Neste Oyj (NTOIF) Q1 2023 Earnings Call Transcript

Neste Oyj (OTCPK:NTOIF) Q1 2023 Results Earnings Conference Call April 28, 2023 8:00 AM ET

Company Participants

Anssi Tammilehto - Vice President, Investor Relations

Matti Lehmus - President and Chief Executive Officer

Martti Ala-Härkönen - Executive Vice President and Chief Financial Officer

Carl Nyberg - Executive Vice President, Renewables Platform

Markku Korvenranta - Executive Vice President, Oil Products

Panu Kopra - Executive Vice President, Marketing & Services

Conference Call Participants

Joshua Stone - Barclays Capital

Sasikanth Chilukuru - Morgan Stanley

Artem Beletski - SEB Enskilda

Henry Tarr - Berenberg

Matthew Blair - TPH&CO.

Peter Low - Redburn Partners

Iiris Theman - Carnegie

Raphaël Dubois - Société Générale

Christopher Kuplent - Bank of America

Matthew Lofting - J.P. Morgan

Erwan Kerouredan - Royal Bank of Canada

Operator

Good day and thank you for standing by. Welcome to the Q1 2023 Neste Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Mr. Anssi Tammilehto, Head of IR. Please go ahead.

Anssi Tammilehto

Thank you. Good afternoon and welcome all to this conference call to discuss Neste's first quarter results published this morning. I Anssi Tammilehto, Head of IR at Neste. And here with me on the call are President and CEO, Matti Lehmus; CFO, Martti Ala-Härkönen; and the business unit heads, Carl Nyberg of Renewables Platform, Markku Korvenranta of Oil Products and Panu Kopra Marketing and Services.

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, Anssi. And a very good afternoon also on my behalf. It's great to have you all participating in this call.

I'm very pleased that Neste had a strong start to 2023. Despite the market volatility and the continued uncertainty in the macroeconomic outlook, Neste's financial performance was very good in the first quarter. And I would like to thank the Neste personnel for making this happen.

I'm also pleased that two of our major growth projects have now started up as the Martinez first phase started up in February and our Singapore refinery expansion started up just after mid-April.

Now moving to page 4. So, in the first quarter, we were able to deliver a group comparable EBITDA of €830 million compared to €575.8 million last year. In Renewable Products, we posted a record high comparable sales margin per tonne, reaching $945 per tonne. This was supported in particular by favorable feedstock costs and decreasing utility costs.

Our sales volume totaled 660 kilotons for renewable diesel and SAF compared to 747 kilotons year year-on-year, and this lower volume reflects the one month shutdown at our Rotterdam refinery resulting from the fire in late December.

Oil Products had a strong comparable EBITDA of €393 million, and this was driven by the still elevated oil product margins and also utility prices were clearly lower compared to the fourth quarter.

Marketing & Services generated comparable EBITDA of €23 million in the first quarter following normal seasonality. I also want to note that, during the first quarter, we took many important steps in our strategy execution, and I will come back to that later in the presentation.

Then moving to safety. Safety performance continues to be a key focus area in Neste. Safety performance in the first quarter improved versus first quarter of last year for both occupational and process safety. We continue our focused efforts to drive a continuous improvement in our safety performance.

Then moving to our overall financial targets. Our financial position remains solid. And building on the strong profitability in both Renewable and Oil Products businesses, we reached a comparable after tax ROCE of 31.8% on a rolling 12-month basis, which is clearly above the target level of minimum 15%.

At the end of March, our leverage ratio was 18.7%, well within the targeted range of below 40%. This solid financial position enables the implementation of our growth strategy going forward.

And finally, commenting shortly on the overall business environment in Q1, I would like to highlight a few key drivers for Neste. Firstly, the renewable diesel demand has continued to be solid. And secondly, the waste and residue prices decreased versus the previous quarter, which supported the renewables margin environment. And finally, in Oil Products, the average refining margin was still at an elevated level, although diesel margins declined after January, and this trend has now also continued in April.

With these remarks, I'll hand over to Martti Ala-Härkönen to discuss the financials in more detail.

Martti Ala-Härkönen

Thank you, Matti. So, Neste's start to 2023 has indeed been strong from the financials point of view. And let's now have a closer look into the group figures.

Like Matti already mentioned, we posted a strong comparable EBITDA of €830 million in the first quarter. This is a notable increase of about 44% compared to €578 million a year earlier.

Our Renewable Products continue to perform strongly with comparable EBITDA at €415 million, renewable products was supported by favorable feedstock prices, lower utility prices and with margin hedging having almost a neutral impact on our result.

Also, our Oil Products continued to perform strongly, contributing €393 million of comparable EBITDA versus €137 million a year earlier.

And finally, our Marketing & Services continued its good performance with comparable EBITDA at €23 million, although impacted by inventory losses in line with falling product prices.

It is here of note that our IFRS EBITDA was impacted by inventory losses, in line with decreasing commodity prices and by the changing in the fair value of open hedges. The difference between comparable EBITDA and IFRS EBITDA was notable in the quarter, totaling €367 million. It is, though, good to remind everybody that comparable EBITDA is the figure which eliminates the non-operative result changes from our performance.

We generated free cash flow of negative €102 million in the first quarter while continuing to invest heavily in our future growth. I'll come later back to cash flow in more detail.

Our net working capital optimization continues. This is visible in the turn rate of our net working capital, which in days outstanding was as low as 25.7 days on a rolling 12-month basis at the end of the first quarter compared to 42.2 days a year ago and 35.4 days at the end of the fourth quarter.

Our comparable earnings per share, which is the basis for our dividend policy, was €0.72 per share in the first quarter, up by 60% versus €0.45 a year ago. This is also a material improvement.

