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Executives

Juha-Pekka Kekalainen - Head of IR

Matti Lievonen - President and CEO

Jyrki Maki-Kala - Chief Financial Officer

Matti Lehmus - EVP of Oil Products

Kaisa Hietala - EVP of Renewable Products

Analysts

Mehdi Ennebati - Societe Generale

Jeremy Aston - Exane

Matt Lofting - Nomura

Joshua Stone - Barclays

Mukhtar Garadaghi - Citi

Henri Patricot - UBS

Saumya Senapati - Bank of America

Carl Frejborg - Carneige

Joel Meyers - Societe Generale

Neste Oil (OTC:NTOIF) Q2 2014 Results Earnings Conference Call August 5, 2014 9:00 AM ET

Operator

Good day and welcome to the Q2 2014 Neste Oil Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Juha-Pekka Kekalainen, Head of IR. Please go ahead.

Juha-Pekka Kekalainen

Thank you and good afternoon, ladies and gentlemen. Welcome to this conference call to discuss Neste Oil's second quarter results published earlier today.

I am Juha-Pekka Kekalainen, the Head of Neste Oil's IR. With me here today are President and CEO, Matti Lievonen; and CFO, Jyrki Maki-Kala; Matti Lehmus, who is the Executive Vice President of Oil Products business area and Kaisa Hietala who is the Executive Vice President of Renewable Products. We will be referring to the presentation that can be found on our website. Please pay attention to the disclaimer since we will be making forward-looking statements in this conference call.

With these remarks, I hand over to CEO, Matti Lievonen to start the presentation.

Matti Lievonen

Thank you, Juha-Pekka. Few words before we go to the finance and other things. So first of all the markets continue very challenging it started early in the fourth quarter. First quarter, second quarter was very challenging in renewable products and oil products. In fact only our retail business was very stable we could be very happy with that. Despite these very challenging markets we made our own action very much to compensate this sort of market and I am very pleased that we could improve the performance by our own actions and in fact during the first quarter result presentation we have said that we will put report for the performance improvement and I will take that later on a few rich more about that, but very pleased on that.

Also the earnings improved 55% from quarter one. So with that we have done a very much in our own behalf only probably negative things that is in our old hand the part of our products line (inaudible) that we have the unplanned shut down there, that was not on good performance it hits during the second quarter.

The other thing that very positive is that the volume development in all markets and all businesses was pretty prudent and that also compensate pretty much the result what the markets could keep for us.

So I think that overall we are not satisfied, never because we could be doing better. But taking account the challenging markets, I'm pleased that my team could really put very much new gear and then find new ways that how we could improve our results.

But I hand over now to our CFO Jyrki Maki-Kala. He will give you a go through to the group finance on quarter two and then first six months and then I come back for the segment results.

Jyrki Maki-Kala

Yes, so good afternoon also, I'm Jyrki Maki-Kala CFO. I will now go to the page six where we are going to talk about the group finance that relating to our quarter two. Like mentioned we had a very positive trend in our sales volumes, we basically record a 7% growth in our topline for our quarter two and that was a good achievement.

If we look the financial figures like EBITDA and EBIT that seems to be very much in line with the quarter two last year. But if we then look to water fall in our presentation, that shows you the big movements what we had in one quarter. Basically what happened is that like I mentioned earlier, the markets were difficult, so we lost in our reference margin roughly EUR 70 million, both in Oil Products also and Renewable Products but what we were able to do is really compensate this negative effect by our own actions meaning higher sales volume, roughly EUR 27 million and then the additional margin that gave a really positive thing what we were able to do. And later on we’re talking about this performance improvement actions and this achievement what we had in our quarter two is basically inside the additional margin and others meaning variable cost and fixed cost. But overall, the quarter two was very positive, what we were able to do and compensate the difficult market what we saw in quarter two.

And the next page basically gives you the idea how the quarter one and the quarter two basically were interlinked this year. The big change, the 55% improvement basically came in all our businesses, actually all products improved slightly. But the positive thing in Renewable Products gained through the reference margin and the additional margin that again gave very strong approach that Renewable Product is a solid business going forward.

