposure to the spot market with the remaining volume. And briefly on the hedging, I would say, in the first quarter the hedging impact overall on the margin was relatively small, and also going forward we at the moment don't expect any major impact on the results going into next quarters. But this of course depends on the market development.

Markku Korvenranta : I could add there in turn on that for the Q1 hedging like you said no obvious impact and like Matti said the neutral impact just that if you break down the total real agile margin hedging was slightly positive, but then the utility hedges gave a negative, so that netting out both impacting on the comparable sales margin was neutral.

Katja Wodjereck : I want to add on the first initial question on the split, we're indeed very balanced with 50% to 55% towards the U.S. volume. So we're continuously globally optimizing as well, but indeed the term deals are a significant high share of that as well.

Erwan Kerouredan : Thank you, the 50% to 55% is for one, Katja?

Katja Wodjereck : That's for the U.S., yeah, 52. So half-half, it's practically half-half today. So we were on a positive note of we were able to really place all the volumes that were hit, but today half-half today. So we were on a positive note of we were able to really place all the volumes that were hit, but today half-half and we're globally optimizing the spot and the term deals. They obviously flow depending on how they were closed with.

Erwan Kerouredan : Thank you. And just a quick follow-up. So are you right to assume that the Netherlands, you're not assuming that the Netherlands will influence the premia in Europe and drive demand and influence the Premia?

Katja Wodjereck : Yes, I would say I think the Netherlands, first of all, is a positive. We're seeing around 300 to 400 additional volumes that will come in, additional demand. We would be able to get a significant share of that. And then obviously pricing will flow with the renewable diesel pricing that is out there in the market currently.

Erwan Kerouredan : Thanks very much.

Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Matthew Blair from TPH. Please ask your question.

Matthew Blair : Hey, good morning. We've noticed that European spot SAF premiums relative to RD have come down recently. Do you have any thoughts on this, and is this impacting your term discussions on SAF volumes? Then my second question is on the upcoming BTC in the U.S., which was scheduled for 2025. Have you heard anything about a potential delay to 2026? And when it does come into effect eventually, what does this mean for your Singapore volumes that you historically have sent to California? Thank you.

Matti Lehmus: Thank you. Perhaps, Katja, if you want to take the first question on SAF.

Katja Wodjereck : Matti, happy to take the first one on SAF. If you look at the reporting lines, and I think you guys all monitor, it has been coming down on the soft side. We however look at it in a way that the market is still not very liquid. There is not a sizable enough move, but obviously it gives a certain trend line that to a certain way, it is correct what we have been seeing. I would probably also say when it comes to the term deals there's an enormous amount of activities that we're currently undergoing for us driving the sales volume up quarter-over-quarter and really towards the end of the year second half in a big theme that's one of the absolute key priorities and we're looking at everything we're looking at current customers we're looking at new customers term deals to extend, but also new ones. So that's really an ongoing process.

Matti Lehmus: Thank you. On the second question on the switch to the producers tax credit in the US, my understanding is that currently there is a very clear decision with the IRA that this would happen in 2025, we are also still waiting for all the final criteria to be defined and that's of course the starting point. Obviously, as it's a political decision and then it would be the separate decision if there were any delays. If I look at the impact well it's clear it's a it's a producers tax credit that it's aimed at local producers, so we would expect it not to be Singapore not to be eligible for this one we would at the same time expect that our joint operation in California, Martinez would be eligible. I know that at the same time, based on the IRA details we have at the moment, it is lower than the BTC. So it is linked to the carbon intensity, but regardless, we would expect it to be lower than the $0.01 per gallon. So obviously then the impact for Singapore would become part of our global optimization like always. Singapore continues to be a very competitive place to produce but it would not be eligible with today's decisions. And something that is then of course interesting to follow whether there is any impact on the rinse for example if this tax credit level changes next year.

Martti Ala-Harkonen: And just correcting $1 dollar per gallon not $0.01 per gallon.

Matti Lehmus: Excuse me, I meant $1 dollar per gallon.

Matthew Blair : Great. Thank you.

Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Henri Patricot from UBS. Please ask your question.