When we next look at the first quarter comparison bridge by business, we can first see the comparable EBITDA increase year-on-year was driven by Oil Products, which had a €256 million positive impact. This was a result of the still elevated refining market and clearly higher sales volume at 3 million tonnes versus 2.6 million tonnes a year earlier.

In Renewable Products, in turn, our comparable EBITDA was supported by a very high comparable sales margin, but sales volumes decreased clearly year-on-year due to the fire in Rotterdam in late 2022. The fire impacted both our Renewable Products production and sales volumes in the first quarter. Our total sales volume in Renewable Products was 678 kilotons, 90 kilotons lower than a year earlier.

Then on the next page, when we look at the first quarter comparison bridge by profit driver, we know that sales margin improvement all in all contributed €355 million to our performance improvement.

In Renewable Products, we achieved the record high sales margin, like Matti noted, US$945 per tonne versus US$783 a year earlier, and the outlook into the second quarter is also strong.

I would here like to mention that we have slightly changed our Renewable Products sales margin calculation formula to fully also take into account the impact of byproducts. The role and importance of byproducts is growing in our renewables business as we have now more new production facilities coming online. The comparable sales margin figures for 2022 have also been adjusted accordingly.

Last year, in the first quarter, our reported comparable sales margin was $806 per tonne. And now with our adjusted formula, the corresponding new figure is $783 per tonne, so hence $22 per tonne lower.

Going into Oil Products, our total refining margin was solid in the quarter at $21.8 per barrel, more than double compared to a year earlier, yet lower than in the fourth quarter of last year.

Regarding Oil Products, it is good to note here, though, that our product margins have clearly come down in April, as the market has also been coming down compared to the first quarter, and particularly so in diesel. The impact of the downturn seems to be more visible in the Oil Products segment at present.

Finally, our fixed costs were €88 million higher than in the first quarter of last year, mainly due to our growth and capacity projects and ramp up preparations at the renewable side of our business.

When then looking at our cash flow in the first quarter, the first note, again, is that the decrease in commodity prices and changes in the fair value of open hedges, it had a significant impact on our IFRS EBITDA, like I already said. So, our IFRS EBITDA, which is the starting point in the cash flow calculation, it was €463 million. And this is, like I said, €367 million lower than our comparable EBITDA at €830 million.

The change in net working capital was €209 million negative. But it's good to mention that materially better compared to the €1.3 billion negative change a year earlier.

The net cash generated from operating activities was €377 million positive, clearly better than the negative €639 million a year earlier.

Our capital expenditure including M&A was €550 million in the first quarter, clearly higher compared to €195 million a year earlier. And cash flow before financing activities then was €102 million negative, again, clearly better than the €960 million negative a year earlier.

So as a summary, our cash flow improved clearly in the first quarter year-on-year, although being impacted, as I went through, by our growth investments and the decrease in commodity prices.

Finally, I would like to highlight the issuance of our two new green bonds with 6 and 10 year maturities, fixed maturities, which were issued in March, €500 million euros each. In total, €1 billion. The proceeds will be used for investments as set out in our green finance framework. The green bonds have enhanced our liquidity position and debt maturity profile, and they will importantly secure the implementation of our growth strategy.

Our liquid funds and committed unutilized credit facilities amounted to €3.35 billion at the end of March versus about €2.87 billion at the end of last year.

The group's net debt to EBITDA ratio was at a very healthy level at 0.7 times at the end of the first quarter, and it is also of note here that there are no financial covenants in the group companies' existing loan agreements.

I will close here and hand it over to Carl to then go through our Renewable Products business in more detail.

Carl Nyberg

Thank you, Martti. This is Carl. Good morning. Good afternoon to everyone on the call. So let me take you through to RP figures.

In Renewables Products, the strong performance continued during the first quarter of the year. Our comparable EBITDA was at €450 million, slightly shy of the year back EBITDA of €490 million, but at the exactly same level actually as our Q4 result.

The comparable sales margin increased significantly year-over-year as well as quarter-on-quarter as we reached a new record margin of $945 per metric tonne, up from $783 per metric tonne a year back.

What is good to note here now as well is that the sales margin formula has changed as we are including byproducts as part of the volume denominator, effectively reducing the margin with roughly $25 per metric tonne compared to previous calculation method.

The strong margin was the outcome of well optimized supply, a weakening relative waste and residue prices, a strong sales performance over the quarter. Waste and residue share remained high in the quarter as well at 96%.

On the other hand, we had lower sales volumes in the first quarter of the year, as volumes dropped from the high sales volumes in Q4 of 779 kilotons to 660 kilotons in the first quarter, which also was substantially lower compared to one year back sales volumes of 747 kilotons.

The lower sales volumes were mainly impacted by the reduced production due to the production outages in the beginning of the year caused by the fire at the Rotterdam refinery at the end of the fourth quarter. This can also be seen in the lower utilization rate of 93%, down from 104% a year back.

The sales of SAF volumes also more than tripled over the course of the year and reached 23 kilotons in the first quarter. SAF sales will continue to see the growth over the course of the year as Singapore SAF production ramps up.

Investments rose quarter-on-quarter, reaching €506 million, up from €370 million in the fourth quarter and more than €250 million up from the year back figure in Q1 2022.

We concluded the acquisition of the West Coast UCO collection business of Crimson Renewables, enabling a further expansion of our UCO platform in the US. As we continue to execute our growth strategy, our RONA continues to remain strong and was 23.8% in the first quarter.

Our CapEx expenditure will remain elevated over the year as we continue to invest in our production capabilities in Rotterdam, Singapore and Martinez.

