Good afternoon, everybody, and welcome to discuss Neste's Q1 results that were published this morning. My name is Jukka Miettinen, Vice President of Investor Relations at Neste. Here with me, we have our CEO and President, Heikki Malinen, and our CFO, Eeva Sipilä. We are referring to the presentation that was launched on our website early this morning. The key highlights of our presentation include today, our position and in the ongoing market volatility, our Q1 financial performance. We will also cover the status of our performance improvement program and the progress towards our financial targets. We are also discussing our near-term focus areas as well as the current opportunities and uncertainties. We will have time for discussions with all of you, and please pay attention to the disclaimer as we will be making forward-looking statements in this call.
With these remarks, I would like to hand over to our President and CEO, Heikki Malinen. Heikki, please, the floor is yours.
Thank you, Jukka. Good morning, good afternoon, everybody. Welcome also on my behalf to the Neste Q1 call. Really great to be here today again with Eeva. Let's start with the summary for the first quarter. Five main highlights. Obviously, as we all know, we had tremendous market volatility originating from the Iran crisis, especially during the month of March. I can say Neste, we feel, was able to manage through that volatility period pretty well. Our financial performance for the first quarter was really good. Looking at the levels we achieved, I'm very satisfied with the absolute profit. Our utilization in the RP business was low. We'll come back to that. We could have done somewhat better. There's still work to be done. I'll talk about that.
The execution of our performance improvement program continued really well. Eeva will give you some more update on that, but I would just say that overall, I'm very pleased with how the team at Neste is executing the program. Finally, the work on the Rotterdam line number two investment continues. The closer we get to 2027, I think the more clear it is that the timing of the investment is good, and I really look forward to getting our production up and running then in 2027. As always, at Neste, we start with safety. Safety is our, so to speak, our license to operate, and we are striving to improve our safety, both in terms of employee safety, which we measure as TRIF, it's the Recordable Incident Frequency, and then process safety.
We have a very systematic five-year roadmap that we're executing. If we look at the results for the first quarter, I'm not very pleased. We have not been able, in TRIF, to move the needle downward, trending sideways. In particular here in the Nordic region and in the U.S., the cold, harsh winter did impact our safety. We should have been able to perform even better as winter comes every year. That is a work that we need to then learn on. On the process safety side also, we had a few, very few, but still events, and they raised then the score in the wrong direction.
I said safety is number one topic, and it is absolutely the highest priority for myself and my colleagues within Neste organization. If we look at the figures, again, maybe the six main numbers, and Eeva will talk about them. On the left-hand side, Renewable Products sales volume, 874,000 tons. You can see that we had the turnarounds, both the Martinez and in Singapore, line number one. We will talk about the other topic from Singapore production. I said, we are at 874, and would have, of course, liked to have a tad more. The margin, sales margin for Renewable Products was very strong, $856 per ton.
Compared to where we were just a bit of a year ago, in 2024, in the last quarter, we've come a long way. Our margins are now clearly much better, which of course, considering also how much capital we have invested in the business, these margins are necessary in order for us then to get, you know, good returns on the investment. On the right-hand side, you can see Oil Products refining margin, $23 per barrel. It is an improvement from the previous quarter, just as a recognition of where we were a year ago, and we were less than 10. Again, significant improvement in refining margins in the Oil Products business.
EUR 861 million of comparable EBITDA, and our free cash flow was very, very positive, and we of course are pleased with that because it impacts our leverage. As we all know, the markets were very volatile. For those of you who don't follow this that closely, I think the message we wanna say to you here is threefold. We've seen significant volatility in crude oil prices. I think Neste was able to manage the volatility pretty well. Subsequently, we saw significant spikes in diesel pricing and jet fuel pricing. When we look at our renewable diesel and SAF business, there is an interlinkage between those prices and also the fossil version of fuel. Neste's one big strength is that our product positioning is very much in the middle distillates.
We are primarily a diesel and jet fuel producer, both for renewable and fossil. Our product positioning, of course, is good given the circumstances we are now facing in the energy markets. What is very important to note is that if you look at the renewable feedstock prices, maybe you cannot really see that well from this graph, but the message we wanna communicate to you is that the feedstock prices, animal fats, cooking oil, et cetera, in the markets where we buy most of our volumes, they were fairly stable. We did see some movement towards the end of the quarter originating initially from the U.S. following the big RVO decision. You saw soybean oil movement. You saw animal fats in some markets in Asia move.
Overall for Neste, the feedstock cost overall burden stayed fairly stable. I think that is an outcome of the fact that our sourcing is very diversified globally, and we're able to then always optimize and try to go for a lower cost position. If we talk about where the world is today in geopolitics, of course, very important is to understand where does actually Neste produce its product. As you can see, we are logistically and location-wise far away from the crisis areas. In the Nordics, with the Porvoo Oil Refinery, we source most of our crude from the North Sea. In Netherlands, west coast of the U.S., I think overall our geographic footprint is good and helps us in this situation to stay away from the conflict area.
I said our crude supply was stable and we were not from a supply standpoint impacted by the crisis. I think that shows that it puts Neste comparatively in a good position. Those were my initial remarks. I'll now hand it over to Eeva to go through the financials, and then I'll come back and talk a bit more about Neste and where we are. Let's click and Eeva, please.
Thank you, Heikki, and good afternoon everyone on my behalf as well. Starting with the renewable diesel reference gross margin, as you can see, it pretty much was an upward trend throughout the first quarter, supported by the anticipation of positive regulatory news from both U.S. and Europe. Neste comparable EBITDA reached EUR 861 million for the quarter. In Renewable Products, the EUR 433 million was reflecting the significantly higher sales term sales premiums this year, something we indicated already last time we were here that we're gonna have a stronger year from the term sales premium point of view. Obviously, of course, the gas oil surge in March had a positive impact.