Oil Retail had a positive development in volumes between these two quarters but again showing the element of solid improvement what we had in the background. If we then move to quarter, to first half of 2014 and the financials, here the figures are of course doubled what versus there in one quarter and here we see the bigger movement between two years. The comparable operating profit basically dropped 83 million on half year to half year. And again, you have to go behind the figures to understand where that drop of 83 million came from. And the next page, basically the waterfall, gives you the idea that it’s coming from our, mainly from our two businesses Oil Products and Renewable Products. But behind these two businesses, the reference margins went down EUR 176 million between two years and half year impact.

And that's partly we were able to compensate through volumes and through additional margin. So overall, the difference will stay in this with is recorded EUR 83 million. So as a summary, basically these two things quarter two and the first half year, reference margin were weak but we were able to compensate most of that through volumes, additional margins, lower fixed costs and these performance improvement actions what we are currently doing.

So that's kind of a summary and then I walk through key financial targets basically talking about the return on capital, solid level. We’re above 10%, 11% at the moment. And then our leverage basically showing that we have still a strong balance sheet in the background, roughly 36% leverage what we are seeing at the end of June. So, good solid half a year, but we have improved; I think that's the point.

Thanks.

Matti Lievonen

Thank you, Jyrki. As Jyrki mentioned, so I think that this, if you look at the reference margin that drop was 176 million six months versus six month last year. So I think that the team has done a really substantial work here to compensate that and very pleased as I mentioned earlier. But If we go to the segment and first oil production that I take on as a highlights there and then of course this 33 million could be higher because we had this unscheduled 40 days maintenance outage at Porvoo refinery.

In fact that was so longer that was preplanned out five days longer and cost of that total cost including everything is about 30 million. So that’s the element that of course lower the oil product result in the quarter two. And if you look at page 15 that really that weak market and to repeat the same what Jyrki told but here you can see that last year’s second quarter and this second quarter so reference amounting minus 28 million and we could still push at our additional margin plus 20 million retail, even there was this first line for unscheduled maintenance. So that was very good and also fixed cost that could be improved our result by 6 million.

If you look at the margin and really I think the big surprise was that the really the European business margin was burdened by the high imports and if I look at the levels what we had in fuel for example in Middle East that was reasonably low level that it was $10 and I don’t remember in my career in so low figures and fortunately now it start to increase but that was a big hit for of course in our result, also it’s mainly caused because USA import was pretty high and also the Russian import was high in that second quarter.

Let's see that how the situation is evolving and now the one good message probably for us, not the long term, but the short-term is that Russia is cutting the diesel export from Primorsk now going to third quarter, because of maintenance sectors in their refineries. The good thing for us was the Urals-Brent price differentials it went pretty wide in the second quarter across 2.5 average compared to Brent. We believe that Urals-Brent the price differential will stay through the all year level of minus 1.52 if you take the whole year.

So, there is a few things that which cost up is of course European demand is lower, lower space and also there has been maintenance announced in the Russian refineries. Despite these production line for unscheduled maintenance, so we could have and keep the total refining markets stable, it was about 8. And we could have this 4.1 additional margin and it’s because of good sales mix that we could realize during the second quarter.

Renewable products performance, I think that it's satisfactory, if we look at the challenging markets. So, if we look the records margin in renewable side it's about US$150 lower than the last year. Also there was a good internal achievements like high sales volume 551,000 tons. Also the utilization rate was very good 102% if you take all the four lines together. We sold 34% of sales to North America and also the sale of waste and residue feedstock that was the record high 66%.

Then if you look the waterfall and then compare to quarter two 2013 and ‘14 we see that reference margin is $42 million lower but we could compensate that by volumes, pretty happy with that additional margin also plus 19. So overall we could do the same we saw the last year. And also if we compare the quarter one and quarter two volumes more significantly high that we could improve our result there.

Overall if we look at the markets, European market is very slow. If you look the fame seasonal price compared with palm oil price so it has been stagnated since January the level of a bit over 200. Also the vegetable oil price differentials, it has been narrow compared to last year I mean the rapeseed palm oil, but we keep our finance that in a long period on average it’s over $200 per ton price differential.