If you then move to the next slide, let me take you through the EBITDA bridge between Q1 2022 and Q1 2023. So as mentioned, sales volumes were down from a year back lowering EBITDA by €65 million. On the other hand, sales margin took a steep jump impacting EBITDA for the quarter by more than €100 million. The stronger dollar also contributed towards a stronger EBITDA by €25 million year-on-year. On the other hand, our fixed cost continued to grow year-on-year as we continued to scale up our business ahead of the Singapore expansion and Martinez renewables. So as mentioned, year-on-year, our quarterly EBITDA ended up €4 million below the Q1 EBITDA in 2022 at €450 million.

If we then turn to the feedstocks, let's look at how the market developed over the quarter. So it seems that palm oil has found good support at these levels and has remained relatively rangebound over the course of the quarter. Soybean oil has, on the other hand, continued to decline over the course of the quarter, mainly on the back of fears of an economic slowdown, narrowing the spread between the two veg oil.

Waste and residue spreads continued to soften over the course of the quarter, in line with the trend we saw during the second half and following the lower values in veg oil complex. The weaker soy prices are also likely to keep a lid on waste and residue values as they need to remain competitive to soybean oil, especially in the North American markets. On the medium to long term basis, we expect waste and residue markets to remain supported as demand growth continues to be robust.

Let's then finally take a look at the US credit prices on the following page. If you start by looking at the LCFS prices, it seems that the market has found support at $60 per metric tonne. Prices started to slowly trend up towards the end of the quarter to reach a level of approximately $70 per metric tonne. It's so clear that, year-on-year, the prices have significantly eroded as the LCFS prices have more than halved from a year ago. However, quarter-on-quarter prices remain stable at $66. The carbon intensity target in California will continue to grow and there are also discussions ongoing which could tighten the CARB targets in the near term future. Since the end of the quarter, LCFS credits have also continued to strengthen and are currently trading at around $80 per metric tonne.

On the other hand, RIN credit prices started to trend down over the course of the quarter, trading at an average of $1.66 per gallon, down from $2 per gallon during the previous quarter, but up from the levels seen one year back. The market seems relatively stable and supported at these levels on the back of current bean oil/heating oil spreads and is currently trading around $1.55 per gallon.

All in all, as will be more elaborated by the CEO later in the outlook section, we are expecting a strong margin also in Q2 with a guided range of $800 to $900 per metric tonne, and the quarter has started well.

This concludes the Renewables Products part. Thanks on my behalf and over to you, Markku.

Markku Korvenranta

Thanks, Carl. Good afternoon all. Now a quick update from Oil Products. Let's look at first at compatible EBITDA development. We had again a strong quarter in a tight volatile refining market. The comparable EBITDA was €393 million compared €137 million the year before and €450 million in Q4 last year.

Sales volume was at 3 million tonnes, up from 2.6 million tonnes the year before and on the same level as the previous Q4 last year.

The total refining margin was $21.8 per barrel, up from $11.5 per barrel compared to Q1 2022 and down $1.7 per barrel from the previous quarter.

Comparable RONA increased from 6% to a respectable 55.5% compared to the previous 12 month period.

Now over to the EBITDA bridge. Total refining margins and sales volumes were the largest drivers of improved results compared to the Q1 last year. The remaining items, FX changes, fixed costs and other items had a minor net impact on the result.

Let's look at the market. We see the market development of main drivers. The disruption caused by the war in Ukraine and general supply/demand situation continues to drive the volatility of oil products. Diesel margin peaked in January, after which it declined towards the end of the quarter, even if the Russian oil product sanctions became effective at the beginning of February. The main drivers were global economic uncertainty and declining heating oil demand in Europe due to mild weather and competition from lower natural gas prices.

The gasoline margin increased during the quarter finally to surpass the diesel margin at the end of the quarter. Heavy fuel oil margins continued to strengthen throughout the quarter.

This completes the quarterly update from Oil Products. Now handing over to Panu for the Marketing & Services presentation.

Panu Kopra

Thank you, Markku. Good afternoon to all of you. This is Panu Kopra speaking. Solid financial performance continued in Marketing & Services. Q1 EBITDA was €23 million, which is better than Q4 last year.

During last year Q1, fuel prices were increasing a lot and we were gaining high stock profits. This year, we were not. So, therefore, EBITDA is less than last year. However, looking back Q1 performances in the last years, it is still healthy start for this year.

Fixed costs were higher due to high inflation, especially in the Baltic countries. Gasoline and diesel volumes were slightly higher than last year and also our market share developed well in Finland.

Jet A1 volumes grew by 17%, mainly due to increased air traffic in Helsinki-Vantaa Airport. Also, Neste MY volumes increased in Finland very well, by almost 80% year-on-year, driven by B2B segment.

LFO volumes were clearly lower compared to last year due to warm weather. In Baltics, tight competition, inflation and economic recession decreased our sales.

We have opened now two new EV charging stations here in Finland and continue to invest into eight new EV sites during this year. Customers have been satisfied with our charging experience at our first site.

This was shortly about Q1 in Marketing & Services. Handing over back to Matti.

Matti Lehmus

Thank you, Panu. And let's now move on to the current topics. So first a few words on our strategy execution during the first quarter as we continue to make good progress in many important areas.

The Singapore renewables capacity expansion project started up production after mid-April with minor delay versus our internal target of end Q1. Following a complex construction project over more than four years, this was a great achievement and I congratulate the whole team for a successful and safe startup. The focus now is on ramping up the production and sales in the coming quarters.

The Martinez renewables joint operation started up its first phase in February. The next phase, including the pretreatment, is expected to start up in autumn 2023 and the third phase enabling the full production capacity of 2.1 million tonnes per year is targeted by the end of the year.

I also note that the Rotterdam expansion project is proceeding well, obviously, being our largest CapEx project in the coming years.