In Oil Products, EUR 337 million, supported first by a cold winter. We had a good January, February from a weather point of view. Cold is always good for us for the demand of our key products, and then in March, the Middle East conflict. In Marketing & Services, EUR 48 million for the quarter, similar to Oil Products, driven by first a couple of good cold months, but then also the conflict resulted in a relatively high inventory gain in March, and that's visible in our results. Our performance improvement program continues very solid and strong progress. We achieved EUR 115 million of EBITDA as an impact in the quarter.
In total, we've now so far reached a run rate, annualized run rate of EUR 476 million of EBITDA. We have a pretty balanced mix. I'd say we're moving a bit more from purely sort of cost reduction to also revenue and margin optimization, so, 64% versus 36% from between the two main areas. If we move into the sort of segments and look a bit more detail into them, starting obviously with Renewable Products. As you can see from the graph on the left, indeed the sales volume was clearly low due to two turnarounds, but also an equipment replacement delay in Singapore, which affected our March volumes.
Maybe something good worthwhile noting that as of the beginning of this year, we are now including in these sales volumes also our trading volumes. They are still very small in the total. It's something that we see the market evolving and something obviously that we're building capabilities for, and hence we feel that this is, this was the time to start including them in its sales.
Now of course, the light blue line on the left-hand side, the sales margin is one that strikes out and clearly is sort of rising to 856 million, $856 per ton is something that was very supportive for our result. On the right-hand side, we compare, where's the fourth quarter, and this now, recent quarter and obviously a very big improvement. Sales volumes were negative, but then again, the sales margin more than outweighed that impact. As you can see from the few smaller numbers, so we were very focused on renewable diesel.
We said already entering this year that we expect the market for market demand for SAF to be slow in the first part of the year. Because of the price difference not being attractive enough, we did indeed very, very much focus on Renewable Diesel in our sales. On the fixed cost, you don't see much of a movement, so slight decrease, but that of course includes slightly higher maintenance cost and some sort of fixed costs that come in the early part of the year. Nothing significant in them as such. Moving then to Oil Products.
Here, obviously the left-hand graph, you see the blue blue columns and indicating our very strong refining margin for the quarter, EUR 20, EUR 23. Indeed, we had a healthy January, February, good margins also for those two months. Really the spike in March due to the Middle East conflict was the one that took us this high. It's important to understand that the sort of how rapidly the crisis hit in March meant that during the first quarter, we were still in our production using crude that was purchased prior to the conflict.
As we sort of typically have sort of one to two months, less than two months difference from procurement to actual sort of running and production, this means that we're currently already now running with crude prices that are on a very different level, reflected by the conflict. Hence, the margin, refining margin for Q2 will be lower due to that. Whenever the conflict ends, hopefully sooner than later, it's good to note that we'll obviously have a one, two months negative of the fact that we will be then running with higher cost crude in our production system before then any sort of reduced pricing comes through the system.
As Heikki already mentioned, we are mainly procuring from the North Sea, availability hasn't been an issue. Really the sort of prices are obviously reflecting the fact that there's a lot more buyers for North Sea oil as well now that the strait is closed. Marketing & Services, similar to Oil Products really, strong quarter, thanks to the cold winter. Indeed, the inventory gain is something worth noting. That had a big impact in the quarterly margins. What you see here is in the fixed cost, they're slightly up.
We have a pretty busy investment program ongoing in our retail network, in Finland, and that is reflected in that number. Moving to group figures again. We had a busy investment quarter. The Rotterdam expansion, you'll soon hear and see more about it, is ongoing, progressing very actively. EUR 206 million cash out investments in the quarter. Now, despite this, we delivered healthy cash flow of EUR 286 million before financing activities. We're obviously very pleased with that. This is very much driven by the strong financial result, which enabled us to really have a step change down in our leverage.
Very pleased to be at 31.7% at the end of the quarter. This means obviously that we are tracking very well on both of our financial targets, already this early in the year. With that, I would hand it back to you, Heikki.
Thank you very much. Let's talk about a couple of other subjects. I wanna show a slide here that goes through some of our key priorities. It's obvious that for us at Neste, improving our refinery performance on the renewable side is absolute priority, in addition, of course, to the safety matter I showed earlier on. Our utilization level in RP for the first quarter was low. We did have turnarounds in Singapore, line number one, and also in Martinez. These were planned, and the turnarounds went well. After the Singapore turnaround, we had an installation of critical equipment, which did not proceed according to our own expectations, and that has created a delay in taking that equipment into use.
That is the explanation why our output or utilization in Q1 for RP was below our own expectations. We are going to have a major turnaround in Porvoo in the second quarter after the summer holidays. This turnaround is very critical for us. We've planned it very thoroughly. We've taken a lot of time to make sure that everything is ready. I have strong confidence in the team's ability to deliver on that turnaround. You may ask, well, given the market situation, could we postpone the turnaround? Unfortunately the case is that technically and for safety reasons, and also for permitting reasons, we will have to execute the turnaround, we will do it as professionally and as timely as it is possible.
I have good confidence in the Neste team. Turbulence in our markets continue. We continue to navigate and try to take advantage of the opportunities. Eeva already mentioned briefly about trading. We've started to do that with limited volumes. It's still early days. But also as the market for renewables grows, it will in the coming years most likely also provide more opportunities for trading and Neste also wants as a major supplier, wants also to participate in creating more liquidity into the market and taking advantage of the positions we have, whether it's on the feedstock side or on the final products side. Finally on the foundation of Neste, we've talked a lot about our performance improvement program. We have reduced our fixed costs.
I think our fixed cost base is now solid. We have improved many of our processes. I think we are better buyers we were in the past. All of this is providing us with greater efficiency and cost competitiveness, which are of course fundamental backbones of being a world leader in our industry. On advocacy, that is a very important part of our business. As you know, advocacy is basically what creates demand in some ways, and we can't really sell before we have the demand creation. It will be interesting to see how this Iran conflict, whether that in some way will positively, you know, accelerate the, let's say, the adoption of these new fuels like the ones we produce. We've talked a bit about Rotterdam in the past, but we've never shown a video.
What I will do is, I will click the button here and let's see if this video comes on screen and you can enjoy a minute looking at what's happening in Rotterdam from aerial view, so to speak. Here we go.
