Neste OYJ's (NTOIF) CEO Matti Lievonen on Q4 2015 Results - Earnings Call Transcript

| About: Neste OYJ (NTOIF)

Neste OYJ (OTC:NTOIF) Q4 2015 Earnings Conference Call February 4, 2015 8:00 AM ET

Executives

Juha-Pekka Kekalainen - Head of IR

Matti Lievonen - President & CEO

Jyrki Maki-Kala - CFO

Matti Lehmus - EVP, Oil Products

Kaisa Hietala - EVP Renewable Products

Antti Tiitola - EVP, Oil Retail.

Analysts

Josh Stone - Barclays

Matt Lofting - Nomura

Mukhtar Garadaghi - Citigroup

Julian Beer - SEB

Henri Patricot - UBS

Yulia Veselova - Bank of America

Operator

Good day and welcome to the Q4 2015 Neste Corporation Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Juha-Pekka Kekalainen. Please go ahead sir.

Juha-Pekka Kekalainen

Thank you, and good afternoon, ladies and gentlemen, and welcome to this conference call, as said, to discuss Neste’s fourth quarter and full-year results published earlier today. I am Juha-Pekka Kekalainen, Head of Neste IR. And with me here today are President and CEO, Matti Lievonen; CFO, Jyrki Maki-Kala; and the business area heads, Matti Lehmus of Oil Products; Kaisa Hietala of Renewable Products; and Antti Tiitola of Oil Retail.

We will be referring to the presentation that can be found on our website. As always, 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 with the presentation. Matti, please go ahead.

Matti Lievonen

Thank you, Juha-Pekka. Good afternoon, everybody, and we feel really great here because, as I mentioned to my personal here that what a year. And when we started 2015, I think that there wasn’t so much hope I mean in the refining that we will be turning as such and of course then our Renewable Products and Retail also, they did a great job.

But if you look a bit at why we ended sort of result and how the market is supporting us. Everything started with a lower crude, probably we didn’t understood, nobody else that how big demand booster will be when the oil dropped from $100 to $54 per barrel, and last year the demand growth was plus 1.7 billion barrels per day and this year we are expecting or the markets are expecting somewhere plus 1.2, 1.4 million barrels per day.

That’s giving good start for this year also because last year the supply demand balance was in very good shape, seems so that this year will be also. And all this really caused the gasoline margin was really strong because of demand and we all know that USA demand was the highest ever. And the consumer, they changed to the bigger cars, more consuming cars, so that was a very positive if we think about our refining sector.

Then the renewables, the whole last year everybody was waiting that when the EPA will make a decision about the mandates. Then how the senate will do the decision about Blender’s Tax Credit but we work as normal business. We didn’t count any Blender’s Tax Credit or any force in the demand side but that was a very positive what EPA came out end of the year. So they will increase this D4, this advanced biofuels from 1.73 billion gallons to 1.9 billion gallons for 2016, it means plus-10% increase and then 2017 once again plus-5% increase, so very positive. And also then the senate accepted the Blender’s Tax Credit for 2015 and now also for 2016, so positive in that side.

Then in the Europe, the biofuels growth was 1% compared to 2014, ‘15. In fact in Europe we are pretty high level already if we think about this 10% target. So I think that we are now close to 8% if you take to Europe as such. That’s a very good. Then Baltic Sea state, the fuel demand growth of some 10% and we have very strong foothold there in the Baltic Sea countries - Baltic countries. So it was very good.

And then I think that obviously the stronger U.S. dollar help us very much because 2014, it was $1.33 and then in 2015 $1.11, so that was pretty good for us and also boosted our results.

The next page we have described the volatile operating environment, and I like to show this don’t going to deep, but you see that if you want to really perform, you cannot only rely on the markets, you need to do your own job and I am very proud that what we do in all business is 2015 great result all and we had our own forward programs where we are still boosting our profitability and I am very happy that we could do it, even we had a big turnaround.

But all in all, the year 2015 was really the weaker [ph] - strong I must say, because it was the highest ever. We made a comparable operating profit EBIT EUR 925 million. And if you take in account that we had the largest turnaround in Porvoo refinery, that cost EUR 130 million profit decrease last year. Then we had some difficulties also in Porvoo in the fourth quarter. So, it was really in the phase of over EUR 1 billion EBIT last year. So we are very proud of that.

Then the strong cash flow, Jyrki Maki-Kala will go to the financials through. But as we said, when we started last year that we believe that we are doing and generating strong cash flow. We did it. And then I am very proud of this return of capital employed after tax. We break this 15% target. We did over 16%. Our balance sheet further strengthen and our leverage is 29.4%. So I am really pleased and give thanks to my people here in Neste that we could also take the advantage that the market was really good. So, internal effort was tremendous, so very pleased.