Then mentioning that we have today sent out the invitations and opened the registration to our Capital Markets Day, which we will host on the 20th of June in London, and I welcome you all to join and look forward to sharing more about the strategy there.

We continued on sustainability our efforts to reach our ambitious climate and other sustainability targets. Our carbon handprint for greenhouse gas emission reductions in the first quarter was 2.4 million tonnes, and we expect our growth projects to support a clear increase in this handprint during 2023.

Then moving to the outlook. For the Renewable Products, the second quarter renewable diesel and SAF sales volume is expected to be 30% to 50% higher than in the first quarter of 2023, subject to the ramp up phase of the capacity expansions.

Based on the current outlook, Neste second quarter comparable sales margin is expected to be in the range of $800 to $900 per tonne. The second quarter utilization rates of renewable production facilities are forecast to remain high, assuming a successful ramp up of our new facilities.

The market in Oil Products is expected to remain volatile. Based on the current forward market, the second quarter total refining margin is expected to be clearly lower than in the first quarter. Second quarter sales volumes are expected to remain high, supported by the summer driving season.

And in Marketing & Services, the sales volumes and unit margins are expected to follow the previous year's seasonality pattern in the second quarter.

Moving then to some other topics for the year 2023, we first of all continue to execute our strategy and invest in our business. Neste estimates the group's full year 2023 cash-out capital expenditure excluding M&A to be approximately €1.7 billion to €1.8 billion.

I also note that we have scheduled a five week maintenance shutdown at the Singapore original refinery in the third quarter and a four week maintenance shutdown at the Rotterdam refinery in the fourth quarter of 2023, which are our regular catalyst changes.

So this concludes the presentation and we would now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. This is from the line of Joshua Stone from Barclays.

Joshua Stone

Three questions, please. Firstly, congratulations on starting up Singapore. Do you have any greater clarity now and when you expect that project to reach plateau, and also maybe the proportion of SAF within the mix?

And then secondly, on the margin, are you able to say how have margins been trending in April perhaps or any data you have for the beginning of the quarter versus your guidance? Just trying to get a sense of how conservative your guide in 2Q might be.

And then just a last quick one, you highlighted the LCFS prices in California that have been creeping higher. I was wondering what's driving that? And what are you hearing about potential changes in the [indiscernible] requirements as well?

Matti Lehmus

Perhaps Martti can start with the first question. Carl will comment on the two other ones. So just on Singapore expansion, obviously, we're very happy with the safe startup. That means the feet is in, the product is in quality. We will now really focus on ramping up both production and then sales. And given this large complex refinery, typically, this happens over the coming, let's say, next couple of quarters. But this is obviously something that we focus on to do as smoothly and as quickly as possible.

And then on the margin question, I hand it to Carl.

Carl Nyberg

This is Carl. On the margin, so we have indeed a very strong end to the first quarter on the margin, and the margin remains relatively strong here in the beginning of the second quarter as well with the relatively weak waste and residue prices. So, so, we kind of see that this probably will continue. At the same time, these are very volatile markets currently. And hence, we are guiding with this kind of this kind of range. Maybe it's good also to note that with the new margin calculation as well, this is also a guidance which is which is slightly above the guidance we gave for Q1. So, all in all, this is where we're seeing it now.

With regards to the LCFS prices, so there has been some discussions ongoing that there might be an increase in the target levels in the CARB's LCFS program. And that might be one of the background for increasing LCFS prices here. But as commented, seems that the market has bottomed out of the $60 and is now trending upwards. But we don't see a big jump in the prices either.

Matti Lehmus

This is still Matti. I forgot to comment on your SAF question. Just adding that, obviously, as part of the startup, we'll also be testing that flexibility. Obviously, then it's during the second half of the year when we would expect the sales of SAF to be able to grow.

Operator

We'll now take our next question. This is from the line of Sasikanth Chilukuru from Morgan Stanley.

Sasikanth Chilukuru

I have two please. Again, with the outlook that you have provided for the sales margin, I was just wondering, given the Martinez refinery is ramping up and you had previously highlighted it could be potentially dilutive, I was just wondering, excluding this effect, are you kind of looking at a margin which is similar to 1Q or just wanted to understand what the effect of the Martinez ramping up was on your outlook?

The second one was related to the five-week turnaround program that you have highlighted for the Singapore original refinery in 3Q. Just wondering if this had any impact on the ramp up at all or is it – of the expansion plan, that is, or whether this turnaround was essentially independent of the ramp up altogether?

Carl Nyberg

This is Carl. So if I start with the turnaround in Singapore, it's a slightly longer turnaround. It's the usual catalyst change, but we also making some maintenance work relating to our reliability program for the refinery. There is no links with the startup of the expansion of Singapore.

Then with regards to the margin, so, indeed, the Martinez volumes will be increasing over the course of the of the second quarter and they do have a dilutive element to them as we still do not have the pretreatment capabilities, and hence have limitations on the feedstock slate.

I would say that, as commented previously, I would say that if you look at the margins overall, it is linked to the – how the waste and residue prices are developing. Then, of course, what we are seeing in the market currently as well is that the diesel cracks have been coming off and that is, of course, an important other element here as well.

But as we are guiding, this is the range where we are seeing that we will landing.

Operator

We'll now take our next question. This is from the line of Artem Beletski from SEB.

Artem Beletski

I actually have three to be asked. So the first one is still continuing on Q2 margin guidance. And you well highlighted basically negative impact when it comes to Martinez. And I was just thinking about Singapore expansion unit with the EPS having also some negative impact on margins, maybe due to the fact that we are in a ramp up phase and there are some inefficiencies. So, this is question number one.

And the question number two is relating to new formula relating to comparable margin calculation. What is the reason behind this type of change what you have implemented? Is it really due to the fact that you do expect SAF volumes to grow significantly and maybe also byproducts will be increasing as a share of total volumes?