Henri Patricot: Yes, hello everyone. Thank you for that presentation. Two questions, please, on the renewable products margin. Just firstly, the very near term, can you give us an idea of how the margin has moved in April so far? It seems to be pretty close to first quarter, but just to check whether there's been an improvement already. And then extending that to the guidance for the full year, because you were obviously below the lower end of the range in the first quarter, but you've kept the upper end of the range $800 per tonne unchanged, which implies that you see a possible scenario where your margin goes close to $900 per tonne for the rest of the year. Can you give a sense of what such a scenario would look like? Assume, for instance, that would be if you have sales close to 1 million tonne rather than a half million tonne. Any other indication you can give us as to what we need to play out for your margin to be close to this sort of level and you ending up at the upper end of the range with the full year? Thank you.

Martti Ala-Harkonen: Thank you, Henri. Perhaps I take the second question on the guidance. And exactly like you comment, we have not changed our guidance. The average margin for the full year we expect to be in the range of 600 to 800. Clearly, I mean, what we are focusing on is, of course, those areas where we can support the margin performance. We are, like you heard from Katja, of course, putting a high focus on buildup of the SAF sales. This is an important part of our strategy and we expect the SAF sales to grow quarter by quarter. The second important one we are, of course, focusing through our general business model is that we really look at the optimization of feedstock and sales in this global position that we have and as the market moves. These are both important drivers regardless of the exact market dynamics. And then I just note obviously in general it's clear that the renewable margin is also sensitive to some market parameters. The absolute diesel price is important. The development of the feedstock prices is important. This is of course a general sensitivity that we have. But this is from our perspective clear. On the short-term market, Katja, you can perhaps comment any changes in early April.

Katja Wodjereck : Henri, thank you for your question. First of all, similar trend line that we're currently seeing we know there has not been any fundamental market changes if we look what happened now in the first quarter, both in the US and in Europe. I would also highlight it's a bit of a seasonality impact when it comes to volume. And then internally, obviously, we're preparing for the turnaround, but we're planning for higher volume on the south side already. That's really one of the ongoing things.

Henri Patricot: Okay. Thank you.

Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Artem Beletski from SEB. Please ask your question.

Artem Beletski: Yeah. Good afternoon and thank you for taking my questions. I also have three to be asked. So the first one is really relating to SAP volumes and appreciate your comments relating to volume growth quarter-by-quarter, but could you provide some further color for example looking at Q2 and what type of pickup we should be anticipating. So is it fair to look for example at production volumes which were clearly high in Q1 so is the good proxy or not. Then the second one is really related to H-rate and could you comment on the outlook for the rest of the year and the last one is on topic mentioned by Katja. What comes to German regulatory situation? So you're monitoring some potential changes there. So what it is in particular? Is it really upstream emission reduction discussion ongoing there or for example HPL sales at gas stations and so on? These three questions, from my side.

Matti Lehmus: Yeah. Thanks, Artem. Perhaps I'll start and Katja again, please, please add then also, if I start on the SAF perhaps looking at it more from the production angle, just reminding that as we have communicated, we started the production of SAF. Also, for SAF in the fourth quarter we have now in the first quarter have been ramping up that production and at the same time building the inventories. So this of course enables from a production perspective than then increasing sales in the second quarter. It's good to note that when you look into the second half, it is our plan that the Rotterdam sub optionality project starts up in the third quarter. And that means then that after the third quarter also that can support from a production capability perspective, the SAF sales growth and likelihood. We are currently very active in of course, at the same time doing the commercial work of selling these additional volumes. But this is why we also say it will come quarter-by-quarter if I just continue on the on the hedging. Just noting in the first quarter, our average hedging ratio for the margin was around 40%. For the full year 2024 for the remainder is somewhat lower, I think we are close to 28%. Correct. And I think the second quarter is somewhere in between 34%. So this is the level and slightly I've explained also in earlier calls we have part of that is then using let's say far more Gasol type instruments, some is using more soybean oil type, heating oil type instruments for the US. So it's a combination of both. Maybe still to add that overall we are somewhat lower level of hedging than we've used to be enough comes also from the partially from the liquidity of the market. Of course, the market price is also on a low level. So the where it makes sense or not to hedge show that's been taken into account -- current hedging ratios going forward. And then there was a third question on the regulatory development I'll make a high level comment but then give it to Katja for the more specifics on Germany. I mean, one interesting one in the next this year, but next year in particular, is that how different European member states implement the renewable energy directive into the national legislation? The Netherlands will of course, a decision that was already made this year that is linked to it. But we are following closely how that then happens in the other member states, and we expect it to happen during this year and next year. And Katja, you can comment on Germany on some of the specifics.