The North America markets especially the U.S. markets it’s really that the regulatory, I'm sure that the impact is there. And if you look some positive I think that the positive is that SME versus soybean price difference had increased, that's a good thing, but still the biodiesel rig values, they are stagnated to same level since January. And really now the producers, the customers they are waiting that when the EPA will make their final decision. There has been different dates under timelines to put that when they will come out with probably the new markets for bio-fuels.

Now the next step is probably end of September that they will come out. And we have called the different parties to views that what EPA might do so the maturity of gases has been that they will increase the bio-fuel mandate upwards, because there is no limitation from supply side. And of course if there is that sort of announcement, we believe that the RIN values will increase.

Then the other thing is this plan Blender’s Tax Credit, there is nothing new, I think that we are keeping the same saying that to be after mid-term election and probably November. And if it will come enforce it will be than the retroactive 2014 and 2015 onwards. And that is not inside in our guidance. But very pleased we are with clinical products strong additional margin. And it mainly came, this $155 per ton by high utilization rates, quality premium and then the high share of waste and residue. So we have been able to find a right customer, right feedstock for this then given a very good additional margin.

Oil retail’s station sales growing so we have a two businesses, we have a station business and then we have a direct sales business mainly here in Finland. And the direct sales business suffering now the slow industrial activities here in Finland but the network sales is doing well. So all markets we could improve our station sales. We open at a 11 new stations, we also introduced the new branded fuels in Baltic countries and in Russia and we increased our sales volume at a unique market that was very good level despite of weaker ruble figures, it’s of course giving an effect, but we hit a 20 million during the second quarter.

I think that page 25 is pretty much what I explained. And we believe that oil retail’s markets remain stable. There is now traffic fuel demand seasonally higher because of summer. And then the gasoline and diesel demand on downward trend here in Finland but then Baltic and other Western Russian markets growing gradually.

Then a few current topics, full year result outlook. We maintained that but we are at the lower end of the guidance range, mainly coming that if you look to forward reference margins so we expect that it’s averaged 3.5 compared to 4 what we announced earlier. And what supports our guidance is also this performance improvement initiative that at least EUR 50 million during 2014. As mentioned earlier, this reintroduction of U.S. Blender's Tax Credit for biofuels would have a positive impact.

And then Singapore NExBTL refinery would be eight weeks during the third quarter and fourth quarter for the major turnaround and that is after four years operating more. So, it's a very good achievement for us, because that's a new plant and we didn't know that how long we could run with existing catalyst and this is a great thing and is giving a good average for us and we could run very efficiently those refineries.

Then few words about updating organization. Why we are doing this is, so that now the renewable fuels is very stable business, we want to increase simplicity and the customer centricity and of course very much accountability and the transparency towards markets, and also we want to have a total profit and loss responsibility by the business lines.

So we are renaming -- renamed the renewable fuels to renewable products and the reason is there that there is a new businesses, it's not on traffic fuels where we are concentrating, we are concentrating biochemicals business and we have a started in a small scale already now to delivering the biochemicals. So that's very good for us.

And then the oil production, the renewable products will be laid, they’re (inaudible) present. Matti Lievonen as you know is now responsible of oil products including the Porvoo big site and the Naantali sites. Then the renewable products; the new one is Kaisa Hietala. Kaisa has a very long experience in the renewable side, she was in the Singapore, building up the feedstock sourcing business also was during the project time there when we developed the whole plant, then see has been the responsible marketing of renewables and the latest was she was responsible of business area of renewable products, renewable fuels but now the renewable products.

Then Sakari Toivola who is the head of the Oil Retail, will be retired end of the 2014 and Antti Tiitola will succeed him. Antti Tiitola has a very long experience in retail business, here in Finland. He has been the creator Lidl chain here in Finland and now he has been responsible of traffic business in the local farewell company here in Finland.

Production Logistic to be part of the business, so there is nothing new and the reporting segment remains so Oil Products, Renewable Products and Oil Retail and the others.

And we haven’t changed our focus, so we focus safety. There is so far good development this year. Cash flow, I could be satisfied also the cash flow in this year but we could improve there. Refinery productivity as mentioned earlier, so there is we still have work to do and then the renewal products markets and customers and we have improved there and we could sold, so in the future what we made during the second quarter, first quarter.