[Break]
There you have it. That is, it's a exciting project, I have to say. I go there frequently, and every time I go I just wonder at, you know, the skill and the work result of our engineers and construction partners. I said, as you can see from the video, the project is moving forward. It is being built, you know, step by step, and then in 2027 we will start production. It's a complex project.
We've taken advantage of the learnings from Singapore, but as said, every project of this magnitude is its own animal in many ways, and there's a lot of work to be done. The safety track record of the project has been really good. We've had very few incidences in the construction site, and I think that just is also a good signal on the quality of the initiative underway. As said, building these types of refineries in Europe is something that hasn't happened really for many years. We've had few industrial projects in Europe, so it is in some ways also one of a kind activity here in heartland of European Union. A few words about short-term opportunities and uncertainties.
I think as I said in my previous slide before I showed the Rotterdam video, I think it's going to be very interesting to see what impact the Iran crisis has on the discussion about energy security. If you look at, you know, the debate we're gonna have, it's going to be about how much energy supply do you need to have within the domestic markets, where do you supply the feedstocks from, where do the crude oil supply come from, and so forth. I think given our geographic location in Singapore, Netherlands, Finland, and the U.S., I think in that discussion, I think we should be pretty well positioned. Regarding regulatory developments, the last months have been very positive.
We have in the United States a historic renewable volume obligation decision by the U.S. government. It is very positive in terms of volume increase and, as it gets implemented, it will bode well for our Martinez refinery. We're of course very pleased with the decision. We also remember we also have the Mahoney business in the U.S. We are a major collector of cooking oil from over 100,000 kitchens in the U.S., so we also have good supply of feedstocks, you know, for our joint venture operations in California. Then in terms of European regulation, RED III implementation goes forward. Germany is now very close to making its final decision in parliament. Based on our understanding, the environmental committee of the parliament has now reviewed the matter.
They've made their recommendation. It should be coming to a vote in the early weeks of May. Looking at the proposal that they have, the way the text is written, it's also very positive for Neste, not only in terms of the increase. When passed, European demand starting from Germany will increase from $4.5 million tons to over $ 10 million tons by the end of the decade, so that's a big demand increase in renewable diesel. We look at that policy, it's very attractive from this feedstock selection part. Double counting will most likely be eliminated. That's positive.
There are very strict requirements regarding control and monitoring of supply, audits, checks on refineries, and that, of course, is something Neste wants that, you know, the quality and assurance of the feedstocks that are being used is tightly controlled. That is Neste positive. As I said earlier, we're in a good position because of our presence in the middle distillates market. We know the jet fuel market is fairly tight. We provide jet fuel mainly for our domestic markets here in the Helsinki-Vantaa Airport and the environment close by. As said, as we improve our capacity utilization in renewables, you know, we will have more volume. On uncertainties, well, geopolitical circumstances are very complicated matters, as we know.
They take time to resolve, and I think we will refrain from making any forecasts on how the matters will evolve. I think the only main point for me really is that for Neste's renewable business, the conflict in Iran does not really impact us from the supply standpoint. I'm also confident that our sourcing of crude oil from North Sea is in good shape. Those are roughly the main points we wanted to show today before we take your questions. We have the outlook. The outlook basically is unchanged, so I won't go into that any further. With those, I guess we're ready to take the questions. Thank you.
If you wish to ask a question please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question please dial pound key six on your telephone keypad. The next question comes from Alejandro Vigil from Santander. Please go ahead.
Hello. Heikki, Eeva, thank you for taking my questions and congratulations for the strong results. The first question is about the volatility we are seeing in conventional products. How are you taking this opportunity in terms of margins? How much of your volumes for the rest of the year are already sold with fixed conditions? That would be the first question. The second question is about the Rotterdam project. The startup during 2027, you think is going to be a low-end process or you are expecting a material contribution from Rotterdam already in 2027? Thank you.
Thank you, Alejandro. Eeva, you fill in, but I think regarding volatility, regarding the Renewable Products business, as we said, we have termed, you know, half of our business, about 60%, for this year. Let's see how our utilization now develops out of Singapore, how we get that solved. Of course, we're trying to get this matter resolved very quickly, and we get more volume. Half of it is termed. Then on the Rotterdam startup curve, I really wanna refrain from making any comments on that yet. I think, you know, it is a very complex project. I recall we have. Was it in terms of just flanges?
I think there are almost like 0.5 million, you know, flange connections which have to be checked and tested. This is a huge, you know, refinery. What is most important is that we have a safe start, even if it's a bit slower, but safe and stable start so that when we make commitments about volumes, then we will, you know, not have a repeat of what we had when we had the Singapore start. We really wanna avoid that under all circumstances. Anything you wanna say about the volatility and how we can take advantage of it?
Yeah, I think we're doing obviously our best to take the opportunities the market has. We are in, that's I would say, more volume constrained, so that obviously limits the opportunities to a large degree. Obviously being agile, and I think our Q1 results prove that, we did a pretty good job with it, with our teams in all of the segments.
Thank you.
The next question comes from Adnan Dhanani from RBC. Please go ahead.
Hi. Thanks for taking my question. Two for me, please. Just the first one, obviously there's been a big shock to the energy system from the conflict in Iran. There's likely to be some rethink of energy policy here. You've noted this as a opportunity for renewables in your presentation. If I flip that around, if there are continued energy affordability concerns, do you see any risk on the policy front as it relates to the mandates in Europe and elsewhere, particularly given how reliant you are on these mandates in the RP business? Just a second one on the Oil Products business. Utilization rates were slightly below where it has been in recent quarters.
Are there any issues here that may restrict you from running higher rates in the coming weeks and months, and not fully realizing the margins that we're seeing in the market, before you go offline for the turnaround? Thank you.
Thank you very much. Your question about energy policy, of course, is it's important. It is something that Neste is, of course, dependent upon. I think that is a fact. We had here recently in Finland, a debate in the government around what to do with the renewable fuel obligation. The outcome of that debate was ultimately that the government decided to keep the mandates in place. I think the decision was very clear that that is the intent of the government. I think that is also sending a strong signal. I've also made the comment very broadly that this is not only a question about fuel supply, but it is also about fuel security.