And now I pass to Jyrki Maki-Kala, he will go through the financials. Jyrki?

Jyrki Maki-Kala

Yes, thank you Matti. So hello also from my side. So we’ll go through the financials, and our CEO told you the big picture about our performance concerning 2015 and now we go one step deeper and go little bit about the details concerning 2015.

We have here now the type of key financials concerning 2015. I will go through some of this and then I will go through the comparable operating profit using this bridge analysis later in my presentation. But if you first look the net sales for Neste Oil and certainly for Neste meaning that 2015 was a year when really we saw the crude oil price dropping to the level of average 50. And the next page gives you the idea of how the revenue really developed during 2015.

We had EUR 5 billion drop in revenues just because of the oil price, and it created with mathematics 50x under million barrels of oil of what we basically did back in 2015. That gives you the figure of EUR 5 billion. And then we have the massive turnaround in Porvoo in the early part of 2015 that took roughly EUR 800 million out of our revenues that was then compensated by Renewable and also activities around our Oil Retail business.

And then finally, the currency that really make a big change since we had a drop from $1.32 to a level of $1.15 during the year and that generated stated sales for us roughly EUR 1.6 billion.

If we go back to the previous page and talking about these figures, if we look our comparable EBITDA for the first time, we really went above EUR 1 billion, nearly to EUR 1.3 billion, which is 40% improvement compared to 2014. And basically that figure shows the performance really that was there among our businesses. I will talk about the comparable operating profit little bit later.

If you talk about our IFRS operating profit this EUR 699 million, which by the way was higher than our 2014 comparable operating profit. So you will see the big change in our profitability, and still we had in our financials 2015 inventory values and losses of EUR 260 million in our 2015 figures. Of course 2014, it was close to EUR 500 million.

Our comparable earnings per share went up to level of EUR 2.84, and if you remember, our dividend policy minimum one-third out of that figure is the minimum dividend that would lead to a level of EUR 0.95.

Then the last line here is the cash before financing activities meaning the free cash flow. We communicated throughout the whole year that we are going to do a good free cash flow when the year is over. And during quarter four, we did exactly like we promised. Our working capital went down, our profitability still remaining very, very nice levels. We lower our contango inventories for example, but of course we also increased our working capital by having the Blender’s Tax Credit at the end of the year, but it was very positive.

And if we go to the next page, it gives you the idea of our free cash flow which we have here 2015 and also 2014. And if you look the figures in that sense that our free cash 2015 was as good as our EBITDA 2014, EUR 480 million. So you will see that the change between these two year was really massive. We invested EUR 500 million roughly and 90% of that basically stayed here in Finland with our Porvoo turnaround etcetera. So we had a year of really big capital expenditures.

Working capital increased, like I mentioned, through contango storages that we were building for 2016, but also this increased Blender’s Tax Credit that we received at the year-end. That’s how we basically land to a figure of EUR 480 million free cash flow. That is very good achievement what we promised to deliver.

But if we then move to this comparable operating profit world and look what it means for quarter four, we improved basically our quarter four compared to 2014 by 38%. It’s roughly EUR 100 million. And if you just look at the big tickets that build the bridge is really about volumes and our additional margin roughly EUR 25 million. As a total, reference margins [indiscernible] EUR 36 million, currency changes EUR 64 million and then some changes in our fixed cost and also in depreciation minus EUR 15 million. That’s basically how we had this EUR 100 million improvement compared to 2014 last quarter.

And then looking little bit bigger figures, looking how the full-year landed 2015 to the level of EUR 925 million, 60% improvement compared to 2014. Oil Products, they had their US$3 per barrel higher reference margin and that made roughly the $284 million. And the currency, mainly US dollar getting stronger from $1.32 to level of $1.15, 13% improvement. That basically gave us EUR 170 million more profitability. So these two items was EUR 450 million, but then remember that we had the biggest ever turnaround in Porvoo under EUR 30 million away from our operating profit, Blender’s Tax Credit brought us EUR 80 million more but also Oil Products additional margin took away EUR 90 million, mainly also because of the low crude environment that we had [indiscernible]. That’s how we landed to EUR 925 million.

Then one step further, we go to this Oil Products that had also a massive improvement in their profitability, 54% compared to 2014, in a year where you really had this EUR 130 million impact coming out of the turnaround. The same story basically here at in the group level. Currency stronger, reference margin, these two improved EUR 380 million, but then the turnaround and the lower additional margin coming out of the low crude oil environment and took some profit away and that’s how we landed to this EUR 439 million level. It was like I mentioned a huge improvement compared to the previous year.