And the last one is on regulatory front. Could you maybe shed some light when it comes to final agreements relating to RED3 and ReFuelEU Aviation basically reached quite recently? What are you seeing there? Are you happy with those ones?

Carl Nyberg

Carl here. So if I start with the first one, so we don't see any impact from the Singapore expansion on the margins. So, there are no impacts from the ramp up as such from the Singapore.

Of course, the volumes, as also Matti commented, so especially when it comes to the SAF, we will see that this significant ramp up in volumes probably mostly to the second half of the year. But as such, there is no dilutive element from the Singapore expansion to our margins.

Martti Ala-Härkönen

And just on the new formula change, so thanks for the question, Artem. So when we refer to the byproduct, so the renewable diesel and SAF impact has been there already before. But here we mean the impact of naphtha and biopropane, which have been sort of byproducts for us earlier and they've been sold actually by renewable polymers and chemicals unit, and now when we are optimizing and growing our capacities, we have some targets to also optimize and grow those amounts. And their importance is growing. So hence, take them fully into the formula. That is the reason.

Matti Lehmus

This is Matti. I can comment perhaps on the question on the regulatory situation. So we are indeed following closely what is happening on an EU level. There is two key regulations that have been discussed over a longer period of time. One is the RED3, the Renewable Energy Directive number 3, and the other one is the ReFuelEU Aviation.

In both of these, our understanding is that the trial process is progressing and we expect quite soon, actually, some decisions from those processes. Our understanding on the RED3 is that the outcome would include, first of all, a clear increase according to the expectation had earlier on the GHG reduction targets for 2030 to our understanding as high as 14.5%, which is basically double to what the RED2 was. And we also understand that the outcome would be, when it comes to feedstocks, let's say, enabling still quite a broad feedstock base also going forward. But we are, of course, now waiting for the details to be confirmed.

What comes to ReFuelEU Aviation, here our understanding is that the EU continues to look at a 2% mandate starting in 2025, which would then move up to 6% in 2030. So also in line with some earlier discussions that have taken place. But, again, we are waiting for the final confirmation.

Operator

Well now take our next question. This is from the line of Henry Tarr from Berenberg.

Henry Tarr

Three quick ones, if I may. One is just on the US availability of feedstock. You've closed a couple of those acquisitions, as you say, [indiscernible] Crimson, etc. Are you able to tell us how much of the feedstock you can cover from waste and residues for Martinez as we sit here today?

The second question would just be on the hedging impact for Q1 and then whether it's likely also to have a – are we going to have a positive hedging impact potentially for Q2?

And then just lastly, on the fixed costs which continue to go up, have we got much further to go on fixed costs with Singapore and Martinez as they ramp up? Or are we getting towards a plateau?

Carl Nyberg

Maybe if I start with the first question. With regards to the feedstock supply for the Martinez renewable, so as we communicated, it's a 50/50 sharing of the supply of the feedstock to the facility. And of course, how we are approaching the feedstock supply for both Martinez as well as the rest of the system is a global approach. And these companies that we have been acquiring in the US are, of course, an important part of that, but we look at it on a global basis. And hence it's an overall optimization. But we continue to build our capabilities and the UCO collection platform definitely in the US.

Martti Ala-Härkönen

This is Martti. Perhaps I can comment on the hedging and marketing on the fixed costs. So, in general, just stating, like we had actually said after the last quarter's results, that for the first quarter while our hedging ratio for the margin was close to 50%, those hedges were quite reflective of the market. And this indeed is the situation. We didn't have any significant hedging results that would have affected our results.

Also, when I look at the second quarter, we continue to have a hedging ratio now that we are rolling those edges between 40% and 50%. But, again, at the moment, we don't expect any significant impact on our results as these hedges are quite reflective of the current market.

Matti Lehmus

And on the fixed costs, so firstly, on the second quarter, we are there forecasting to stay, particularly in Renewable Products, still roughly €20 million of higher fixed costs compared to the first quarter. But having said that, so we have programs and initiatives ongoing. We're looking carefully into what we call a fixed cost efficiency. As well, we are looking at net working capital efficiency, have been looking for long. But we do forecast that we should start to seeing our fixed cost in relative terms against renewable sales volumes, tonnes to start going downwards particularly in the second half of this year and then onwards. So starting at the operating leverage, so we have needed to upscale in fixed costs, like we have earlier comment, a bit ahead of the new ramp ups and the capacity increases, but once we get fully ramped up, we expect it to start seeing those efficiencies. And at the same time, we are running on programs which are driving on mid, long term efficiency improvements as well.

Henry Tarr

So, peak around middle of the year maybe?

Matti Lehmus

Yeah. Maybe we can comment later, Anssi, for that. We are targeting that kind of an efficiency, yes, correct.

Operator

Well, now take our next question. And this is from the line of Matthew Blair from TPH.

Matthew Blair

The first is on SAF margins. I think your original expectation was that SAF would not be diluted to your overall system. I know it's only about 3% of your total sales, but is that holding up so far?

Second question is the final US RVO will be coming out in June. Are you expecting any changes to the D4 obligation compared to the preliminary RVO?

And then, the final question is on page 17 where you show these waste and residue feedstock prices? From a modeling standpoint, do we need to think about any sort of lag on these prices as they roll into your financials? Or for Q1, was it January 1 to March 31 pricing per this chart that rolled into your Q1 reporting.