The thing with renewable fuels and also having domestic supply is something that is in a moment when there could be big shortages. We know that, for example, in some countries there's serious shortages on jet fuel. So for Neste, it's, I think we're well-positioned. At the moment, and especially if this German decision now goes through in May, I think the policy concern is much less of a concern than rather it could be a very good tailwind for us in the coming years. That's our read on that as we speak. Regarding Oil Products utilization, we were two percentage points below the previous reference number, a bit below. I think overall, I think Porvoo is running smoothly.
The only thing that you need to have in your models is the turnaround, and we will do our utmost to get it done in the shortest possible time, as long as it is safe. No visible concerns there.
All right. Thank you.
The next question comes from Derrick Whitfield from Texas Capital. Please go ahead.
Good afternoon, all. Congrats on your results. I have two questions. The first, with the benefit of clear regulatory policy in the U.S. and exceptionally strong diesel and jet crack spreads in E.U. and Asia, how are you thinking about the allocation of RP sales across your end markets? Second, could you elaborate on the trends you're seeing across the global waste-focused feedstock markets? Referencing slide 30, it appears the E.U. markets are depressed relative to the U.S. markets. Are you also seeing that in other eastern markets for fat oils and greases and PFAD?
Okay. Thank you very much for your comments, Derrick. Well, I think the decision in the U.S. regarding RVO is, of course, very positive for Martinez. If you recall, looking at the margin levels and the oversupply we have had in the U.S., this should start balancing out. We can, of course, not say, you know, how close to balance, you know, the U.S. market is at. That calculation is very difficult to make. I think anyway, we can see that the market is balancing. Of course, the margin, if you look at the spot margins, they are moving in the right direction. Now that we have the Martinez, you know, turnaround behind us, you know, we should be good to go and get that volume out.
In terms of your question about optimizing volume, following the loss of the BTC, our Singapore volume has been going to Europe to a large degree, and that is the current status of affairs. We've been very clear that as, you know, we've committed so much capital to this business, we need to now get the returns. We will, of course, be optimizing globally our volume, especially out of Singapore, depending on how, you know, the margin levels vary. The U.S. is a large market, but we'll just have to see, you know, how this all evolves. As said, we're very pleased with the decision taken by the current administration.
Regarding your question about feedstock prices, it was evident that when the RVO was announced in the U.S., or maybe a bit before that, we saw soybean prices, soybean oil prices go up. We saw animal fat prices in Australia move upward. They were very actually, I recall mentioning in one of the calls that the ANZ animal fat prices were actually fairly low. That has now corrected itself quite rapidly. They're not anymore at the low levels they were just some months ago.
That clearly is a bit of a signal that, you know, there's increasing demand coming out of the United States, which is then impacting animal fat demand in some parts of the western part of the Pacific. Regarding UCO, a fairly stable European market has been overall quite, you know, I think, you know, subdued. I don't know if subdued is the word, but, you know, fairly stable. And as you know, we also have now sourcing from Brazil, so for animal fat. We have now multiple options on how we can play. Maybe one important thing is still coming back to European policies that in some European countries animal fat has not been, you know, accepted.
I know some of the regulation seems to be going in that direction that maybe even animal fat could be to some degree approved or accepted. If that happens, you know, that would be net positive and give us more, more tools to play, you know, as we optimize our own production. Overall I think we're really well, I think we're well-positioned, if I may say it that way.
Thanks. Great update.
The next question comes from Paul Redman from BNP Paribas. Please go ahead.
Yeah. Hi, guys, and thank you very much. Two questions. The first one is on the renewable fuel margin. I know you've put up a chart that kind of implies that margins at the end of 1Q were close to $1,300 a ton. Is there anything you can talk about what you've seen in April? Have the margins been higher, lower, broadly in line? Anything you can kind of mention there. I guess the next question is a strategic question. The balance sheet's degearing, it's dropped from 40%, roughly 40% in 3Q 2025 down to 32% today. If these current margins persist, clearly the balance sheet is going to deleverage even further. Do you have an optimal balance sheet level that you think about or work towards?
If you reach that, what are your priorities at that point? Is it CapEx? Is it capital allocation to shareholders? Is it on inorganic acquisition and growth? Could you just kind of talk about your overall thoughts on capital allocation? Thank you.
Maybe, Eeva, you take a crack at the first one and I'll start with the second, and then you can.
Sure.
Fill in the gaps, so to speak.
Yeah. Paul, we've seen a healthy renewable fuels market also in April. Of course it's supported by the gas oil prices that are a result of the conflict on-ongoing. That's been a, in that sense, healthy start for the quarter. To the balance sheet.
Of course, we're very pleased with the good cash flow. We of course, needed a lot of money for Rotterdam, but still the cash flow is good. My own personal point of view, and I think Eeva shares it, is that we are very much on the deleveraging, in the deleveraging category or deleveraging camp. I personally believe that, you know, if a business is this volatile in terms of earnings profile, you know, the balance sheet should be fairly robust. If you ask me about priorities, you know, how where to use this money, I would very much vote for deleveraging.
Going forward a longer term, your question about where are we gonna use, you know, incremental funds, you know, if and when they arrive, and hopefully of course they will come, but let's see. We now have Rotterdam as a major investment. We need to get that up and running. We're of course looking through our whole system if there are any more debottlenecking opportunities, hopefully there will be in the coming, you know, years. That of course, will require some capital, but obviously less than a greenfield. What happens after Rotterdam, I think that is a very much open question. At Neste, you know, that is not a question we're spending, you know, the team Neste is spending much time on.
I think about it and Eeva as well, but I think our focus is now on getting everything we have out of our existing system, getting Rotterdam 2 up and running, and then we'll just have to see what the world looks like. And then, you know, what is the, what is then the trajectory of travel as we head into the 2030s. I think we have good capacity now. Let's work with what we have and make the best out of that first and try to get our returns up, you know, to the levels, you know, we want them to be. How's that?
