Neste OYJ (OTC:NTOIF) Q2 2016 Earnings Conference Call July 28, 2016 8:00 AM ET
Juha-Pekka Kekäläinen - Head of IR
Matti Lievonen - President and CEO
Jyrki Mäki-Kala - CFO
Matti Lehmus - Head of Oil Products
Kaisa Hietala - Head of Renewable Products
Panu Kopra - Head of Oil Retail Business
Mehdi Ennebati - Societe Generale
Josh Stone - Barclays
Thomas Adolff - Credit Suisse
Henri Patricot - UBS
Mukhtar Garadaghi - Citi
Peter Low - Redburn
Elena Malareva - Goldman Sachs
Giacomo Romeo - Macquarie
Thank you and good afternoon, ladies and gentlemen, and welcome to this conference call to discuss Neste's half year financial report and second quarter results published earlier today. I’m Juha-Pekka Kekäläinen, Head of Neste IR and with me here today are President and CEO, Matti Lievonen; CFO, Jyrki Mäki-Kala; and the business area heads, Matti Lehmus, of Oil products; Kaisa Hietala of Renewable products; and Panu Kopra, who is the new head of our Oil Retail business. We will be referring to the presentation that can be found on our website. As always, please pay attention to the disclaimers we will be making forward looking statements in this conference call.
With these remarks, I'm pleased to hand over to CEO, Mr. Matti Lievonen to start with the presentation. Matti, please go ahead.
Thank you, Juha-Pekka. Welcome to this conference call. First of all, very pleased to be here and also to stating that the strong performance continued and very delighted to say that the hard work, what we have done here's to turn this company more and more a cleaner fuel company seems so that it start to bring it through it. Also the dedication, what we have from our personnel to new things and then developing the new things through R&D, through sales, through supply chain, has been really one of the key points that we have been able to increase our performance quarter by quarter, year by year and second quarter was really, really strong. And, of course, if we are looking only to market references, one could think about it that what sort of result Neste could post and luckily we have been able to do very much of our own work to improve our performance and this luck is not coming that we are waiting but we are really pushing the things through. We have been able to really take advantage for the market in different part of the business.
Also very good performance from our refineries, [indiscernible] oil products and also from renewable side. So, all in all, very confident that we are really doing the right things. If you look at the second quarter. So, we post a comparable EBIT EUR282 million. It's much more than what the consensus for and as we have said earlier already, last year that we are not giving the numerical guidance but we are telling that how we see the markets, but probably here we haven't been so good to communicate everything because there was so big difference with the - between the estimates and our result, but we like to do the best that we could keep. Still much better guidance, that we are closer with the analyst. All in all, as I said, a very good operational performance at the refineries and Matti Lehmus and Kaisa Hietala will tell more. Also very pleased that renewable products continue to be really strong on profits. However, there was this Rotterdam refinery turnaround but beside that we did a very good - excellent, excellent job and Kaisa will go through the things there. So, there was a big stock markets, very good operational performance in the other refineries. So, very good. Very solid cash flow and strong balance sheet. And really if you look at the - our final sell targets, return of capital after tax. So, we posted 19.1% rolling 12 months and we had the Finnish conference earlier and I said there's a very seldom process industry company, so we could really bode sort of results and very happy and also that we have been able to quarter by quarter improve this financial measurements. Also the leverage is low end, it's 25.2%. Very happy with that also and we look forward at that figures to improve.
But now, I will hand over to Jyrki Mäki-Kala, our CFO, he will go through the Group financials of quarter two and the half year.
Yes, thank you, Matti. Welcome also on my behalf. So, we are talking about the quarter two and the first half of the year financials. And as you can see from the figures, they were very strong for Neste. If you think about EBITDAs, EBIT, talking about cash flow, talking about earning per share, they all were very strong for us during the first half of this year. And we met the financial targets like our CEO just briefly discussed. If you look at the group financials overall for the second quarter of 2016, we reached in revenues close to EUR3 billion, very clearly an increase compared to last year’s quarter two. Thinking about also there was a big turnaround in Porvoo last year even though we still increased our volumes when thinking about apple-to-apple looking at the figures. Our comparable EBIT improved more than EUR200 million between these two years and it was not just the turnaround in Porvoo, the EUR130 million impact last year that made us post a very, very profitable figure, remember also we had a turnaround in the Rotterdam this year.
