Hi everyone and welcome to InderesTV. Today I'm in the studio with Petri Gostowski. Hi.

Hi.

And we're going to talk about Neste.

Yep.

Yeah. So Neste beat both our and consensus estimates in Q1. Beyond the immediate numbers, what is the most critical shift in your investment thesis following this report?

Well, I think the biggest factor is that we raised the longer-term expectations on the renewable products segment's sales margin.

Mm-hmm.

And then the key driver here is that Neste posted a solid sales margin in the renewables business and, to our understanding, to a greater extent the increase came from the better margins in the annual contracts that they negotiated. And this basically reflects the huge shifts that we've seen in the market from the end of 2024 to the end of last year, when Neste typically does these annual contracts at the end of the the previous year. So basically the shift in the market balance had a bigger impact on the sales margin than we expected and therefore we raised the sort of, say, normalized level expectations on the margin. Saying normalized, kind of like, you can't really say what the normalized level of this business is. It's more or less also, so yeah, not normalized as such, but But anyway, longer-term expectations.

Longer term expectations there, yeah. So what effect did the war in the Middle East have on Q1?

Well, it boosted the margins of both the renewable business and the oil products, mainly due to the fact that the price of fossil diesel has skyrocketed, and this obviously widened the margin for the oil products, so the traditional business, but then also the fossil diesel is used in the pricing of renewables, so it's basically commonly

Ah.

the the price of the fossil diesel plus certain margin

Ah,

or

okay.

premium. So it boosts the pricing in both segments.

Mm-hmm. Okay. So you already mentioned the margins there, but margins for renewable products strengthened considerably, but sales volumes in renewable products decreased by 2% year-on-year. So what are the main reasons behind this?

The biggest factors are the maintenance shutdowns that Neste had to some extent at the end of last year, but then also continuing kind of in the beginning of this year. So they had some downtime and they couldn't get any more volumes out of the system currently. And then, you know, it's large scale industrial processes. You have some, you know, hiccups here and there in the production. Yeah, the operations weren't running at the, you know, nameplate capacity, so to say, but it's kind of common in this kind of industry.

But Yes.

yeah, uh nothing uh

You're not worried.

no, nothing dramatic there.

Okay. So the good free cash flow development has reduced Neste's net debt. How would you describe the company's net debt level at the moment?

It's a solid level given that they are doing this huge investment in Rotterdam that eats up CapEx. I mean if they didn't have this huge CapEx estimate for this year, say 1 to 1.2 billion I think it is from the top of my head. So yeah it would be obviously even more solid than that. But given... How it stands within the investment outlook, it's solid and and then obviously this current environment where where at least short-term expectations for margins are are high and therefore cash flow expectations have have risen it it looks good

So it looks good then.

Yeah.

Yeah. You mentioned that the Rotterdam expansion should reach its full capacity in terms of volumes and margins by 2029. What are the biggest execution risks during this ramp-up phase that could potentially damage the thesis?

Well, it's always, you can start with if they will be able to start up the new capacity at the time what is now the expectation, so mid-2027. You could have some delays in this kind of huge projects and then there's always the risk that that the ramp up does not uh go as planned. I mean you can have some uh issues with uh with equipment that can break down. I mean it was a tough uh ramp up in the previous uh the new line in Singapore Mm-hmm. a few years ago. Before that they had been going rather smoothly and then they had a really tough time. There was some equipment breaking down and it had to be taken down again and and and yeah, there were difficulties, so I mean looking at the size of the project, anything

Anything

yeah

could happen.

exactly

Yeah. yeah Yeah. Okay. So a lot of risks there.

yeah, a lot of risks but they are common for this kind of business. It's not like, you know, you just plug in the cord and expect the TV to go on. It's totally different so they are kind of normal in this kind of large-scale industrial process.

Or should, yeah, okay. So what about current valuation and our recommendation?

We have our Accumulate recommendation. I see the valuations as rather attractive given that there will be this big, big volume growth in renewables in the upcoming years and, you know, a decent. A return does not require you to, you know, raise the expectations on the renewable margins to a high level if we, for example, compare to the history,

Hmm.

but then obviously We've seen the market fluctuate a lot. There are certain risks associated with the margin estimates, but currently I see that in order to reach a lucrative return you don't need to expect the margins to skyrocket and you can actually compare our longer-term estimates. They're just above six hundred dollars per ton.

Okay.

you can compare to the Q1 figure, which was like around eight hundred and fifty, and then if we look at the longer history, they were above 850 because there's the really high years of 2021, 22, 23. So yeah, I think with decent expectations you should expect an attractive return from these levels

Okay, thank you so much for all these answers.

you

Thank you. And if you want to know more about Neste, go to Inderes.se and if you have more questions for Petri here, you can log in to our forum. Welcome.