And then talking about Renewables. Like mentioned here, boosted really the profitability, nearly 70% improvement compared to 2014 coming out of volumes, coming out of the US Blender’s Tax Credit and coming out of the stronger US dollar. We had roughly 160 [ph] more volumes but we deliver the marketplace giving us EUR 44 million more profitability. And then also this currency EUR 80 million and additional margin that was slightly lower in 2015 compared to 2014 when we take into account the EUR 90 million Blender’s Tax Credit that we had at the end of the year. So that’s basically how we brief this new record level of EUR 402 million.

Then finally but not by any means lease is the Oil Retail, which being there as a third business area, improved also their operation along during 2015 having an improvement that of 25% in their operation. It’s a great achievement. And that really came through their own actions coming out of higher volumes, coming out of better margin in nearly all the marketplaces where we operate around the Baltic Sea area. Of course the weak U.S. - weak Russian rubles take some profit away from P&L, but nevertheless they landed in the record high EUR 84 million EBIT level that was there booked by the year-end. So again good achievement by Oil Retail.

And at this point, I then leave the word to Matti Lehmus, who will go to these operational issues more with the Oil Products.

Matti Lehmus

Thank you, Jyrki. So in the next couple of minutes I will go through the Oil Products’ results and I will start with the comment that I am indeed pleased with the result level of EUR 439 million, which is a strong result in a turnaround year.

Looking a bit high level behind that result, I think there is a couple of main things to be commented on the full-year. The first one is indeed that the reference margin ended up being at $7.7 per barrel, which is $3 per barrel improvement from the $4.7 that we had the year before. This is of course in the background. We had a strong market.

The other highlight is indeed that the turnaround was successfully completed, which is very important, at the same time it did have an impact of EUR 130 million on the result, which is clearly visible, especially in the second quarter numbers. But all in all, a strong year with a RONA of 18%.

Then perhaps going a bit deeper and looking at the market which is on the next slide. I think the first thing to be commented about the year 2015 is that it was the year when gasoline margins dominated, and indeed we did see a demand response, a demand growth of more than 2% globally, which resulted in a tight gasoline market, especially in the third and - second and the third quarters, but also still a strong gasoline market in the fourth quarter when gasoline margins were still at $13 per barrel, which is a strong level for the fourth quarter. So it was really gasoline which was driving the margin.

At the same time turning to diesel, one could say that the diesel market was well supplied. The demand did grow probably around 1.5%, but we also had strong supply growth. So as a net impact, the diesel market was well supplied and the margins were not as strong as for gasoline.

Final comment would be, which is important for Neste, is that we did enjoy wider REB differential than in previous years. The full-year REB differential ended up in at $1.8 per barrel, but I think it’s important here to note that for example towards the end of the year it widened, and in the fourth quarter we had a level of $2.7 per barrel for the REB differential. And also looking into 2016, I think there is a number of drivers including growing supply output from the Middle East like Iran, Iraq, Saudi Arabia that support the view that the REB differential could continue to be widened than in previous years.

Then turning to our own total refining margin. The 2015 total refining margin was $11.8 per barrel, so clear growth versus 2014. And within that, we had then additional margin of $4.1, which is $1 per barrel lower than in 2014. And high level, of course the additional margin drop can be explained in particular by two factors. It was the lower crude price environment which does support our overall refining margin, but at the same time puts pressure on the additional margin and it was the Porvoo turnaround.

If I turn to the fourth quarter, one could comment that we’d actually succeeded in having a strong additional margin, $5.3 per barrel. This was driven by factors such as winter product premier [ph], unwinding of the contangos, and at the same time we are not so happy with the performance at the refineries. We did have some unplanned downtime both in Porvoo production line and also Naantali. So here clearly the focus going to 2016 is to ensure a smooth run in terms of reliability, and we do not have any major turnarounds planned so we do look forward to good run in 2016 and do focus on the topic of reliability heavily.

Final comment would be that we did succeed in taking down production costs. They ended up at $4 per barrel. This is of course clearly something coming from the lower crude environment and continues to support the total refining margin also in 2016.

With these words, I hand over to Kaisa Hietala, who will go through the Renewable Products results.

Kaisa Hietala

Good afternoon everybody. Let me first take this opportunity and wish you all a very successful 2016. Good to have you all here joining our conference call after the Christmas break.

If we look at the Renewables’ performance in 2015, I think I would like to summarize it by saying that we were yet again navigating through pretty volatile market environment with a very strong focus on our own performance. And we were successfully managing the performance and eventually then reaching EUR 402 million EBIT result for the year.

We focused on increasing the volumes and our sales volume was close to 2.3 million tonnes and this is also including the turnaround we had in Porvoo, which also impacted the Renewable sales. We also were able to reach the 2.4 million tonne capacity for the renewable diesel production and we were operating at 94% utilization as an average for the year.