Matti Lehmus

This is Matti starting with a question on the SAF margin. So, exactly like you noted, last year, of course, our SAF sales was still limited to that roughly 100 kilotons. And now during this year, especially in the second half, we will have the opportunity with increased flexibility in Singapore to hopefully then also ramp up the sales. We continue, we haven't yet and obviously that volume will then move when we are in that period. We continue to see that the SAF demand is robust and we expect also, from a margin perspective, that it will not be dilutive. We will then see when we are in the second quarter whether we are able to have higher margins, for example, but we maintain that statement that it at least should not be dilutive.

Carl Nyberg

Matthew, this is Carl. So if I come back to your RVO question, so we have indeed seen that the market seems to be recovering a little bit. I think that there was a bit of a negative sentiment when the RVOs were announced. There has been some discussions around how this kind of eRINs would be treated and there are some question marks around that. So the market seems to be factoring some constructiveness, let's say, in the market, but we don't have any further details on that yet. But as said, the market seems to be relatively well supported where we sit now.

With regards then to the feedstock costs and their impact to our results, so basically, how it works for us is that we see it pretty immediately actually in our margins. So, there is no delay as such. There is, of course, delay in the market and how the waste and residue markets are reacting compared to the veg oil markets, for instance. So the kind of element of these kind of smaller commodity markets that are, let's say, reacting at a slower pace than these larger commodities, basically, but as such the prices are coming directly into our result.

Operator

Well now take our next question. And this is from Peter Low from Redburn.

Peter Low

The first was on the acquisition of Crimson Renewables which you completed. [indiscernible] kind of other UCO and feedstock acquisitions you've done like Mahoney and Agri Trading. Can you give any indication as to how material the contribution to the RP result is from these non-renewable fuel businesses? I think the Agri Trading at least had some revenue, which you disclosed at the time of that deal. But I just wanted to know, in aggregate, these companies were now making a positive contribution.

And then secondly, I know you get this question a bit. There's been some concern about how much new capacities in the market are coming into the market in the coming quarters. Fuel margins continue to be very strong. Can you just give any comments as to kind of whether you're seeing increasing competition and whether that's having any impact on the markets you operate in?

Matti Lehmus

This is Matti. Perhaps I can briefly comment on the both questions. So indeed, on the acquisition of Crimson, it's obviously from a strategic logic very clear. We want to strengthen our used cooking oil platform. It complements geographically nicely the platform we have had with Mahoney, now also strengthening that, especially on the West Coast. The way we have looked always at this, we obviously report the contribution from these collection businesses as part of our overall renewable products results. It's also included in the margin. They do have a positive contribution. But we look at this as an overall contribution in our entire renewable product business. But of course, clearly stating that if I look, for example, last year, of course, for example, Mahoney and Agri Trading, have had a positive contribution to our results.

Then perhaps commenting briefly on the new capacity in the markets, it's exactly like we've commented earlier quarters. We do expect, during this year, on one hand, global demand to grow, especially North America. We will be driving demand growth. We see the mandated demand growth in road transportation segment somewhere around the 2 million tonnes globally. And it is true that we, at the same time expect, supply growth once the different projects ramp up, to be clearly larger than that 2 million tonnes.

Obviously, like always, when starting up a new unit, the impact will only then be seen once these units are actually up and running and how quickly that happens. So it's something we keep monitoring. In our case, we focus obviously on our business model of optimizing continuously the feedstock and also the mix between products and markets. And that continues to be extremely relevant, even with new supply coming onstream.

Operator

[Operator Instructions]. We'll now take our next question. This is from the line of Iiris Theman from Carnegie.

Iiris Theman

Firstly on SAF pricing, what is the current premium compared to your average renewable diesel price? And do you expect that this premium could stay in the short to medium term.

And secondly, a housekeeping question, basically is Q1 depreciation level a good proxy for the rest of the year.

And probably, finally on biofuel demand, have you seen any hesitation among your customers or basically do you continue to see very strong demand thanks to positive regulation?

Matti Lehmus

This is perhaps Matti on the first question on SAF pricing. Obviously, the market is now forming a very typical pricing formula. It's similar to what we see on the renewable diesel side that the price is linked to fossil quote, in the case of aviation then typically the fossil jet quote, and there is a premium. We haven't now started comparing how that exact premium compares to the renewable diesel. But, obviously, like I said, we've optimized based on the margin, so we will, from our perspective, over time, ensure that the margin contribution is equal or strengthening also for aviation.

And then on the depreciation, Iiris, so indeed, we had €178 million of depreciation, up €25 million year-on-year. We haven't guided, of course, very precisely this figure, but we do expect that to go upwards as we get also the new ramp ups regarding our capacities and we have these assets under construction fully turning to an asset that we start depreciating. So I do foresee that going upwards and also for the full year compared to last year's figure. Maybe we can come offline if you want to discuss in a bit more detail.

Carl Nyberg

This is Carl. I'll come back to the question on biofuel demand. So, overall, we have said that the demand has been robust over the course of this year, and that's also what we communicated after the term negotiation. So, we see that there is there is good demand and demand is also growing year-on-year every year by a couple of million tons.

I think that the regulatory environment is, of course, also now shaping up in the Europe with RED3, as Matti comment, and that's, of course, an important element of how the demand is growing, specifically in Europe. Of course, we will then have to see how this translates into the different member states as well and how they implement the RED3, and that will, of course, be an important element here as well.

If you look at then on the US side again, so I think that it looks also relatively constructive in terms of the IRA discussions and, overall, the demand for biofuel. So, for the time being, we are seeing good support and good demand for biofuels.

Operator

We'll now take our next question. And this is from Raphaël Dubois from Société Générale.

Raphaël Dubois

The first one is about the animal fat and used cooking oil pricing trend. What is your take on those two feedstock prices coming off? We've been hearing for a very long time that it will be the key bottleneck to bring in new supply. So, it's a bit surprising to see those prices trending down now. So it will be great to have your views. That's my first question.