Katja Wodjereck : Indeed there's quite a lot of exciting thing happens not only on the voluntary side but also on the mandated side. So in Germany we expect kind of in the next couple of days, if you look at, read around 7 to 14 days, there's an expectation for the final decision to practically get HVO on the pump. That it has been a long time outstanding, so we look forward when that gets finalized. And in terms of volume market, current estimates are around that that would open up an additional, from a market perspective, 400 kt per year. But that's currently the calculation that we have. It's then remained to be seen the exact amount.

Artem Beletski: Okay. This is clear. Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the line of Sasikanth Chilukuru from Morgan Stanley. Please ask your question. Your line is opened.

Sasikanth Chilukuru: Hi, good afternoon. Thanks for taking my questions. I had two, please. The first was also going back to the renewable sales margin and the full-year guidance. I just wanted to put the question in a way that if the current conditions were to prevail throughout the year, can you achieve the lower end of the range, the $600 per tonne, purely by the higher contribution of sales? I was just wondering if there was any expectation of conditions improving from year one baked into the lower end of that guidance range. The second was on the Martinez plant. The plant is still running at less than 50% of nameplate capacity. I was just wondering when can we expect the work to start on it and for the plant to reach full capacity now. Are there any additional costs associated with the work? And if it had been operational at 100% capacity in Q1, would it have diluted the margins further than the $560 per tonne?

Matti Lehmus: Yeah, thank you, Sasikanth. I'll perhaps start with the answering. This is Matti Lehmus. So on the renewable sales margin guidance, I mean, just reiterating what I also said in the earlier question, it's good to note it is the average sales margin over 2024 that we are guiding. And we are saying we expect it to be in the range between $600 to $800 per tonne. And obviously, I mean, what we are focusing on is those activities where we can support the margin whether it's the SAF sales growth, whether it's the feedstock optimization, the sales optimization, but we just in general note that the margin is also sensitive to some market parameters. But that's of course then to be seen in which direction they move. On Martinez, perhaps a couple of comments. I mean, the situation is very much similar to what we had in our previous quarter. So the unit, the Martinez operation is running at slightly under 50% capacity utilization rate. And we are still waiting for also the authorities to give a go ahead, so that the repairs can be executed. At the same time, obviously there's a lot of work ongoing by our partner to prepare those repairs, so that once that is available, these can be executed. And the target, of course, is that by the end of the year, this unit could reach again its full capacity. Obviously also it will have some costs. The fact that we have to do repairs will be reflected in some additional costs that come to the repair costs. Yeah, that will unfortunately be a couple of tens of millions of euros in fixed cost, our estimate. Some of that was already in a Q1, but it will come more, we assume, now, during the second quarter, so that we cannot escape.

Sasikanth Chilukuru: Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the line of Michele Della Vigna, Goldman Sachs. Please ask your question.

Michele Della Vigna: Thank you very much. I just wanted to re-ask a couple of questions on the South market. So first of all, we've got the mandatory blending in the EU starting at the beginning of 2025. I was wondering if you have a view of when the distributors will really start to buy in larger volumes ahead of that. Should we assume that starts at the beginning of the fourth quarter to be fully prepared for the January 2025 blending? And then secondly, I was wondering in terms of new countries announcing a mandatory blending, if you're seeing any development, we were waiting, I think for the UK to also put a mandatory blending for 2025, but I'm not entirely sure if that has been passed yet or if it was just a proposal. It would be great if you kind of run us through which other regions could provide the more SAF demand upside. Thank you.