Our waste and residues’ share of feedstock was 68% and some of you might remember that we hit the record high 75% already in Q3. With all this solid performance combined with some of the - some more visibility on the regulatory side, especially in the USA as described by CEO, Lievonen, I’m very pleased with the Q4 results as well as the overall 2015 results.

If we then look into the European market, and then especially looking at the reference margin, the same price compared to palm oil price, we have seen the strongest magnitude of volatility over the past years taking place in 2015, quite a swing. And at the same time, if we then look at the vegetable and animal fat prices, we saw the downward trend to continue, which was mainly caused by the crude oil price, but then stabilizing in Q4. And what I would like to point out here is that if you then look at the spreads between the rapeseed oil and palm oil, we are now returning to the average historical levels. So now the spread is getting closer to what we have typically seen in the future, while for example at the beginning of 2015, the spread was narrow.

If we then look to the U.S. market, the market from the reference margin point of view was a bit flattish and there was some speculation towards the year-end when the regulatory decisions were expected, and since then we have seen a recovery. But then on the other hand, the biodiesel RIN values are clearly describing the supply and demand balance, and clearly the year 2015 was started with some shortage and the less of the rollover from 2014 than expected, and then towards the year-end the speculation around the regulatory decisions was also impacting the RIN values.

Here we have a picture of the Renewable Products margins. And as you can see, the reference margin has not been supporting the biofuel industry in 2015, but while Neste has been able to have a very solid operational year and then we had the Blender’s Tax Credit decision at the end of the year, we - our timing of margin management was successful, as well as the optimization of our feedstock mix and sales allocation was good, and this combined with the lower production costs due to the higher capacity, it helped us to support the additional margins roughly on the same level as what we have seen throughout the year.

So these were the details regarding Renewable Products’ Q4 and 2015. And I would like to now hand over to Antti Tiitola to discuss the Oil Retail’s performance in 2015.

Antti Tiitola

Okay, thank you, Kaisa. Good afternoon, ladies and gentlemen, also from my behalf. I am very pleased to give you the results of Oil Retail. We had really a successful year in Oil Retail like Jyrki Maki-Kala earlier told that it was an all-time best result.

Our fourth quarter was really successful. Our comparable EBIT was EUR 17 million compared to the EUR 8 million in 2014. The overall result was EUR 84 million compared to the EUR 68 million which we had in 2014. This is based mainly on the unit margins and sales volumes and we have increased those in all the markets, especially in the Baltic states we have had a very successful year in all the place, not only due to the reason that there is a good growth of GDP, but also with our own doings with we have really a good team in every country there and we have succeeded getting more new customers and with the - also with the active network development work we have gained more market shares there.

In Russia, of course the situation is more difficult but although that the Retail is declining with two-digit numbers we have been able to do with our work a good result there as well. In Finland, we have structured, we have mentioned earlier last year the organization and I believe that the first results are now coming out with the new agile verticals [ph]. So I am pretty pleased and also happy with the results in the difficult Russian market and also in Finland where we have some challenges especially on the commercial - for the commercial vehicles and in the industry segments.

We have invested EUR 19 million last year, which is up around about the same amount like in 2014, and the RONA was pretty remarkable at 41.2% last year. So we are very happy with that.

With these words, I give back the word to our CEO, Matti Lievonen.

Matti Lievonen

Thank you, Antti. And our current topics. Firstly, as we communicated in the third quarter interim report on October 23, 2015, Neste has discontinued giving numerical result guidance to be consistent with the industry practice and that’s what we are doing but we are giving some guidance anyhow.

So first thing is that Neste’s effective US/Euro rate expected to stay close to market rate. Capital expenditure expected to be about EUR 400 million and the effective income tax rate to be approximately 20%. This year it was pretty low and I’m sure that there will be a question on that and Jyrki Maki-Kala is prepared to answer all of those questions.

Then the segment outlook. Oil Products, 2015 was a very strong reference margin year and especially supported by gasoline, and we expect that the gasoline will be relatively good and support the margins, but we don’t believe today that the margins will be as strong as it was last year but it will be the good level. The good thing is that we haven't planned any scheduled maintenance, so the utilization rates should be very high.

Then the Renewable Products, we expect that the - that reference margin will remain about the average level of 2015. In Renewable side, as we discussed, there will be the scheduled seven weeks major turnaround at Rotterdam refinery April-May this year. And the Oil Retail, we expect that the - will follow the previous year’s seasonality pattern and could post good result also in the Oil Retail.

Then Board of Directors proposed a dividend EUR 1.00. From our policy, it is EUR 0.95 per share and now we have given a bit more, so EUR 1.00. It’s showing that the Board of Director, the management believes that the company is doing well and also the shareholders deserve a good dividend. Dividend yield will be 3.6% at the year-end 2015 share price and the net payout is 35% of comparable net profit.