So, overall, we improved by our own actions more than EUR100 million compared to last year. And the reference margin in oil products was lower. So, thinking that we had a very excellent operational performance during the second quarter of 2016. If you look at the oil product figures really coming from EUR14 million to EUR149 million. Of course EUR130 million coming out of a turnaround, but remember that there was lower reference margin this year 2016, taking away close to EUR40 million out of their profits. But looking in this respect, they are very, very strong performance in the refineries during the second quarter. Talking about 97% utilization rating Porvoo that is really high thinking about where the refineries are today run in Europe. Looking at renewable products performance and then posting EUR119 million EBIT in a quarter where Rotterdam turnaround took EUR35 million out of their EBIT. So, the performance can only be described as a very strong achievement.
North America, 40% of the volumes when there and thinking about how the return on net assets in that business reads 28%, very great. It's a big figure. Great achievement. [Indiscernible] in margin management, sales allocation, high share of BTC, et cetera, et cetera. All those are the things what we can do as Neste, not market [indiscernible]. Oil retail, very strong performance continued, again better quarter than previous year even though the weak ruble still is taking some profit out of their P&L. And a superb return on net asset, 47%, strong performance. If you think about the group level figures, our IFRS operating profit improved nearly five times compared to last year quarter two. Strong cash flow, EUR346 million in the quarter. That is something telling that we are managing the balance sheet as well and we still have the contango inventories to be released for the second half of this year. Group earnings per share, it was four times higher than previous year reaching EUR0.84 a share but everything comes at the end of the day how the earnings per share looks like.
Most of these things I already described when looking the bridge between these two quarters, EUR200 million improvement, very strongly seen in the additional margin, EUR200 million improvement. The others things are very clear, volumes coming out of the turnaround year 2015, reference margin mostly negative in the oil products, FX change is no big change and US dollar has been very stable compared to last year. Fixed cost slightly higher because of maintenance, maintenance basically what we had there in the first part of the year and otherwise others improving like other segment in the background. So, very solid why we had EUR200 million better profit than last year. If you look then very briefly the first six months of the year how it all turned out to be, I think the big things are listed here in the first page. Refining margins lower compared to first half of 2015 in the oil products, but excellent additional margin what you see here in the background, really coming out of the operation and the sales structure.
Very clearly something we have highlighted where Neste was also focusing on. Last year, we had the big turnaround. Now, we didn't have a success - that kind of impact on our P&L. Renewable really managing the operation, margin management, sales allocation, all the positive things, how it all came at the end of the day with our P&L. Figures of the first half, EUR5 billion turnover, more or less the same as last year. Oil price was slightly lower this year first half compared to last year though the difference is basically coming out of that. Volume development has been positive. Comparable operating profit was EUR457 million and it's not just the Porvoo turnaround that is making the improvement. It's really what we have done inside the company with our own operations. Oil products strong operations, lower reference margin, better additional margin. Renewable more than doubled their profit compared to last year in a quarter where there was a turnaround in Rotterdam, excellent achievement. Oil retail again, 15% improvement compared to first half of 2015. So, all the businesses had a very, very clear improvement, what they have in 2016.
Cash flow, we have talked a lot over the previous years. Now the first half of the year EUR420 million free cash flow, more or less the same what we posted for the full year 2015. And like I mentioned we still have some contango storages in our back pockets to be released or part of that to be released during the second half of the year. Comparable earnings 80% improvement compared to last year reaching already now EUR1.41. The bridge basically gives you the big idea not to go into detail so more, but everything comes with our own operation, how we manage our business, how we are managing the additional margin. My colleagues will tell a little bit more about the additional margin going forward. And that's basically how financial in the first half of the year went, solid performance and looking for the next six months of the year.