Yeah. No, fully agree. I, and I think obviously, it's an exciting time to be in the energy space and we definitely see growth opportunities. The time is perhaps not quite yet. Hence it's really building on our capabilities than to take on those opportunities.
The next question comes from Artem Beletski from SEB. Please go ahead.
Yes. Good afternoon, and thank you for taking my questions. I have two to be asked. The first one is relating to renewable sales margin, and it indeed jumped almost $400 per ton compared to fourth quarter of this year. Could you maybe talk about the magnitude of impact coming from renewal of term contracts? The other topic what you highlighted was higher gas oil prices and maybe what comes to pretty low utilization rate in the quarter. Did it have adverse impact on the margin? The second question what I had was relating to regulation, and you did mention RED III implementation in Germany. We are close to the finish line, so to speak.
Maybe you can remind us, do you still see that volume impact for this year could be $ 1.5 million tons or something more what comes to Germany? The smaller market where RED III has been approved, is Netherlands. What is the impact from regulatory changes on that front? Thank you.
Maybe you take the first one, I'll talk on the second.
Sure. Yeah, Artem, the term contract impact is the one I would highlight. We, like we indicated in February, we talked about the significant step change in them. You are right though to point out that obviously with the lower production we had higher production costs in the quarter, and that's kind of had a negative impact on the margin as well. I'd say the sort of gas oil impact came pretty much the last weeks of the quarter. Yes, obviously an impact, but I think a bigger impact than for Q2.
Regarding your question about the volume increase, our own calculations are indicating that in the 2026, 2027 window, we're talking between $ 1.5 million - $ 2 million. We're not able to more accurately at this stage model, you know, exactly what year and what volume. I think the important point here is the direction of travel. You know, we basically, given the volume we have, we can sell that. You know, the market is there. I think the only thing maybe want to just mention here is that if, you know, fuel prices remain very high or even if they were to rise, you know, there will be some amount of demand elasticity, especially on the B2C side.
We have seen, you know, here in the Nordics, in our domestic markets, some, you know, pullback in end consumer fuel consumption, you know, maybe let's say 6%, 7%, but it's still very early days. It's such a short amount of data from about, you know, four weeks or so you can't really draw bigger conclusions. Of course, if fuel is very high on the B2C side, you will see probably some demand decline. How much that then impact, you know, RD, cannot say. Overall, I think the key message when you model is the direction of travel on demand looks to be quite favorable for Neste now.
Artem, on the Netherlands, I'd say that Germany is really the big one moving the needle for the other countries. Whilst of course, everything is important as it accumulates, but we're talking about 200 kilotons and the Netherlands would be in that camp.
Okay. This very clear. Thank you.
The next question comes from Sasikanth Chilukuru from Jefferies. Please go ahead.
Hi. Thanks for taking my questions. First I had two please. The first, I wanted to get again a little bit clarity, I suppose, on the current Renewable Products sales margins. Of course, we've seen a very strong start to the quarter. European and U.S. Neste Renewable Diesel prices, default resin prices and fossil diesel prices are all at pretty much three-year highs. You've represented very Neste Renewable Diesel gross margins of around $1,200 per ton. All these factors kind of suggest that the current sales margin was also at similar, if not, more than these gross margin levels. I was just wondering if you thought this was a fair interpretation.
You did mention healthy volumes, healthy margins, but just wondering if this was a fair interpretation or are there any other factors that we should be considering that could materially impact realized margins? The second one was for the Oil Products. There is of course this big divergence in product lines and between middle distillates and gasoline and fuel oil. Your message on Neste being a middle distillate gate company is pretty clear. I was just wondering how much flexibility do you have to optimize your refining system further towards higher middle distillate yields? What operational or perhaps configurational levers can you use to maximize middle distillate production and how much more can you add?
Yeah, I think you had a sort of good, a good recap on the items impacting the sales margin as such. Nothing really much to add on that. Then on the OP side, rest assured we are very much maximizing everything we can on the middle distillates because of the situation that the world is in. I don't see much more flex in a way we are approaching the turnaround and that will probably give us a bit more additional than opportunities if we're still in the middle of this conflict. Obviously, hopefully not, but of course, the price, the product market might be tight still for the even towards the end of the year. Then having brand new sort of components in the system. Right now we're definitely sort of maxing everything out.
Yeah, as said, we're so close to end of run on the catalyst that there isn't really much, you know, there isn't any wiggle room, so to speak. When we have new catalyst, you know, set up in the reactors, we will then look at the table and, you know, options and then produce accordingly, looking to maximize margins.
Very clear. Thank you.
The next question comes from Kate O'Sullivan from Citi. Please go ahead.
Hello. Thanks for taking the question. Following up on your answer to Paul's question, with the backdrop of renewable fuels margins back at highs seen in early 2023, at what Renewable Products margin could you justify sanctioning new investment? What sort of conditions are you looking for to sanction new growth, and anything you had on hurdle rates and geographies where you would consider adding capacity would be helpful. Thank you.
Yeah. Thank you, Kate. It's much too early to discuss that. Really, I think, you know, for me, at Neste at the moment, it is really critical we get Rotterdam 2 up and running, and we start earning a return for that investment. Don't forget, we had initially planned for EUR 1.9 billion. We're now at EUR two and a half billion. It's a year delay, you know, we have some work to do to get the returns back on that. Then we need to get the deleveraging job done. There's also the question, how do we think when we look at the thirties, you know, what type of technology do we really wanna employ? We've mentioned that we have the work on lignocellulosic.
You know, how will that progress? Is that's one sort of route. Another is to route, you know, with the current feedstocks that we use with the residues. You know, we have some key technology choices we will also need to make. Then, you know, what options do we still have, you know, with our existing facilities, you know, to even further debottleneck? I would err on the side of just saying that, Let's get the evidence that the Rotterdam is, you know, generating the cash. Let's look at any of debottlenecking opportunities within what we have, then, you know, make smart decisions regarding, you know, where, when, and how we then invest. Far too early to discuss that. We have other priorities for the time being.