As always, we focus on the things and we are very company that was that we do not chase because we believe that we are not the master in those areas, so we concentrate very much to safety. Cash flow, we believe that this year will be also very good much coming to cash flow, of course we are utilizing the very good contango possibilities and we are using that, but the cash flow will be strong. Refinery productivity, that’s the area where we are putting lot of effort now, because we feel that in those areas we will have a lot of potential that we could - that we like to take it into our own hands.

Markets and customers, I think that we had the last year excellent openings what’s coming in the RP, we got huge brands to using our renewables, the big cities. Then in Oil Retail side, we’ve used new bunker quality. Then in Oil Products side, we have a lot of new feature that what we offered to customers or services and that will be continued also for this year. So customers are focal point for us.

With these words, we are ready for the questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will now take our first question from Josh Stone from Barclays. Please go ahead. Your line is open.

Josh Stone

Hi there. Good afternoon. I’ve got two questions please. Firstly on the Blender’s Tax Credit, and then second on the dividend. Focusing on the Blender’s Tax Credit, if I run the math, it looks like you captured a rather large share of the credit. It’s somewhere in the 80%. I was wondering how you managed to achieve that, and is it a case that are locked in for 2016 and how to expect that to progress going forward through the quarters as I suppose contracts might roll off and new contracts might be renegotiated and just how - if you can give any guidance, that would be helpful. And then second with dividend. You talked in the past of a favorable dividend which you defined as a growing dividend. Is the case that we should expect the current dividend to continue to grow from here? Thank you.

Kaisa Hietala

Thank you for the questions. Let me first take the question regarding BTC, and the question was that how did we achieved to reach such level of BTC in 2015. And then the second part of the question was that how do we see that the BTC sharing mechanism will take place in 2016.

Basically Neste’s renewable diesel is a high quality solution for our customers in the USA. The only drop in product that you can transport via pipeline and you can blend without any blend walls. So of course that gives us good position to discuss with our customers regarding the commercial terms. When it comes to the 2016, this is going to be an interesting year because for the first time ever when the industry is entering a new year, there is decisions made on the both, the mandate level, so everybody knows how much they are obligated to blend, and secondly there is a decision of BTC.

How the market will turnout and how the industry players are going to play the game remains to be seen. But basically now when the BTC decision has been taken, it becomes like part of the negotiations for the contracts and it’s not been sort of retroactively discussed. So it will be part of our price and we will be invoicing sort of our share of the BTC as a part of the invoicing, and therefore also the cash flow in that will come more evenly spread throughout the year compared to how it has been in the previous year’s when it has been retroactively granted.

Josh Stone

Can I just follow-up on that point?

Kaisa Hietala

Yes.

Josh Stone

Is it - just want to say, it’s not the case that these are - the share of Neste’s credits is locked in, it will be up for negotiation and therefore - well and it seems to be stressing in the current environment, it might - that share might be lower, but I just wanted to check and understand that properly.

Kaisa Hietala

Well, I mean, I am not implying that our position in USA would be different in 2016 and 2015. What I was trying to say that its part of the commercial negotiation as it has always been, so between the seller and the buyer depending on the timing, depending on the market situation and so on. So I don’t see any difference when it comes to the contracting, but where I am sort of waiting and looking very carefully how the market will now develop while we have both the mandate levels known as well as the BTC decided for 2016, and this is a new situation for the whole industry.

Josh Stone

Okay. Thanks.

Matti Lievonen

Then Josh, I’d like to add for Kaisa, I’m sure that we do not speculate anything. So this 80% what you have accounted, you have accounted that the figures, but of course this is our own secret, because it’s a commercial negotiation and that we are not opening in the whole word as how much we are getting or how we are giving to our customers.

Then the dividend was your question and I think that we already have been said that several times also in the company remarks stated that we want to be the solid dividend payer and this at minimum is this one-third that what we are doing and that’s where we are today from results we believe that we are continue to good results also for the future and dividends is one of our top priority if we think about the cash usage.

Josh Stone

Okay. Thanks so much, Matti. Thanks.

Operator

We will now take our next question from Matt Lofting from Nomura. Please go ahead. Your line is open.

Matt Lofting

Yes, thanks. Afternoon all and congratulations on the 2015 results. Two sort of quick questions, if I could. Firstly, just on the CapEx profile, obviously falling to about EUR 400 million this year. I wonder if you could just sort of breakdown the key inputs into that group number, and particularly how much of it comes from the sort of the one refinery integration program and what you then see normalized CapEx as that investment rolls off? And then secondly, just wanted to sort of come back to the additional margins, particularly on the Oil Products side and the sort of bridge charts that you showed earlier. Obviously there was an impact in last year’s numbers for the - particularly the solid turnaround last spring, what your thoughts are in a cleaner operational year for 2016 in terms of where the additional margin could be. Thanks.