Then I have a question about the mix. As you grow SAF production, should we expect that you also produce more bio-naphtha? Is there a market for that? It will be great if you could tell us a bit more about that as well.

And lastly, there was a press release not long ago about the departure of your head of renewable aviation. And I was wondering if you could shed a bit more light on either the reasons why this person left and also you what replacement you have in mind? Is there someone coming in quickly?

Carl Nyberg

It's Carl. Maybe if I start with the feedstock question and the mix question. So, I would say that what you've seen in the market here in the UCO and the animal fat is really a result of partly the veg oil prices coming down and eventually also driving down the fundamentals and sentiment for the waste and residues. At the same time, there has probably been a bit of a supply/demand glitch as well and probably partly also caused by this change in the fundamentals in the overall veg oil market. And I would say I see that to be the primary reason for why the prices have been coming off this much and rather steeply also for part of these waste and residues.

However, I would say that, if you look at the investments going into this industry and the increased R&D capacity, it is clear as well that there is robust demand for these feedstocks and, let's say, the medium, long term demand picture is very constructive. So as a whole, I don't think that the picture has really changed, but it's more of a correction in prices. They were very elevated in the last year.

Then with regards to the mix, so there are some minor impact from the SAF distillation, but it's not really impacting too much the naphtha yield. The naphtha yield has been there all the time and, of course, as we are continuing to grow our presence in the polymers and chemical market, this naphtha stream is, of course, of very high interest as well and something that we will continue to the market – towards this market. But there is no direct link in that sense to the SAF production.

Matti Lehmus

This is Matti. I'll shortly comment on your third question. Indeed, we announced in the beginning of April that Thorsten Lange who had been leading our aviation business since early 2020 left the company. I think a lot of important good work done during this period, don't really want to go into any detailed, all the reasons. But of course, we are focusing now on the replacement, that search is ongoing, and we will come back with more information when we are complete with that process and can communicate about it.

Operator

We'll now take our next question. And this is from Christopher Kuplent from Bank of America.

Christopher Kuplent

Few last questions left for me. Maybe you could give us a little bit of an insight into your second half of the year planning? How did you come up with those €85 million, €65 million impact? Can you give us a bit of an indication what the underlying assumptions are on perhaps volumes or margins that you're missing out on?

Secondly, I think you mentioned that you do expect net working capital to perhaps reverse a little bit into the second quarter and the second half. Any additional insight that you could give us here would be, again, greatly appreciated.

And the last one is regarding the restatement again of your renewable product margins. Now, I'm a little confused. Your original guidance for the first quarter, was that based on the old or on the new definition of these margins? And perhaps you could help by simply telling us what the Q1 margin would have been using your old definition, i.e. instead of $945, where would you have ended up? That would be great to color.

Matti Lehmus

I can start. This is Matti with the first question. So, like traditionally, when we've commented on the expected impacts of our plant turnarounds, mainly, of course, what you have also there in the outlook is that they have a certain length. So in the case of Singapore, it was expected to take roughly five weeks in the third quarter. In the case of Rotterdam, roughly four weeks. So this, of course, then correlates with the expected impact on the production volume. And this is then the basis when we make a rough estimation for what the EBITDA impact could be then versus a situation where we didn't have the shutdown.

For the other questions, net working capital, I hand it to Martti.

Martti Ala-Härkönen

On the net working capital, of course, now with this €209 million negative change, then I mentioned that we are driving efficiency on that side and very happy on the days rolling figure. We do have this larger scale capacity ramp ups now in our plans, and also in the SAF side. And I do foresee that, because of the volume growth, we're going to see some negative change in the second quarter, possibly also in the third quarter. Having said that, overall, in the second half of the year, we will be running a program sort of trying to further optimize after we've had the ramp ups on our inventories and the general NVC levels. And overall, I think we are managing this well already now. But this is sort of normal optimization after major ramp ups.

Carl Nyberg

This is Carl. Maybe I come back to the RP margin for Q1. So, indeed, our guidance was on the basis of the old margin calculation. And actually, if we look back at the quarter, so with the old calculation, we'd have been roughly $25 per metric ton higher. So $970. Going forward, this impact will be roughly the same, potentially slightly higher, but this is the kind of magnitude we're talking.

Operator

We'll now take our next question. This is from the line of Matthew Lofting from J.P. Morgan.

Christopher Kuplent

Two follow-ups, please, on waste and residue, feedstock markets and the maintenance guidance. On the former, it seems that some of the comments and points that you're highlighting for the EU's waste and residue markets, like the lagged nature of the response to more liquid vegetable oil muck trends, make sense, but presumably Neste would have anticipated that previously. So what's sort of changed relative to where you saw things at the beginning of the year. And I'm just trying to understand how much of that softer outlook relate to delays and deferrals in global supply additions that perhaps get caught up over the course of the next 12 months.

And then, secondly, on the maintenance, a bit surprised in some ways by the second half turnarounds, given they weren't really guided and quantified clearly within the full year outlook in February. You're now seeing €150 million combined effect. So what changed there? And what is the regular maintenance cycle of the portfolio that investors should expect going forward?

Carl Nyberg

This is Carl. Maybe if I start with the first one, the waste and residue. So I would say that, in the previous call, I think we were highlighting that there is this delay and the palm oil had been going lower already.

I think what changed over the course of this quarter was that the soybean oil really started coming off quite steeply and that eventually then also drove further down the waste and residue. And I think it was difficult to forecast the movement of soybean oil, and I think that this is probably one element that really changed over the course of the quarter. But as communicated earlier as well, these smaller commodity groups' price movements, I would say, they're much more difficult to predict as well.

And there is a sort of certain kind of logic, like [indiscernible] that they are following eventually, but actually that can be delayed. There's no clear understanding on how quickly that happens, actually. And I think these are maybe the main elements of why we saw this change and we couldn't fully predict it.