But then to increase and report our guidance so we increased the profitability by at least EUR 50 million during the 2014. Where is this coming? It’s coming the refinery process improvement. So, there we are looking the yield improvement and the catalyst cost optimization, sort of things that you might ask that why you haven't done it earlier. We are doing that all the time, but when the times are really tough then we are doing much more.

Then the refinance utility cost, we are discussing and we have negotiated the new [hydrogen] and steel contracts, so we could decrease the cost there. And also very much we are putting efforts to increase energy efficiency in refineries.

Then what's coming the business fixed costs, so there is lower staff cost and the refinery fixed cost savings, common function fixed costs, also the lower staff costs and less external services, traveling and sort of things. And the logistic cost is shipping outsourcing, it's proved and also we have renegotiated and we will be renegotiate our cost of logistic and the contracts.

Sort of things is in our agenda and we all here and also the teams outside they are very confident that we could bring it this 50 -- over 50 million in this year to increase our profitability. This is short term and then few marketing knowledge, so we have capital markets day. We will host that in London 11th of September and the program will cover and update the Neste operations and strategy and you could see the more information in our website nesteoil.com/investors.

Thank you and I think that we are ready for the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Mehdi Ennebati from Societe Generale. Please go ahead.

Mehdi Ennebati - Societe Generale

Hi, good afternoon all. So I will ask two questions please. The first one regarding your dividend policy, up till now your dividend policy was minimum payout of one third of comparable profits and this year according to my estimates to keep the dividend unchanged, you need approximately 71, you will have approximately a 71% payout. Now, should we consider you will get your dividend in a material way, or on the contrary your dividend is at the bottom range of your long-term targets. You should be able to keep the dividend at a level relatively close to 2013 even if you don’t benefit from the blend of tax credit overall by the end of the year. And my second question regard with renewable fuel division, you announced the [shelf] waste and residue reached 6% of your feedstock. So this is record high. Could you tell us what will effect and how you do, do you think you could reach in the long term and what could be the consequences in terms of maintenance turnaround in your facilities, please. And finally just if you could tell us which renewable fuel could you say we could expect in Q3 and Q4 given you would be negatively impacted by maintenance, please? Thank you.

Matti Lievonen

Here is Matti Lievonen, thank you Mehdi. I know you and there was much more than the two questions, but it's okay. The dividend first, our policy it is one-third and if you go back by history, so there has been differences we have made out 105% in one year. And so, of course we are always looking not only to specifically one year and it's result, but more how the business is evolving and I think that's that we have done, sure.

Then what's coming through renewable products, Kaisa will give you answer for your question.

Kaisa Hietala

Thank you Matti, this is Kaisa Hietala speaking. The first question was regarding the waste and residue and the fact that we were able to reach record high share of 66% in Q2 and what it is sort of a long-term target. Clearly for renewable products, the flexibility of the feedstock is one of our sort of a key strategic talk. And therefore I mean we have been working hard in this area and we keep developing our assets to increase the share further.

However we haven't set a sort of certain long-term target, but I would say that the work continues and we’re very happy with the current flexibility we have been able to do and the technology has proven to be able to handle much more and waste and residue type of raw materials than originally planned.

Then there was another question regarding Q3 and Q4 sales volumes and especially in the light of the Singapore turnaround which we are going to have in Q2 and Q3 -- sorry in Q3 and Q4 altogether 8 weeks naturally that we will have an impact on the sales volumes. However we are also at the same time as you’re able to see also in Q2 increasing the overall productivity of our assets. So unfortunately no sort of detailed guidance given for this, but we will definitely maximize the production and the sales in Q3 and Q4 as well.

Mehdi Ennebati - Societe Generale

All right, thank you very much.

Operator

We will now take our next question from Jeremy Aston from Exane. Please go ahead.

Jeremy Aston - Exane

Hi guys, good afternoon. You’re saying in your release, that you expect your full year 2014 reference margin to be $3.5 per barrel rather than $4 per barrel and that seems the former basis of your reduced guidance. And given the relative strength of the refining margin so far this quarter which I think is about $5.5. Does it imply you’re expecting a complete collapse refining margins for the rest of the year? Thanks.