Matti Lehmus

Okay. Thank you, Matt. This is Matti Lehmus answering. So first, I’ll comment on the CapEx profile as a lot of it comes from the Oil Products business area, and indeed there are two main elements to the CapEx spent in Oil Products. One is the base maintenance CapEx load, the other one is linked to a number of major strategic growth investments that we have communicated earlier, and it is the sum of these two which makes up good chunk of that EUR 400 million.

This year obviously different from 2015. We do not have a significant CapEx spends related to the turnaround. That is something that was specific to 2015 and that explains also the reduced level.

On the additional margin, I would comment that the one fundamental driver which is affecting our additional margin is the crude price level. We talked about this in our Capital Markets Day, and the fact that we are now in a lower crude price environment than in 2014, of course puts some pressure on the additional margin. So we talked about roughly $1 per barrel impact when the crude price halved from $100. That is still there.

And at the same time, we do, let's say focus on the operational performance. So avoiding unplanned shutdowns, taking advantage of contango opportunities, the base oils business etcetera, all these support the additional margin. So I think it’s the combination of these two that will impact the final additional margin. And I just comment that our long-term guidance of reaching the $5 per barrel level after our investment program is completed is still in place.

Jyrki Maki-Kala

Yes, this is Jyrki Maki-Kala, just adding to the discussion of question around the capital expenditures, it’s really like what Matti Lehmus said about OP, but remember also that we have these ongoing project also in Renewables, we need the biopropane in Rotterdam and also the Rotterdam turnaround that will take place in the early part of next year.

We have also our ERP [ph] system implementation going on already this year. So we have an extra CapEx that will basically form this level around EUR 400 million for the full-year, which is a little bit higher than the normal, let's say over a cycle kind of CapEx level if we look forward years as well.

Matt Lofting

All right. Thanks guys, very clear.

Operator

And we will now take our next question from Mukhtar Garadaghi from Citi. Please go ahead. Your line is open.

Mukhtar Garadaghi

Hi, good afternoon. Thanks for taking my questions. Two question for me, both on Renewables. Kaisa, could you please comment on what you think are the key moving parts for renewables outlook both in U.S. and Europe going into 2016? What do you think is going to drive their end levels now that we have some visibility? And similarly in Europe, what do you think where we are with utilization and how do you expect the margins to develop? And secondly very quickly, what are you expecting in terms of volumes production from renewables in 2016 with your - with the turnaround? Thank you.

Kaisa Hietala

Thank you for the questions. The first question was about the drivers or the key moving parts regarding the outlook for EU and USA markets. If I start from the USA, which we have already discussed here quite a lot, it’s clearly going to be a supply and demand balance that we are talking here and currently it’s difficult to forecast how is it going to turn, because as I said, it’s a new situation for the industry that all the regulations are in place on January 1. But we are following it very closely and I believe the whole industry is doing so. But for the obligated parties in USA, I think it’s really great that they know the mandate levels and they can now do a proper planning and build their strategies how to fulfill the obligations. And as a biofuel supplier, we also feel that that’s the right way to go, and hopefully this is going to be a - give us a bit more visibility and stability in the USA because the markets have been very volatile.

In European Union, the mandates are still firmly in place. So the Europe is heading towards the 10% mandate by 2020. We see different countries having a faster pace and some of them having slower pace. We see mandate levels varying from 6% up to even 10% already country-by-country. And of course that creates different supply demand balances for different European markets.

And our strategy is to serve our customers and find the best markets for this product, very actively working with our customers to help them to get the best the value out from this product, and therefore I think our strategy to use both term and spot volumes, which has been the case always in renewables, I think it gives us the flexibility that we need in markets like Europe.

Then there was another question regarding production outlook for 2016. We have published that the Rotterdam turnaround will last seven weeks in April-May. This is exactly the time which we took also in Singapore for a similar major turnaround. We are not expecting any other turnarounds. And basically there it’s possible to calculate an estimate that what is the volumetric impact. But at the same time of course you remember we have our sort of a longer term target to reach 2.6 million tonnes capacity creep by 2017 and we are working on that. So we will be doing test runs with the higher capacities and so on.

But roughly I think seven weeks Rotterdam - seven weeks with the Rotterdam turnaround will give you sort of roughly right figure. Thank you.

Mukhtar Garadaghi

Thank you, Kaisa. Just as a follow-up on U.S. just to understand how the supply demand impacts given you have quite a differentiated product and my understanding you’re not competing with a lot of your - they have a lot of domestic producers and have very different sort of sales model. Why is supply demand from that perspective on the country scale so important for you?