Of course, now really in the midst of this Middle East conflict, I think it will be very interesting to see kinda how energy policy in Europe comes out of this. This is now the second big shock to the system in a matter of a few years and obviously sort of that, we'll need to base our sort of thoughts also on what happens around us. I mean, clearly, for us as a company, it's important that we are re-returning attractive rates for our shareholders, that we are a competitive investment for the investors globally.
Maybe one more thing which we need to, we need to get more better clarity on SAF mandate for 2030. The current 6%, I mean, we understand that the European Commission is very much sticking to that, but we need to get a bit more closer to 2030 to actually see, you know, how much of the demand as we head into 2030 and into 2040 will be sort of skewed into RD, how much of SAF. It's also going to be interesting to see what happens to Asian demand for these products after the Iran crisis. Because if you look at Asia, they've been severely hit, probably more than anyone, from this Iran crisis. Will we start seeing some pivot into renewables? I mean, for example, Australia, a big market not using renewables at all.
You know, are we gonna see these countries rethink their energy policy post Iran conflict? Of course, we're gonna be advocating that, you know, renewables is the way to go, but we need to get more visibility on that, you know, before we could make any decisions. I said Rotterdam and debottlenecking, priority number one.
Thank you. Just a follow-up. You know, your comments about whether the Iran situation could positively affect the adoption of renewable fuels. How do you think about the interaction between renewable fuel adoption and affordability for RD and SAF, given today's pricing mechanics, which are largely referenced to fossil diesel crack plus a green premium? Given your feedstock inputs, animal fats are not directly linked to crude oil prices. Is there any scope to evolve pricing structures so they're less mechanically tied to rising oil prices?
I think these are complex questions regarding price structures, and I really don't wanna go into that at this stage. What I wanna say, though, is regarding SAF, you know, one could make the statement, "Well, you know, SAF is expensive. You know, the airlines can't afford it." You know, if, you know, current high jet fuel prices are painful for airlines, how could they pay for SAF? I don't believe that is a, you know, strong argument. I think there are other drivers for decarbonization beyond just looking at costs. The reality is that if we look at, for example, the B2B segment, in software, we have also, you know, cargo customers who want to reduce their scope three emissions.
Clearly can see that, you know, the market is absorbing the per ton or per parcel cost, you know, relatively easy. If you translate then the cost of SAF, you know, into the airline ticket, ultimately, it is not a on the airline ticket basis, it's not that huge a number. I think in the airline business, we're going through a transition. You know, SAF will be adopted. It takes its time. The market will grow and SAF will become more common, but it will take its own time. Some companies will be faster to adopt, others. Maybe that's all I have to say. Thank you.
Thank you, Heikki.
The next question comes from Alice Winograd from Morgan Stanley. Please go ahead.
Hi. Thank you. I wanted to ask about biofuel volumes, please. From the release, it seems like you sold essentially all of the volumes you produced in 1Q, even though from memory, inventory levels were reported to be quite low at the start of the year. I wanted to ask to what degree are you comfortable with current inventory levels, and whether we should expect some production to be saved for inventory in the next couple of quarters, looking at, of course, the heavy maintenance season at the end of the year. Also, still on that, you mentioned a negative surprise with some issue in Singapore, you have kept guidance essentially unchanged. I'm wondering if this has any marginal impact on your full year expectations or if this was offset by other assets running harder. Thank you.
Sure. So Alice, indeed, your memory is correct that we did start the year with lower than planned inventories. I think the obviously in this type of a very strong market, it's financially sort of not very, not a very easy call to start replenishing inventories when demand is very strong. I think we're, we'll sort of, we would plan to sort, maybe sort of, produce a bit more to inventory, but I think the demand now in the second quarter we is also something that will remain strong and then that will kind of. I think we will manage on that.
Obviously, we want to avoid any additional issues, such as the one in Singapore. Other than that, I think we'll just need to manage our ship with tighter inventories. It takes a lot more from our sales and operational planning teams, and some sort of adds, of course, some logistical complexity. I don't see, in this environment, a real opportunity to talk about bigger inventories.
I would say on the, on the volume side, we are stretching every single production line we have in renewables, looking for any way we could increase feed rates. We made some good progress here last year and this year. They're not huge improvements, but still, you know, the focus is every single ton we can get out, you know, safely, we try to do.
Great. Thank you, and congratulations on results.
Thank you.
Thank you.
The next question comes from Nash Cui from Barclays. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my questions. I have two, please. The first one is on your inventory impact. I wonder if you could isolate and talk about the positive inventory impact on both of your RP and OP margins this quarter, please. The second question is, one of your major energy peers is selling their big 800,000 ton biorefineries near Rotterdam. I wonder how Neste thinks about this and as an option. On the flip side, if another company bought it, how will you deal with competition not only on product sales but also on supply chain? Thank you.
Well, if I take the first one on Heikki. Nash, when it comes to sort of inventory valuation gains or losses, in OP and RP, we have the comparable EBITDA, which kinda cleans out that impact. That would be typically the difference between comparable EBITDA and the IFRS EBITDA, and really in a way to provide you with a clean number. In Marketing & Services, where I mentioned it, the logic is slightly different because the inventory cycle is very short. We talk about one, two weeks, and it's part of the how we run the business. There, the gains are included in the comparable EBITDA. Again, if it was purely a sort of evaluation at the end of the quarter, it's also and significant would be comped out. Hopefully that kinda answers your question.
Regarding your second question, I'm not sure exactly if I heard it verbatim correctly, but when you refer to competition, I would just say that from the standpoint of Neste, you know, this is a growing market. Neste, of course, will not be able to supply it, you know, and so on. It's good that there are other companies investing. I think it then gives confidence to the regulators also to increase the mandates even further. It's good to have, you know, European supply and not sort of, you know, we've talked about the level playing field. I won't go into that discussion here today, but I think it's good that we have European-based producers also. Yeah, that's really all I have to say about that particular case.