Matti Lehmus

This is Matti Lehmus answering. It is indeed correct like we said that we have based our guidance on the assumption of an annual average of $3.5 per barrel on the reference margin on oil products if you look at the first half of the year the actual number was 3.7 and if you look at the forwards they are of course volatile, but the level for the full year has been ordering of owned 3.5. So that's what we're basing our guidance.

Jeremy Aston - Exane

Okay, okay, that's clear. And just a question on the Singapore refinery a follow up. Did you, I mean you said you're not giving detailed guidance about the reduction in production but can you confirm that you've managed to increase your inventory of NEXBTL this quarter in order to partially compensate for that turnaround? Thank you.

Kaisa Hietala

I mean this is Kaisa Hietala, again. It’s part of our sort of the normal optimization to make sure that we are able to keep our customers commitment. And therefore sort of managed our inventory levels, I mean preparing for turnaround, so it's a very normal for oil business. So we have been doing that and it's in our plans. So I am not any surprises from there.

Jeremy Aston - Exane

Okay. Thank you very much.

Operator

We will take our next question from Matt Lofting from Nomura. Please go ahead.

Matt Lofting - Nomura

Yes, thanks, good afternoon all. Two questions if I could please. Firstly, just coming back to the full year guidance on the refining side, I just wonder x any margin improvement or fluctuation. If you could talk a little bit about how much underlying performance improvement is embedded in H2 expectations of poor on the assumption that its maintenance free second half of the year after two turnarounds in the first half. And then secondly, on the performance improvements, you obviously saw a bit of firm number in place this morning and sort of pointed to at least €50 million for this year, could you talk a little bit about this sort of perhaps a scope for the medium term beyond 2014 and to continue to look to drive additional synergies through the business units, 2015 plus. Thanks.

Matti Lehmus

So this is Matti Lehmus. On the first question, on the refining outlook. In the previous question I already commented on the reference margin outlook you are fully right that we are of course doing everything in order to maximize the additional margin at the same time and if I look into the second half of the year there are no major planned turnarounds in our oil product refineries. So we are fully committed to hopefully having good run on the additional margins. And as a bridge to the question part of the corporate wise performance improvement is of course also related specifically to all products and this is also an area where we expect this to support our additional margin in the second half of the year.

Jyrki Maki-Kala

Yes. This is Jyrki Maki-Kala, I can add to this improvement action also that when we started in the early part of quarter two, I think what we achieved in first half of this year was roughly €10 million so we expect to get this at least €40 million for the rest of the year. And like early I mentioned this is part of the program that we continue this and in fact it will also be there for 2015. It is important for us to work when the markets are tough that we can do internally the right things.

Matt Lofting - Nomura

Okay, thanks for your comments.

Operator

From Barclays we will now take our next question from Joshua Stone. Please go ahead.

Joshua Stone - Barclays

Hi, good afternoon and thanks for the presentation. Two questions please. Firstly on the methodology of refining margin or reference refining margin and guidance. You mentioned you are using forward curves. I was just thinking given Neste being one of the best refiners in Europe, it’s going to now, it’ll have to be load two quarters in a row of that forward curve. Do you not think your sales might have a mark view on the margins, I am just using forward curves.

And then secondly, I guess probably Kaiser on the renewable products division. Feed stock in North American, I mean we saw animal fats obviously at very high prices in the quarter. Was there any switching to soybean oil or other sort of cheaper feedstocks in the quarter? Thank you.

Matti Lehmus

Matti Lehmus, on the reference margin outlook. I think first comment is obviously that our focus is on the additional margin. That's where we can impact where our own performance impacts the results and that's where we put all our efforts. And if you look at the first two quarters of this year, we had an average additional margin of 4.6, which is a good achievement and like I said earlier we are putting everything into having at least good additional margin in the second half of the year.

On the reference margin outlook, I think the forwards is a good starting point, because that obviously is the average of the market use. It is obvious that we are now in the period where we have the driving season, so gasoline is supported in the short run. But I still think that market forward gives also fair view which is in line with our view of the second half.

Kaisa Hietala

And this is Kaisa Hietala, again. Regarding the feedstock mix and especially the question was regarding North America and whether we have started to switch to soybean oil.