Katja Wodjereck: Okay. Thank you for the question. Maybe I start with the first one on the time lining, when to expect, because as you rightly said, the refuel EU is going to expect it to hit in 1st of January next year. Cannot give a full answer to this, but there is an expectation that obviously towards the year of the end, the demand side would need to get ready and different distributors would prepare for that. And we're clearly seeing a high dialogue on the customer side as well. As I said before, we're very much out there talking to existing but also to new customers. So there is an expectation that really as we get closer to the year at the end, a lot of distributors will need to get ready for that. Towards your question on the UK, that is really some exciting news because you rightly pointed out the UK is looking into a mandate that would be even higher than what the refuelers use currently. They're looking at 6% by 2030. The UK is currently looking at 10%. It's not finally through. I think there has been some headlines today that it could progress further, but still to remain to be finally closed. And then other countries, we looked at Switzerland as well. Switzerland is just in the final discussions as well to adopt the refuel EU mandate level. So talking again, they're looking now at 2% 2025, and then 6% at 2030, that would be in line with the refuel EU, and that's one of the additional opportunities. So as I said, there's a lot of exciting things happening on the mandatory, but also I have to say on the voluntary side, we're pretty out there and voluntary customers, direct airlines, there's a lot of discussions currently going on.

Michele Della Vigna: Thank you.

Operator: We are now going to take our next question. And the questions come from the line of Peter Low from Redburn Atlantic. Please ask your question.

Peter Low: Thanks. You mentioned the underlying environment was similar to 1Q so far in April. Does that mean we should be assuming a 2Q margin towards the lower end of the guidance range as things stand and to what extent do you have visibility on where the 2Q margin might come in? And then just on the voluntary staff demand point that you just mentioned, you said you'll be into a lot of conversations. What do you think has to happen to get those customers over the line and to begin actually buying those volumes from you? Thanks.

Matti Lehmus: Thanks, Peter. Perhaps Matti here. I can take the first question. So obviously, as you're aware, we are giving guidance only for the full year. So, not giving any specifics for the second quarter, I mean, noting what we have said that what the key drivers are that we are working on to support the margin, it's the growth in the SAF, and that happens quarter by quarter. It's also a reality that the market in the first weeks of April has not really changed. So from that angle, it's clear that in the second half of the year, we would expect the margin to be then higher than in the first half. But that's as far as we can comment. On the voluntary demand, Katja, you can add.

Katja Wodjereck: Yeah, I think to what's your question on the finishing line, I mean, the full Rotterdam Q3 is coming online in Singapore. So we're in the preparation really in terms of, but the preparation then obviously leads as well to getting them on the fence line. So on the aviation side, it really, I would say it is going as planned.

Peter Low: Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the line of Kate Sullivan from Citi. Please ask your question.

Kate Sullivan: Hello, thanks for taking my questions. A follow-up on Martinez first. You mentioned in your prepared remarks that it has a dilutive impact in 1Q. Any indication of the magnitude of that dilutive impact in the sales margin? And is it feasible to consider upgrades to the facility which could minimize the facility, which could minimize the impact, particularly as the clean fuel production credit will favor a lower carbon intensity fuel? And then secondly, just to follow up on US regulation, you mentioned that you're still waiting to hear on specifics for the clean fuel production credit. When do you expect that should be finalized? Is it later this year, a particular quarter? Thank you very much.

Matti Lehmus: Yeah, thanks Kate for the specific question on Martinez first and indeed we commented it also in our annual report and in the prepared remarks that it has a dilutive impact on our sales margin. Obviously, first of all, the unit is at the moment only running at less than 50%, but also we obviously don't have the full operation optimized yet. And order of magnitude in the first quarter, it had a 10% diluting impact on the sales margin. And this is something we will have to focus on going forward, ramp up the unit but also at the same time really work on the optimization of the performance for that unit and the question then whether it needs some further upgrades et cetera is something we will need to look at going forward. On the U.S. regulation, obviously the question was asked earlier. At the moment, we have a very clear timeline coming from the EPA. The new credit is supposed to, let's say, kick in 1st of January next year. So from that angle we would expect, of course, to hopefully have all the details being defined during this year. But I don't have any exact timeline.