Thank you. Sorry, Eeva, can I just follow up on your first question, please? 'Cause I'm looking at slide 15 in the presentation where you were talking about pre-conflict price crude that contributed to the high OP margin. That's why I'm asking on whether you have any inventory impact within the margin rather than the EBITDA.
Okay.
Hope that makes sense.
Yeah.
Just want to clarify on that.
Sure. Okay, yeah. No, I was thinking of sort of the inventory valuation part. Indeed, from that sense that, like I tried to explain on that slide. Just the sort of lead time from procurement to production, there is obviously one and hence the production runs we were running in March were using crude that was that came into the system at a lower price. In that sense gave us a higher margin when the product prices then very swiftly jumped. That you see in the refining margin. That obviously now, you know, as I mentioned, has already balanced out because the cycle is relatively short, less than two months. Yeah.
Thank you.
Thanks.
The next question comes from Iiris Theman from DNB Carnegie. Please go ahead.
Hi. Thanks for your presentation. I have two questions left. Firstly, depreciation was down from the Q4 level in RP. Is this level a good indicator for the rest of the year? Secondly, regarding OP's margin, did you mention that you expect lower refining margin in Q2 due to higher crude costs?
All right. Maybe I take, Heikki, both of them. Yes, Iiris, you may remember that in the performance improvement program, we've had one specific area looking at lease costs. As we are bringing them down, that has a sort of positive impact on depreciation, in the sense that kind of lowers them as well. I think the Q4 is a good proxy. I think you would have seen some movement between the quarters already earlier. Yes, I think we're sort of, we're still in a few areas. I think we can sort of, do some work on the leases, but not anything significant anymore. On the OP, indeed, when I was referring to this total refining margin of 23, which was boosted by the exceptional circumstances in March. We would guide you for a lower total refining margin in Q2 than the 23.
Okay. A follow-up question on OP's margin or crude costs. Do you see somewhat lower crude costs currently versus, for example, in March?
I would say they change on a daily basis, you can't really have there's no real trend, and I think we can all read from X what happens this hour and the next hour. I wouldn't be able to draw any such conclusions other than that they're all over the place if in lack of a better expression.
Yes. Okay. Thank you very much.
The next question comes from Henry Tarr from Berenberg. Please go ahead.
Hi, thanks for taking my questions. Just to follow up quickly on the OP previous question. There's obviously a lot of sort of moving parts to that, and it's been very volatile. Is it the case that because of the premiums you're gonna be paying for crude now that the sort of realized margin is gonna be different to the sort of indicator margin that you might see? Is that what's happening? Then, you know, could you give us any indication as to where sort of the realized margin has been running in April for OP?
I think, Henry, the challenge is that there is a pretty big difference between a paper market and the physical market in a conflict like this. As said, this is a sort of extraordinary shock on the system. I think the sort of... Obviously, we play in the physical market, so that may sort of make it more complicated from your point of view if you're purely looking at the kind of on the screen. I would just say that obviously our view is based on what the real cost of physical delivery is. Then on April, we wouldn't sort of provide that exact guidance.
I think I've tried to be very clear enough to help you out on the Q2, without even, of course, ourselves knowing what's gonna happen in the remainder of the quarter. Just based on the input that we have now in the system, that's our sort of what we've kind of wanted to kind of give you a bit more guidance than typically because of appreciating that in these circumstances, it's not an easy job that you have to predict our margins.
Okay. That's great. Then just one quick follow-up just on hedging within Renewable Products. Was there any impact on hedging for Q1 in terms of the margin, et cetera? Do you see anything, you know, do you have any sort of hedges in place for Q2 as we sit here today?
Sure. In RP, we, when we talk about hedging, you could perhaps call it also margin management, but we typically are active in when it comes to the term sales, because that's obviously where we have an open position, if you may. We're not able to buy feedstock at, at the sort of same length as then our commitments on the term sales. Of course, then the shorter your term contracts are, then they sort of start to be better in line. Certainly in the beginning of the year, we would look into hedging to reduce our exposure than that the sort of feedstock goes in a, in a very different direction.
We're not sort of very big in hedging in the sense that obviously you have to be very careful when you're using proxies. In a market like this, I think it's not surprising that the hedges will be more negative because of course the sort of March developments were something that one wouldn't expect. It wasn't a sort of big impact, but nevertheless, there was a negative impact from hedging in RP. That is kind of something that we would consider a cost of doing the business. It's, as said, it's more sort of a margin management approach that we're sort of, we think that has proven served us pretty well.
Okay. Okay, thank you.
The next question comes from Yulia Bocharnikova from Goldman Sachs. Please go ahead.
Hi, everyone. Thank you for taking my questions. I have couple, please. First, just to clarify on Q2 volumes in Renewable Products, you mentioned that you would optimize production and probably sell everything without building inventory to the same extent as in previous years. I'm just wondering if we should assume pickup in production and sales volumes in Q2 versus Q1, or this is probably gonna be more flattish, and then we will see pickup in second half of the year? On refining volumes as well, given there is a poor return around in Q3, how should we think about refining coal sales volumes versus production? Is there gonna be any inventory built ahead of maintenance, or you will just sell everything because there is a very strong margin? Thank you.
Sure. In Q2, obviously, we have the benefit of we don't have any planned turnarounds, so that, we expect to support production volumes and, sales volumes. Unfortunately, as Heikki explained, we have lost one month in on one line in Singapore in here, now here in April. That of course, eats up some of it. But still, I think the overall is positive. Then, what we sort of decide for Q3, it's a bit early to say now when the conflict is, as said, moving by the hour. Obviously we would typically sort of look to build some inventory before we go in RP into the turnaround season and balancing those discussions in the coming months. My commentary was really more for now for Q2 and where we are now that we obviously want to support our customers who have a need for the product.
Thank you.
The next question comes from Matti Kaurola from OP. Please go ahead.
Hi. Good afternoon on my behalf as well. First question actually regarding the maintenance taking place in Singapore and Martinez. Eeva, if you could get a little bit more open up the increased production costs or what kind of sales margin impact we are speaking of. Then the second one is actually regarding your term contracts. If I'm calculating it by agreement, you've been locking in during the March, sorry, November, December timeline. I think you've been giving some of the discount compared to the spot levels. Is that correct to be assumed?