We have an opportunity to optimize between 10 different raw materials and this is the beauty of the Neste technology. And this is sort of like daily optimizations that we are doing and unfortunately we have not sort of sharing the exact feedstock mix.

But I would say that our waste and residue share being 66% in Q2 is the strong indication that the waste and residue type of raw materials are favored by our customers and also by authorities.

Joshua Stone - Barclays

Okay. Just one follow-up on that. In North America, I know you talked about 10 feedstock, can you use all of those to set into the U.S.? I mean my sense was you couldn’t just palm oil for sustainability reasons but I wonder if there is nine or extra other feedstocks, if there is any issues over those as well?

Kaisa Hietala

Well all the 10 feedstock can be used to USA as long as they are being fulfilling the criteria set by the Environmental Protection Authority, the EPA in USA, so including palm oil as well.

Joshua Stone - Barclays

Okay, thanks.

Operator

We will now move to Mukhtar Garadaghi from Citi. Please go ahead.

Mukhtar Garadaghi - Citi

Good afternoon. Two quick questions from me, first of all, apologies if this has been covered, I've gotten a bit late. Could I just hear your latest thoughts on what's going on with the EPA and where you think the discussion is and where do you see the timeline? And just you previously said that what you were seeing in the U.S. by the market is that the wider market, local producers were working on an assumption that the tax credit will be renewed. Can you -- just share your thoughts, has that changed or do you continue to see that behavior or has the market moved to assume it comes in later? And just on the refining side, could you just clarify is that 50 million improvement that is going to come from that business, included in the lower end of your guidance range? Thank you very much.

Kaisa Hietala

Shall I start? Okay. So, Kaisa here. There were two questions, the first regarding the EPA, renewable volume mandates, timeline and the sort of the market sentiment and then there was another question regarding Blender's Tax Credit. As Matti Lievonen was saying, EPA has been postponing to giving final numbers of the prior fuel mandates for 2014. Currently, our estimate is that they will release the numbers in September, probably towards the end of the month. And the market sentiment is positive that the numbers will be higher than the original track which was release already late last year.

Then when it comes to the BTC, we remember from last or from Q1 that the Senate Finance Committee approved the proposal, but it has not passed the House of Representatives. And currently, the thinking is that it will take until the mid-terms elections and beyond, probably November when we can expect something from there. At the moment, very difficult to say what will be the outcome, the industry has a very mix feeling.

Jyrki Maki-Kala

Yes. And this is Jyrki, talking about the 50 million improvement that we have announced, it is included in our full year guidance as 50 million. Yes.

Mukhtar Garadaghi - Citi

Thank you very much.

Operator

We will now take a question from Henri Patricot from UBS. Please go ahead.

Henri Patricot - UBS

Yes, thank you. Good afternoon everyone. Two questions from me and first one to fill up on the feedstock, the western residue. I was just wondering if you could give us an idea, any price difference between prime and western residues and your chart in presentations showed a price of animal fats going up recently, but I guess that’s not fully reflective of the cost of feedstock for you, and if there is difference between two DC sustainable? And second question just on the cost reductions, I was wondering if there was any impact on the CapEx budget from your plan, I am thinking more about the refinery processes improvement. Thank you.

Kaisa Hietala

Kaisa Hietala here. There was a question regarding the waste and residue and sort of the price levels compared to process palm oil. Waste and residue markets are very fragmented and not transparent at all. It’s sort of difficult to find a reliable quote for that. And our sort of a sourcing system which is a global and currently really focusing on the waste and residue material is building the volume from a very small stream. This information we have not made public, the price information and it shall remain like this also in the future.

Matti Lievonen

This is Matti Lievonen, so I’m answering on the second question which was about the CapEx budget. The performance improvement project where we are targeting this least 50 million Mr. Lievonen was explaining that the type of elements we are looking after are lower cost in utility cost, improvements in how we run the processes, fixed cost savings of course. So there is no direct impact on our CapEx budget. We have regardless of this obviously in the last year spent a lot of time in having a very good CapEx prioritization process. And if you look at both maintenance and productivity investments, we are very carefully prioritizing what we are doing already for a number of years.

Henri Patricot - UBS

Okay.