Kate Sullivan: Okay. Thank you and just on the optimization you discussed the potential optimization on Martinez would you see that being more feasible applying it to the feedstock side or product side say for example SAF?

Matti Lehmus: No I was referring specifically to feedstocks this unit is focused on renewable diesel. So creating SAF capability would take a separate investment decision and construction project, which is, of course, longer project. But this is something we are focused on. It's a good observation. It has a clear diluting impact. And with the volume growth, this is, of course, something that is good to note.

Kate Sullivan: Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the lab. Giacomo Romeo from Jefferies International, please ask your question.

Giacomo Romeo: Yes, thank you. The first question is just checking whether you were surprised not to see a stronger price reaction on European prices following what they have been some policy tailwinds in the Netherlands and obviously it looks like, as you talked about, the Germany. In Germany we could see some volume uplift, but yet in prices in Europe are not yet, haven't really shown a significant improvement relative to the first part of the year. The other question is just trying to understand how you're thinking about your entry in policy as you move into 2025 in the context of the lower prices you're seeing. Are you expecting to scale these down further? Are you thinking about that?

Matti Lehmus: Sorry, can you repeat the last question?

Giacomo Romeo: Yeah, the other question is around entry policy in 2025 in the context of lower prices, whether you're thinking of scaling it down further, given what prices are at the moment?

Matti Lehmus: Yeah, thank you. If I comment on both, I mean, obviously, like Katja noted, it's positive if you see regulatory demand that increases demand, like we had the Netherlands decision. At the same time, the market has been weak in the first quarter. There has been ample supply, so we have not seen a big immediate impact of that decision. Obviously, we continue monitoring the different regulations in the different member states. That is, of course, an important driver. Looking, for example, also at the next years. In terms of the hedging policy, I think we have a clear policy in place. As you will remember, we basically target that we have a higher hedging rate in the first quarter and then subsequently it goes lower for the following quarters. We have some flexibility what the exact hedging level is. Historically we were as high as 50% or close to it. Now, we have been more like 30%. But this is of course something we then need to decide depending on the market forwards and the market outlook. So no decisions done on that side, but we are continuously reviewing, of course, also the hedging market and what makes sense. But no decisions on that side concerning 2025.

Operator: We are now going to take our next question. And the questions come from the line of Henry Tarr from Berenberg. Please ask your question.

Henry Tarr : Hi there. Two questions for me, please. One is just on the inventory buildup that we've seen, should we be thinking that that might unwind through Q2, Q3, or is there any timing on that? And then the second question, sorry to come back to it, but just the sales margin, again, in renewable products. Was the environment in Q2, was the delivered margin broadly in line with what you were expecting when you set the guidance? Or was it slightly weaker than you were expecting given the environment? Thanks.

Matti Lehmus : I can comment on the first one, on the inventory buildup. So you can see, observing the balance sheet, that like I mentioned, that our inventories were up actually by €712 million. Now it was €4.08 billion, and that was because of the turnaround and the SAF inventory buildup. Also, our DIO, we are, of course, following the different turn rates what's up I do foresee that we should have our inventory we will target to balance it out particularly in the second half of the year from the third quarter onwards, third and fourth quarter and particularly fourth quarter typically we optimize most on the inventory side. But of course, we have higher volumes as well so to say, so to speak, when we get all the safe upper running et cetera. Yes, short comment on the sales margin question, I mean, like commented earlier, obviously, we are focusing on the things we can do ourselves, like SAF, like feedstock and sales optimization, but it's also good to know that our margin is sensitive to some key market parameters. And obviously, in the first weeks of April, the market hasn't really changed. So it's something we continue monitoring. Hopefully, the market will eventually recover.

Henry Tarr : Okay. Thanks.

Operator: We are now going to proceed with our next question. And the questions come from the line of Derrick Whitfield from Stifel. Please answer your question.

Derrick Whitfield : Good afternoon, and thanks for your time. I have two questions. First to clarify the previous Martinez optimization question, do you expect Marathon will be in a position to increase its allocation to waste and residue feedstocks by year end? And second question is did you anticipate the passing of the Netherlands biofuel mandate in your self-mixed expectations for 2024?