Kaisa Hietala

The reason why we really need to look carefully at the supply demand is that the - our product is a part of the D4 RIN category were also the biodiesel like soya methyl ester is also participating in this RIN generation and the RIN - D4 RIN is basically - the supply demand is the key here. And those RINs can be generated by the biodiesel producers as well as the companies like Neste who are producing renewable diesel. And therefore the supply demand of course is important from the market point of view.

Mukhtar Garadaghi

Thank you. That’s very good.

Matti Lievonen

Yes. Here is Matti. So to add something that of course we have - as Kaisa mentioned, we have a different position, also we need to highlight that the California for example it’s a really big market for us and we could generate these low carbon credits much better than normal soya-based biodiesel. So we see that the U.S. market is very attractive for us.

Mukhtar Garadaghi

Thanks.

Operator

And we will now take our next question from Julian Beer from SEB. Please go ahead. Your line is now open.

Julian Beer

Thank you very much indeed, and good afternoon, everyone. Congratulations on a spending set of results. If I may, start by looking at the balance sheet. You have a fantastic position heading into 2016. You’ve told us approximately what your CapEx plans are going to be for the next few years, and we can see your progressive dividend plans from this EUR 1 starting point. And I think it doesn’t take a lot of differential calculation to come to a conclusion on that basis you could well be free - you could be cash neutral or cash positive on the balance sheet within two, three years. Could you talk a little bit about what your investment plans could be regarding growth to make you sort of that strong balance sheet position?

Matti Lievonen

Here is Matti Lievonen. So thank you for the question. We have said that we have three different area where we are allocate our cash. The one is that we keep that really the leverage rate will be between 25% to 50%. The one thing is that we want to keep our existing production facilities in the good shape and also improving there our additional margin, decreasing the cost side, that’s what we are doing now with for example Porvoo and Naantali investments.

Then we have the new growth area, the first thing is the biopropane what we are now doing the investments. And then we also informed in the Capital Markets Day that we are looking the new growth areas like biochemicals. It’s too early to say that when exactly we start to invest there but that is the area where we see the growth. And of course then this really the political decisions will be more clear in Europe after 2020, also the USA that is long-term things that’s give us the possibilities to invest very rapidly also if needed.

And the third element to our cash is really the dividends, our shareholders. Those three things are the essential. And we are happy to be in the position that we have a strong cash flow. We have a strong balance sheet. It’s much nicer to find out the new opportunities if you have some money in your pocket.

Julian Beer

Okay. But from a planning perspective, it looks like you are going to have that opportunity. When do you think you’re payable to settle down to decide how specific to use them?

Matti Lehmus

As I mentioned, we will look forward when we have things in our hands.

Julian Beer

Okay. Then a quick extra question, if I may. It looks as if heavy fuel oil margins are seeing a lot of momentum since the start of the year. Can you identify anything that specifically which could be driving that move?

Matti Lehmus

Yes, this is Matti Lehmus answering. So indeed I agree with the observation that the fuel oil margins have increased from the beginning of the year. And one possible explanation is simply that given the low absolute price levels, we are now seeing some substitution effects, for example in the power use which take away some time to happen but clearly we are in the absolute price range where fuel oil demand may be supported by new applications in a way come from substitution.

Julian Beer

Okay. Thank you very much indeed.

Operator

[Operator Instructions] And we will now take our next question from Henri Patricot from UBS. Please go ahead. Your line is open.

Henri Patricot

Thank you. Yes, hello everyone. Thank you for presentation. A couple of questions. First one on the Renewable to follow-up on previous questions. Are you able to say how much you expect to send to the U.S. compared to Europe in 2016 for your volumes, and perhaps if you can't answer this question, couple of years ago when the commissions were very good in the U.S., you were able to send roughly 50% of your production to North America. Has there been a change within your contracts or to market that would prevent you from and make as much as of that part in 2016? And the second question on refining. There has been some increase in your light distillate yield in the fourth quarter. I was wondering if that’s a consequence of the [indiscernible] or if it is from your efforts to try to maximize the production of gasoline? Thank you.

Kaisa Hietala

So thank you for the questions. If I take the first one, this is Kaisa speaking. So the question was about what is our expectation regarding the sales allocation between European Union and USA and has there been change since 2013 because we have seen higher rates then. Well, basically we remain our policy to steer our sales allocation based on margin environment.

As said, we have some term commitments but we also have spot volumes to keep the optionality or flexibility on our side. So basically we will continue to look at the margins in different countries in different continents and we will then allocate the sales volumes accordingly. So no change expected to our process. And then remains to be seen how these different markets are and their margin environment are behaving, that will then finalize what is the allocation between, for example European Union and USA. And we will be reporting this on a quarterly basis also in 2016.