Operator

We will take our next question from Saumya Senapati from Bank of America. Please go ahead.

Saumya Senapati - Bank of America

Hello, good afternoon, gentlemen. A couple of questions from me please. First, a general housekeeping question. There was a step up in CapEx this quarter from last quarter. Is this in preparation for Singapore and can we expect you to be at the higher end of your $300 million to $350 million guidance for the full year? That's my first question. And my second question is sorry to come back to this question on your feedstock mix. I just wanted to understand, was it economically more profitable to use the waste and residues versus CPO? I know you can't give us exact numbers for competitive reasons but if you can give us an approximation to say that the waste and residue was more cost competitive to use versus CPO because CPO prices also fell during the quarter. Thank you.

Matti Lievonen

Yes. Talking about the CapEx, what was you were referring to, which really that we had roughly EUR 140 million CapEx for the first half of this year. And the change compared to earlier is that we have recorded also this so called catalysts CapEx that are not cash booking in our system. So, what we have earlier said about the range of EUR 300 million to EUR 350 CapEx that remains to be at a level with our so called cash based CapEx, but these non-cash will be roughly higher or at the same level for the second half of this year. So in that sense, you are right that the CapEx are higher, but on the cash level, we are still at the same range what we were talking about. But also it can be seen in our cash flow material what we (inaudible) for the first six month cash based CapEx was roughly $104 million so we are in the range what we have talked earlier.

Kaisa Hietala

And Kaisa Hietala here. The second question was regarding the feedstock mix and then the way how we sort of manage that and why do we have the waste and residue share of 66%. Basically it is not -- I mean we should not look at the sort of the feedstock price as such, I mean the whole optimization by choosing the right feedstock at the right time and connecting that to the right customers who value that feedstock and having a very efficacy and supply chain in between across the production I think this is the key. And this is visible in our additional margin percent.

Saumya Senapati - Bank of America

Okay, great. Thank you.

Operator

We will take our next question from Carl Frejborg of Carneige. Please go ahead.

Carl Frejborg - Carneige

Yes, hello. I had a question regarding the Renewable Products please. I just know that your comparable operating profit and IFRS operating profit has huge difference from 31 to 2 presumably have some hedges derivatives behind. Could you tell me something about the hedging you have renewable fuels play?

Jyrki Maki-Kala

Yes. This is Jyrki Maki-Kala. You’re probably right with the level what you’re referring to. Our hedging rate roughly in renewables is below 20% and basically that has been the case going, going, going back also in the history and that’s basically only hedges what we have currently in our company, not with all products anymore.

Carl Frejborg - Carneige

So are you hedging both sort the sales or also your raw material?

Jyrki Maki-Kala

We are talking about here the cash flow we are basically hedging for the coming let's say six months period basically.

Carl Frejborg - Carneige

Okay. Net cash flow, right?

Jyrki Maki-Kala

Absoltuely.

Carl Frejborg - Carneige

Thank you.

Operator

(Operator Instructions). We will take our next question from [Ricardo] Investments. Please go ahead.

Unidentified Analyst

Hi, good afternoon and thanks for taking my questions. I have two, the first one is in the outlook statement. You say, you expect vegetable oil price differential to within the rest of the year. So what solid rate seed and palm oil price assumptions or spreads are assuming the guidance compared to today's levels. And the second one is a question on cash flow that was weak in H1. What was behind this and what are you cash flow expectations for the full year? Thank you.

Kaisa Hietala

So this is Kaisa Hietala. The question was about vegetable oil’s price differentials and our guidance and view on that. What we saw earlier this year was that there were some weather and harvest concerns for palm oil and we saw the spreads between palm oil and soybean oil and rapeseed oil to shrink quite a lot. Now what has happened during the Q2 and now what is the forecast for Q3, it seems that the palm oil production has been able to recover and it's going towards the highest production season, which is typically in Q3 and at the same time we have started to get the information regarding rapeseed oil and - sorry rapeseed and soybean harvest for this year. And looking into the palmoil situation at the moment we believe that the price differentials between the vegetable oils will normalize and our guidance has been that they will in a long term they will reach the average levels roughly $200 per ton.