Matti Lehmus : If I comment briefly on the question, so on the market optimization, I think the key focus is now to first of all get all the units up and running once we have the go-ahead for that, but in parallel then also to enable really using more waste and residues and then of course also build up all the logistics and the commercial capabilities and this is something that both parents have to do. It will be a gradual process, but the interests are obviously aligned. It's also clear it will not happen overnight, so it's a process that we need to focus on going forward. In the Netherlands, I mean, it's clear that we have different type of regulation that has not been passed. This one has been in preparation already for some time. So from that angle, I think it was our base assumption that it would be passed like it now has.

Derrick Whitfield : Thanks for your time.

Operator: We are now going to proceed with our next question. And the questions come from the line of Paul Redman from BNP Paribas. Please ask your question.

Paul Redman : Hi all, and thanks for the time. I just have two questions. The first is, we talk a lot about the upside here to margins potentially, SAF regulation upside, Germany, Netherlands, LCFS credits for example. What are the risks to the downside? Matti you seem to keep mentioning market parameters. What parameters are you talking about that you're worried about potentially downside on margins from here I'm essentially trying to work out our margins bottomed out at this point? And then secondly, how underpinned is the 0.5 million tonnes per annum of SAF sales, you mentioned on this call about talking to new customers voluntary demand, I'm trying to work out whether that's upside on 0.5 million tonnes per annum, because the 0.5 million tonnes is already underpinned or whether you need these deals to happen to get to 0.5 million tonnes per annum.

Matti Lehmus : Perhaps I can start with the risk question. It's of course clear that there are also always different type of risks. I mean, if I take a couple of the obvious ones that I referred to earlier, if we look at the fact that, for example, feedstock price development is an important driver for the margin, and it can, of course, go either way. So, it is also a risk if there is a clear increase in the prices. In the same way, one can look at the general diesel absolute price level. Our pricing is very typically linked to that one on the renewable diesel side, so if that decreases, it is of course also a risk. And then you have of course the risks of, for example, unplanned shutdowns or other types of risks that are related to our target for the year. But it just comes to the general observation that the margin is quite sensitive to a number of parameters, which of course can go so either way on the self-sales, Katja.

Katja Wodjereck : In fall on the staff side, the market is really developing and we part of developing it now, because I mean it's still below a million and now it's going to be significantly up and then continue year-over-year. So to your question if this is add-on that's part of developing that market to the expected numbers that we announced 0.5 million to 1 million and that's what we're working towards too.

Operator: We are now going to proceed with our next question. And the questions come from the line of Matt Lofting from JPMorgan. Please ask a question.

Matt Lofting : Hi, thanks for taking the questions. Two, please. First, if you just take a step back and look at the first quarter in terms of the outturn, the numbers that you published, I'd love to hear your perception on how that compared with your expectations for the first quarter earlier in the year in the context that I think during the sort of the pre-call and prior to that that the inference was that the year had pretty much started as Neste had expected? And then secondly, just coming back to the Netherlands and the mandate increase there and I think you said earlier that it's expected to be retrospective for the full year 2024. How swiftly do you expect that impact to begin to feed through on the market and low-carbon premiums in Europe when you think about the second quarter and into the second half of 2024? Thank you.

Matti Lehmus : Yes, thanks, Matt. I'll start with the first question. And I mean, I more look at it, I had it in my opening presentation. If you look just a bit at the trend of the different market drivers during the first quarter, I mean, it's clear that, for example, RIN prices actually continued weakening during the quarter, if I compare it to where we were in the beginning of the year. And also, one could say that on the European renewable diesel side, the premia were also weakening still during the first quarter. So from that angle, I think it's something that continued happening in the first quarter. It was a weak quarter. We have also in a way seen that the demand level in the first quarter was seasonally weak, and this is of course, something that was also reflected in the first quarter. So that's how I would describe it, I mean, it's also something that happened during the quarter these trends. For the Netherlands, Katja?