Matti Lehmus

And then this is Matti Lehmus. On the question on the light distillate yield in the fourth quarter, indeed it’s correct. When you look at the percentage, the light distillate, it is somewhat higher. This is quite simply a result from the fact that the maintenance was carried on in production line four which is focusing on diesel production, so hence the diesel yield was lower than normally. Perhaps as a general comment into next year as we look into year where we don’t have any major planned shutdown, I think the important thing is that the utilization is high and then in a way the individual yields of the individual products fall off from the normal operation. There is relatively little we can do operationally in terms of changing that yield structure.

Henri Patricot

Okay. Thank you.

Operator

[Operator Instructions] And we will now take our next question from Yulia Veselova from Bank of America. Please go ahead.

Yulia Veselova

Thank you for taking my questions. I’ve got three, if I may on the Renewables. First one is again the Blender’s Tax Credit capture. If I do little calculation here, I think that share was roughly 50-50 in 2013, when at least in the second half of the year there was also visibility on the Blender’s Tax Credit. And I’m just wondering if we should look at that as a reference point or there is any change in the commercial landscape we should take into account? So that’s number one. And also if you could maybe talk about the credits you captured in the low carbon fuel standards and also maybe the expectations around the elections in November ‘16. So that’s one. The second one to Kaisa, if I may. When you guide for the reference renewables margin flat, I’m just curious about your expectations for the SME spreads in particular, because they were quite weak in the fourth quarter. There was a bit of a pickup at the start of the year, but I’m wondering whether you are assuming that in the second half there should be more of the recovery in the SME spreads? And then the final question is on the capacity in the Renewables division. If I backsaw from the utilization that you report that my capacity already for this year comes out above 2.6 million tonnes which you actually guide for only 2017. In the previous quarter you’ve explained this with the inventories. I’m just wondering how on an annual basis, you’ve managed to overachieve the 2.2 stated capacity? Thank you.

Kaisa Hietala

All right. Thank you for the questions. Let me start from the last one, which was about the capacity. So the original design capacity for our units have been - the combined capacity has been two million tonnes. And since then we have been creeping roughly 25% both in Singapore, in Rotterdam, in Porvoo. And that brings us to the current capacity - production capacity which is 2.4 million tonnes.

There are inventory management topics that might be shifting volumes between the quartiles and sometimes even on an annual basis, and of course in those years when we have the turnarounds, we also need to secure our customer commitment so our inventory levels are reflecting those. But the current production capacity is 2.4 million tonnes and we are targeting and getting towards the 2.6 million tonnes, which is our target by 2017.

Then the second last question was around our guidance regarding the margin environment, especially the SME margins. When we say flattish average margin environment to just to remain on the same level, I mean this is - when we look at the whole year as an average, the margins are extremely volatile as you can see from the graphs and it will - we are not giving on a quarterly based forecasts how the margins are going to move.

So what we mean by saying that the - we are expecting the margins to remain roughly on a same level at an average, we unfortunately cannot forecast what kind of a volatility there is going to be between different months and quarters.

Okay. And then finally there was a question regarding USA market sort of like three parts. The first one was about the BTC capture. This is a commercial topic and it’s been negotiated with the customers and it always it depends on the market situation, the sort of value of the product for the customer and so on. We have said that we are capturing a considerable portion of the BTC, and I think it was also visible from 2015 results, but we are not really - unfortunately we’re not able to give any guidance on this and we are not also speculating on this topic but it’s a commercial topic.

Then there was a question regarding the California credits. So California has an own carbon reduction program on top of the federal one. They want to achieve higher carbon reduction in California compared to many other states, and therefore they have a special credit system built for players who are blending their product in California.

And this program is of course has its own target levels for every year and has its own regulation and it’s been governed by the officials in California and we are looking into it. Our product fulfills all the criteria. Our customers are pleased with our product in California. As you have seen, we are working with many well-known brands in California. So this carbon credit system is built by the Californian authorities and it’s implemented by them.

And then there was a final question regarding the elections. Unfortunately no speculation on that. I suppose it’s going to be a very exciting year. And let's see what is the outcome of the election. Thank you.

Yulia Veselova

Thank you. And can I just follow-up on the Californian credits. Would you be able to quantify then for Q4?

Kaisa Hietala

Unfortunately this is also sort of the commercial information. We are not reporting country or state level volumes or RIN generation or credit generation. Unfortunately we are not reporting that.

Yulia Veselova

All right. Thank you.

Operator

There are no further questions in the queue at this time.

Juha-Pekka Kekalainen

Okay. This is Juha-Pekka Kekalainen speaking again. If there are no further questions, we thank you for your attention and participation. Neste’s first quarter results will be published on the April 27. Until then, thank you and goodbye.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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