Matti Lehmus

Matti here commenting on the second question on the maintenance. You're right, when we commented on the full year, focused on these major turnarounds, which we have typically commented on, we basically just wanted to add it now for more transparency. This catalyst turnaround is, of course, a recurring event. Every renewable refinery has to change its catalysts in regular intervals. That may vary over time, but typically something between 12 and 15 months. And we just wanted to provide the transparency, to provide some more information.

Martti Ala-Härkönen

This is Martti. I would like to add exactly, so that there is nothing like that we would have made a new decision now after the February to initiate these catalyst changes. They were then already now. So we are just providing a bit more detailed information. And I think early on, Neste has not always provided that information for catalyst changes, but now we decided to do so.

Operator

[Operator Instructions] We'll now take the next question. And this is from Erwan Kerouredan from RBC.

Erwan Kerouredan

Congratulations on the strong start to the year. I've got three questions, please. First, on the RP guidance for 2Q, you indicated that the quarter had started well. Can you just clarify which underlying driver you're pointing to? Is it about price premiums? Is it about feedstock costs? If you could provide some indication on that.

And then the second question is on fixed costs. So, for the first quarter, it came in lower than guided in the fourth quarter, the incremental €10 million. And for 2Q, you guide for an incremental €20 million. I don't know should we expect some kind of volatility in the in the ultimate number? And does it have anything to do with the cost efficiency, the fixed cost efficiency program that you mentioned, Martti, earlier on the call? So this is my second question.

And then the last one on SAF mandate please. Thanks for providing your expectations for RED3 and ReFuelEU Aviation. At country level, do you still see a risk on a SAF mandate amendments on some of your key markets including Sweden? This is my final question.

Carl Nyberg

This is Carl. I'll start with the RP guidance on the margins. So, I would really say that, first of all, as commented already, the SAF volumes will not be increasing to any huge extent in the second quarter. We will see the actual ramp up of SAF sales more towards the second half of the year due to length of the value chain.

The key elements are around the feedstock costs, how they will continue to develop. And then, of course, the diesel price is also a key element here. I think if you look at, in addition to this, of course, we have had a huge change in the utility cost as well if you compare to – Q4, Q1, for instance. They seems to be stabilizing now at this current level. So, I doubt that they will have an as huge impact now when we go into the second quarter really. The element of hedging as well, I don't see it to be having a big impact. So, it really is around the feedstock cost and then how the diesel crack will continue to develop over the course of the quarter.

Martti Ala-Härkönen

Thanks, Erwan, for the question on the fixed cost. Again, so there is always some variance between the quarters. If you look at last year, so the fourth quarter, we have by far the highest fixed cost. And actually, if we look into the Reasonable Products figures, the fixed cost for the first quarter of this year was €5 million lower than in the fourth quarter of last year. And in the bridge that my colleague Carl went through here was against the first quarter of last year. So, for the year-on-year comparison, the fixed cost is up, but against the fourth quarter, actually we have a bit down. So there is always some variance also how we are providing on certain issues, et cetera.

Now with €20 million higher fixed cost forecast, so I don't think there's anything rather extraordinary, but it's now against the first quarter, which might have been a bit on a lower side.

And then for the full year, we are giving for RP the guidance per quarter. So what I said earlier that, as we are ramping up, so it can happen going forward that – if I look for the full year that our fully fixed cost continues to go somewhat up also in the third quarter and fourth quarter is good to maybe assume. So, if I look for the whole, but in terms of efficiency, so I mentioned that fixed cost as an example, compared or measured against Renewable Product sales volumes, I think, there, we should start seeing the efficiency in the second half as we have ramped up the capacity. So, we need to have the fixed cost a bit more earlier and then we have the capacity, hopefully, ramp up and then we start seeing the efficiency. So that's what I wanted to highlight earlier.

Matti Lehmus

Finally, on the third question on the SAF mandate – this is Matti speaking – so we have obviously focused – when we look at new regulation on the EU level process, there, the intent is or the plan is to propose EU-wide mandates starting from 2025.

You're right, on a country level, there is a few countries who have introduced mandates, for example, Norway and France. I'm not at the moment aware of any new development, but it's obviously something we are following in parallel to this EU level development.

And perhaps then adding the comment that, if you look at the current situation where only a few countries have introduced mandates, an important driver for the market is, of course, the voluntary demand. So, for example, airlines or transport companies setting their own targets for sustainability and this has been also an important driver for the interest for the product.

Operator

We'll now take our next question. This is from Raphaël Dubois from Société Générale.

Raphaël Dubois

It's just a follow-up on the increase in annual demand. You mentioned earlier 2 million tonne. And I was wondering if you could shed some light on what you expect from Sweden. I think we're still expecting what's going to be the next mandate for 2024. Have you heard anything that could lead to a change in the demand from this country?

Carl Nyberg

It's Carl. So, indeed, there are discussions ongoing in Sweden with the new government. And there are some discussions also around the [indiscernible] that they potentially would be reducing that. We haven't had any further information on that yet. So it's an ongoing process and there are dialogues ongoing in the country with stakeholders. So, not nothing new from our side on that one.

Operator

Thank you. No further questions at the moment. [Operator Instructions].

Matti Lehmus

If no further questions, I would like to thank you for your very good questions and the active participation. And as we have discussed, we are pleased with Neste's performance in the first quarter and the strong start to 2023. And while the macroeconomic growth expectations affect the energy markets, I'm confident that we will be able to navigate successfully in this environment and continue creating value for our customers, employees and shareholders. And for Neste's renewables business, 2023 will be a year of significant growth. Thank you and stay safe.

Operator

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.