I don't think we sort of want to go to that level of detail that provide the production cost as such. As said, it's of course a fair point that when you have production issues and of course, just the sort of fact that we had sort of big turnarounds and a ramping up and all that of course, eats up on the margin. I think that's a right view to have, but wouldn't go into more detail.
Then to your comment on possible discounts on term sales, I would say that typically in order for the term sale to be a win-win equation, it would not be the sort of based on a spot price. Of course, it has to be a commercial decision that makes sense for both parties that we do end up terming. As you remember, we did end up terming more than we thought. We thought that we saw the sort of commercial value in terming slightly more without then sort of commenting more specifically on the market prices. We have said earlier as well that of course the market prices sometimes can be as a bit misleading. It's a very thin market and not fully transparent. Obviously we sometimes have the benefit of being a big producer of having a pretty good sense and perhaps a better sense on the real value.
That's good. Maybe one follow-up question regarding regulatory environment. Heikki, what are the top three things your PA team is right now working kind of the most right now? Or what are the key things that you're focusing on?
Right. Well, the agenda is very broad. I think, of course, the most important thing is now to make sure RED III gets implemented across Europe. As the German decision gets hopefully now finalized, there is still some open areas. Another interesting area for us, I think longer term, is the whole question of Asia. You know, starting all the way from Japan to Australia. I think if you think about how many people live there, and how much, you know, transportation there is, one of course would like to see the mandate start to move also there. I think these are really the, you know, the most important things. You know, we have these trade questions that we have discussed in the past, but maybe in today's situation, given the crisis, these trade matters are of lesser important.
I'm sure they will come back here once the Iran crisis is over. Those are the three things.
Maybe one more question. I just saw a headline that there is a strike in Martinez put in place. Do you have any kind of estimate at this stage how long it's going to last, and any volume impacts compared to the Martinez sales volumes?
Yeah. The turnaround went according to plan in Q1. Production is up and running. There are negotiations between our joint venture partner, who is the operating partner, and United Steelworkers, USW. Those conversations are going well in a constructive manner, and my understanding is that at the moment the refinery is operating, you know, pretty close to normal.
Yeah. Yeah, production is running there as we speak.
All right. Thank you. Thank you very much.
The next question comes from Christopher Kuplent from BofA. Please go ahead.
Yeah. Thank you very much. I've only got one question left, and maybe for you, Eeva, to sort of talk to us about U.S. tax credits. You were calling out quite a significant number in Q4, which seems to have dropped. Is that a quarter-on-quarter headwind that I think maybe around EUR 50 million that's hidden in your sales margin? When I look at your variation charts, which slide is it on, for Renewable Products on page 14, that 400 number, is that inclusive of this time round in Q1 receiving less help from these CPC credits? Just a clarification, please. Thank you.
Sure. Yeah. I was just checking the release that indeed, we had a lot less credits because of the turnaround in Martinez. We state in the release that we booked EUR 13 million of credits. Yes, that is then I wouldn't say hidden in that, but it's such a small number that doesn't really move it. Now, of course, you can expect that number to grow as in line with a more normalized production.
Okay. Thank you very much.
The next question comes from Matt Lofting from JPM. Please go ahead.
Hi. Thanks for taking the question. I wanted to just ask you about freight costs. They've obviously gone up a lot on a headline basis in recent weeks. Neste procures feedstock on a pretty extensive basis in the renewables business in particular. Could you just talk about what you're seeing from that perspective and how it affects and feeds into the realized margins, including the capture of that in the margin chart that you showed, I think on slide 11? Thank you.
I think overall, this pertains primarily now given our situation to volume coming out of Asia, both feedstock and final product into Europe. Everything is going through, you know, around Africa, so you have the extra, you know, delivery time, and freight costs have risen somewhat. I don't think we have yet any material number that we would flag as being a concern.
Yeah. Yeah, I think it's obviously one of those indirect impacts of this conflict that may matter, but I think that's more, more relevant for those trading in, in that area. For, for other security reasons, a lot of our cargo has been, as Heikki said, going around Africa already well before this, so in that sense, no significant change. But yes, do we see some price pressure in this area? Yes. I think that's of course the reality and in one of the indirect areas where this onflict, I think, is causing inflationary pressure or for many of us.
I would though say that in terms of our performance improvement program, I think we've commented on this, I think we've made very good progress across the whole sort of, you know, expenditure base. Also looking at logistics costs in terms of better consolidation of freight and better negotiating of terms with freight suppliers. I think, you know, we've been able to buffer this, you know, through our own, you know, internal measures, become much better buyers of freight. Just as a mention on that.
Super. Thank you.
There are no more questions at this time, so I hand the conference back to the speakers.
Thank you very much. As a very quick summary after this long and colorful and good discussion. As said, you know, I think both Eeva Sipilä and I are pleased that we were able to manage our way through a fairly volatile quarter. Of course manifests with very, very good results. Our focus and my focus and my colleagues in the line organization, our focus really is now on operational reliability. I think everybody at Neste recognizes that this is a cyclical industry, and when the demand is there, we need to produce. That message is very well understood by everybody at Neste, and we're working very hard to get production where it needs to be. The performance improvement program is going very well. We have exceeded the target we set for two years. I'm very happy with that.
You saw in the charts, we have a bigger number. We still see more opportunity across Neste, and we're working on that, and you will then get updated reports as we go through the year. Still more to come. I said the decisions on regulations from the United States to now hopefully in the next few weeks in Germany and in general in Europe, I think is also providing a longer-term tailwind for our business in Renewable Diesel. Of course, I mentioned the role of Asia. Let's see what the Iran conflict, once we're over, whether, you know, energy resilience, you know, energy security will then give an even further boost, but we'll have to just wait and see what comes our way. With those words, thank you very much for your attention.
Eeva and I will then return back to you after the end of the second quarter. Have a very good day. Thank you.