Jyrki Maki-Kala

Yes - this is Jyrki Maki-Kala talking about the cash flow that you asked about the first six months of the year if you look at net cash what we have generated. Basically you have two elements there effecting lower cash flow one is the lower profitability meaning the lower EBITDA what we have generated and the second one that swings in the net working capital if you just look the increase of inventories taking part in between last year and this year that is basically explaining the other part of the lower cash flow in that sense and of course we are working toward the year end that we will have a solid cash flow in the background I think that’s very clear statement from our side as well.

Unidentified Analyst

And if I can add another question on the renewable products, last year you already used the high percentage of waste and also the capacity was already higher in H2 so can you tell us what do you expect for additional margin level in H2 2014 versus H2 2013? Thank you.

Kaisa Hietala

This is Kaisa Hietala again. Unfortunately we are not giving guidance on the renewable products additional margin.

Unidentified Analyst

Okay, that’s fine. Thank you, thanks a lot.

Operator

We will take our next question from Joel Meyers from Societe Generale. Please go ahead.

Joel Meyers - Societe Generale

Hi, good afternoon. I had a quick question or I guess a comment there. There was an article I think it was probably three weeks ago in the New Yorker and then there was another article I think it was the Sunday Times talking about kind of the increasing theft of used cooking oil from restaurants and hotels, et cetera; basically talking about how that it was established players were having to really trying to stop that because the prices had been coming up. I guess there's -- obviously you're not in that business directly but you're down the supply chain from that. I mean does that indicate that some of these kind of less visible pricing that there's pricing pressure or is that just that people have kindly figured out that actually there's value here, and the other question on that dynamic is I guess have you had to update your procedures in terms of verification and supply because obviously the chain of supply is important to you. The UK article was saying something like 20% of the used cooking oil is now being stolen in the UK. I don't know if you believe those numbers are accurate or not.

Kaisa Hietala

Kaisa Hietala here. Used cooking oil has been widely used for the traditional biodiesel production for example in Europe. It has a certain sort of incentive like double counting in several member states.

At the same time, there has been a growing concern whether the trade of used cooking oil fulfills the sustainability and traceability criteria, and this has been widely discussed in Europe and this Sunday Times’ article is one example of this.

When Neste Oil is sourcing it's raw materials we definitely want to know where the raw material is coming from. We call it traceability. And this traceability means that we know the origin of the oil. Whether that is plantation when it comes to crude palm oil or whether that is a slaughtering house when it comes to tallow and so on, our system has been certified and verified by third parties several times. And I would say we are one of the industry leaders when it comes to this. And it is a license to operate in biofuel industry to know where your raw material comes from and to make sure that it fulfills the different criteria that the authorities are setting for biofuels.

Joel Meyers - Societe Generale

Great, thank you.

Operator

(Operator Instructions). We will take our next question from Mehdi Ennebati from Societe Generale. Please go ahead.

Mehdi Ennebati - Societe Generale

Yes. Sorry, two additional questions. Regarding your $155 per ton additional margins on the renewable fuel, what is the portion coming from the factory, are you using waste and residues? And should we consider the additional margins have been equivalent in Europe and U.S. or was it higher in the region in particular? Thank you.

Kaisa Hietala

So, Kaisa Hietala here. Unfortunately we have not analyzed the -- publicly analyzed the additional margin elements. I would like to highlight here once again that the raw material as such might not be the case here, but it is the fact that we are able to combine a right raw material to a right customer in a right market and having very, very accuracy and supply chain and production in between. And this is the key for additional margin creation.

Mehdi Ennebati - Societe Generale

Okay. Thank you very much.

Operator

(Operator Instructions). There are no further questions remaining in the queue. That was conclude today's question-and-answer session. Juha-Pekka I would now like to turn the call back over to you for any additional or closing remarks.

Juha-Pekka Kekalainen

Thank you very much. If there are no further questions, we thank you for your attention and participation. Neste's third quarter results will be published on the October 23. I would also once again like to encourage all those interested to attend our Capital Markets Day in London on September 11th. Until then, thank you and goodbye.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.

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Source: Neste Oil's (NTOIF) CEO Matti Lievonen on Q2 2014 Results - Earnings Call Transcript

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