Katja Wodjereck: Yes. It's a little bit difficult to say exactly when the mandate volumes, monthly or weekly now when this is going to come in. I think on the good side is that the Netherlands are already taking a couple of hundred metric tonnes of biofuels that are moving already, the whole distribution the setup is already there. So I would probably say expect this rather soon to seem materialized, but I cannot give any concrete numbers here we don't know exactly when throughout the year.

Matti Lehmus: I could perhaps still add to the Q1 outturn, so of course, when we were in early February with our last year results, we probably awaited a little bit better margin outturn for renewables for the first quarter. We acknowledged already then that the market is highly volatile. On the positive side, I think our operational performance as such on the renewable side was as expected. And then also at the very end of the quarter, we had some postponed sales in a way to -- which impacted a bit on the sales volume. But otherwise, it was sort of as expected throughout the quarter.

Matt Lofting : Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the line of Anish Kapadia from Palissy Advisors. Please answer your question.

Anish Kapadia : Hi. Good afternoon. The first question was on refining margins in terms of how things are trending Q2 today with obviously lower diesel cracks. And I think there's around consensus around $15 Neste refining margin for the remainder of the year. So how are you thinking about that? The second one was just going back to the blended tax credit. Based on my calculations, I think you're getting about $100 to $125 per tonne in terms of your current sales for that blend of credit. I was just wondering, in terms of your single volumes into the U.S., is that a good number to estimate in terms of what you'd expect the impact to be for 2025? And then just a final one in terms of where kind of the profitability is at the moment and the earnings are. You know, with the weakness that you've seen here today, will that have any impact in terms of your ability to kind of pay the same dividend or grow the dividend this year? Thank you.

Matti Lehmus : The refining margin, Markku, I hand it over to you.

Markku Korvenranta : Thanks for the question. So based on the current forward market, both gasoline and diesel cracks up pricing lower levels in Q2 versus Q1. However, market is highly volatile driven by increased geopolitical risk and unclear economic outlook. The middle distillate inventory geopolitical events together with the potential summer heat waves can have a significant impact on the market and mitigate the weakness in the industrial diesel demand. More uncertainty, but today's market situation points towards lower margins in the second compared to the first quarter.

Martti Ala-Harkonen: But like you mentioned Markku, last year there were some, because of the heat waves, some problems with some of the refineries which a little bit surprised even us that it helped the pricing particularly in the third quarter. Remains to be seen how this year goes.

Markku Korvenranta : Exactly.

Markku Korvenranta : I'll take the second question on the BTC and then switch next year to this CFPC. The BTC actually is $1 per gallon. When you convert it into dollars per tonne, it is roughly $340 per tonne. When we then again look at the CFPC that will start next year based on the IRA, it is linked to the carbon intensity, so it's not possible to give an exact number. But looking at where typical feedstocks are it in our expectation would range from zero to roughly $200 per tonne, so still lower than the $340 per tonne that we currently have for the blender stacks credit. And then on the dividend, I mean, obviously at the moment we are just in the April month, so I would just refer, I mean, we have a very clear dividend policy. It says that we pay a competitive dividend that is growing over time. This is, of course, something then that the Board will need to look into when we are at that time of the year.

Anish Kapadia : Thank you.

Operator: We are now going to proceed with our next question. And the questions come from the line of Christopher Kuplent from Bank of America. Please ask your question.

Christopher Kuplent : Yes. Thank you. Good afternoon. I've got rather boring questions left on your scheduled maintenance. When do you think you'll be in a position to talk to us a little bit about the earnings impact of what you're planning? That's quite a bit in the second half. And as far as your second quarter maintenance shutdown is concerned, you gave that earnings guidance quite a while ago. And to the earlier point we discussed, refining margins have since come down quite a bit, do you think there is also downside risk to that EBITDA loss that you are guiding for the second quarter from that schedule maintenance? Thank you,

Matti Lehmus: Yes. Thank you for the question. I'll start with the question first on the scheduled maintenance in the second half of the year. Obviously, what we have given is the information when these scheduled maintenance takes place and how long they are. You will remember in the third quarter we have the Singapore first line, we have the Rotterdam, and then in the fourth quarter we have the second line in Singapore with the eight week. The exact economical impact I think it's of course depending then also on the margin level at the time from the duration you can, of course, already make your scenarios because you can then see what the volume impact is. At the same time I also note like we commented we are of course typically also building inventories then ahead of these turnarounds, so the actual impact is then spread over several quarters. That's how we typically do it. But then in a way Markku as you can comment on this Oil Products specific or Porvoo specific.

Markku Korvenranta : Yes, thanks. Thanks for the good question. So basically when we made these estimates we were looking at the market backwardated market conditions so some of the declines that that we've seen and potentially going to see in the second quarter was already building to our initial estimate on the absolute EBITDA impact as indicated in the previous call.

Christopher Kuplent : Okay. Thank you.

Operator: We are now going to take our last question. And the questions come from the line of Naisheng Cui from Barclays. Please ask your question.

Naisheng Cui : Hey, good afternoon. Thanks for saving me for the last three questions, if that's okay. The first one is on safety data. I just want to ask a number on Page 4 of your presentation, TRIF. I understand that's a good operator, but the trend has been discouraging. Your safety data has been deteriorating for the last four years. And in Q1, that 2.5 is worse compared to 2023. I just wonder if you can help me understand why. Is this a structural issue or do you have any action point to change this trend? Then my second question is on the renew sales contract discount. I think you explained earlier, Matti, that Q1 margin is lower. Part of the reason is because you had a discount versus last year on those 80% term negotiation. Can you tell us what is the discount you get for 2024 versus 2023? Then my last question is on SAF sales volume. I think it's a very deliberate decision. You are saying, oh, I'm building inventory. I'm going to increase the volume Q-on-Q. Why is that? Can't you find any demand this quarter? I mean, Q1? Thank you.

Matti Lehmus : Yes. Thank you for the three questions. If I start with the safety question, and indeed, thank you for noting that if I look at the safety performance in the first quarter, we can see that on the process safety, which we followed through this PSER. We were basically, let's say, the trend was in line with last year's performance and we had good operational performance here. On the occupational safety that we measure through this total recordable injury frequency, it went up from last year's average of 2.3 to 2.5. Here I note one structural thing is that we have added last year actually already all the acquired entities, which is of course a lot of personnel that is involved in the collection of used cooking or for example in North America, we have beginning of this year also added the acquisitions we did during last year. This is one of the areas where we are working hard to really drive an improvement in the safety performance, and to avoid these finger injuries or slippery or the type of injuries that you have when you move these containers of used cooking oil. It is a very important area. And in general, we put a high emphasis on our systematic safety programs we are in particular focusing, of course, on contractor safety we are focusing on high risk incident prevention in particular so we have a number of initiatives that we are systematically driving forward. Without these new entities the TRIF would be clearly on a lower level, or also in the first quarter. On the term sales question I mean I can't quantify it exactly, but of course, what is good to understand that when you look at the term contracts that were in place for the year 2023 these were negotiated in autumn 2022. And then of course, when we again look at the term contracts that are now in place, they were negotiated during the latter part of 2023. So of course, term negotiations always reflect also the market at the time. And in that sense, this very clear decrease of the premia is also something that is visible in the term contracts. But I don't have an exact number. It reflects this general decrease in premium that we have seen. And on SAF sales volume, I'll just make one comment and let Katja then add. One thing to observe is, of course, that as an important part of the SAF sales is to also be able to supply different airports. It means that we need to create the supply chains to the different airports. It also means that we need to build up the inventories in that supply chain. So that is just a thing that needs to be in place before the sales can actually start. But anything else you want to add?

Katja Wodjereck : Well, there's nothing to add, Matti. That's exactly one of the reasons. So we're really getting ready for this, and that's why we're building up the inventories to be then at full scale as the quarters progress. And then specifically second half kicks in that we then really ready to supply reliably and safe to our customers

Naisheng Cui : Understand. Very clear. Thank you very much.

Operator: We have no further questions at this time. I will hand back to you for closing remarks.

Matti Lehmus: Thank you very much. So I want to thank you all for the excellent questions and for joining this conference call. I would conclude by stating that in a more challenging renewables market, we will continue to execute our strategy. We will focus on execution and we will build on our competitive strengths to maximize our performance. Thank you, have a good day, stay safe.