And now I turn the message to Matti.
Thank you, Jyrki. And I will start with a segment review for oil products with a comment that indeed we really had a good quarter operationally. And it's great to see that even if the market was clearly weaker than last year at the same time of the year when the refineries run smoothly, it has positive impact everywhere in the supply chain. So, really happy with that operational performance. What it enabled was comparable EBIT of EUR149 million and of course in this case a comparison year on year, it's important to note that we have the shutdown year ago. So, there is no direct comparison from that perspective. But I can say that if you look at some of the highlights in the numbers that we were able to increase our sales volume to 3.7 million tons. This is actually a very good level also compared to previous quarters. The high utilization in the refineries and particular Porvoo at 97% is reflected also in the fact that we were able to increase our sales volume.
Another one that I would like to highlight here is that when the refineries run smoothly also, feedstock optimization is possible and the fact that we were able to run the euro share of 69% was a very positive factor because in our reference margin, there is only 55%. So, it's higher the share the better the additional margin in this kind of environment. So, very good quarter financially. If I then turn to the bridge to make some comments on how the result change year on year, the first comment is of course that the reference margin was clearly weaker, $8.7 per barrels last year, $5.6 this year, and the impact is clearly seen in the waterfall. On the other hand, this is more than compensated by volume growth and additional margin growth and perhaps some of the factors I would like to go through here is three of the main ones. First one is the high utilization rate in Porvoo. This is reflected directly into sales volume, but it is also clearly reflected in the additional margin because in an environment where the refineries run smoothly, feedstock optimization, supply chain optimization, sales mix optimization, it all - it has positive effects everywhere.
The other one that I would like to raise, is that we did have a good quarter on the [base] source. This is also reflected in the additional margin, very strong performance by the team. And the third one worth mentioning is that we did unwind some of our contangos in the second quarter. Thereby also showing some of the result. At the same time, we did actually rebuild contangos also, so we did not yet have a cash flow impact and like Mr. Maki-Kala commented, we expect to unwind these contangos in the third, and in particular, the fourth quarter of 2016. So these factors very much explain the waterfall. Then turning to the market and a couple comments, what happened in the market environment. I think it's quite clear if you look at the product margin first of all, that we started the quarter with quite a strong gasoline market expectations for a good driving season. And I think it's fair to say the demand has been good all quarter long. Where the changes happen is that the supply has been higher than expected, and how this has been visible is that the inventories for gasoline, which typically decrease during the driving season, actually this year have not decreased.
And we are still today at high inventories, up to 10% higher than a year ago. And this was then reflected towards the very end of the quarter in particular in a clear drop in the gasoline margins, and like you have seen I'm sure in the last weeks, also the reference margin has very clearly decreased in July because of the gasoline. One perhaps interesting point to make is that one factor which was driving the high gasoline supply was also a yield shift, we have observed roughly 1.5% yield shift from diesel to gasoline. And the flip side of this is that actual diesel inventory started decreasing the second quarter and from a very high level. And you can note that the diesel margins have actually started recovering during the second quarter. Third comment here would be that the rep differential continued to be wide, minus 2.6 in the second quarter. We continued to see quite a good supply both from Russia, but then also alternative medium heavy crudes from the Middle East and hence wide rep differential has supported our ability to make a good result. In the very last few weeks, in July, you can see that the rep differential has slightly narrowed, driven by quite a strong fuel oil margin. This pretty much summarizes it, perhaps last message then on the total refining margin is that in the end was makes the strategy in oil prices all about is to be able to make a good total refining margin in various market environments. You can see for example that in the second quarter, we actually had a higher total refining margin than a year ago, in spite of a decrease in the reference margin. And the focus going forward now that we are currently in a weaker reference margin environment, is very clearly to continue working on all the things we can do ourselves to support the additional margin and hence have a good overall refining margin also on the second half of the year.
With these words, I hand over to Kaisa Hietala to go through the renewable products.
Thank you, Matti. Good afternoon, good morning, everybody, this is Kaisa Hietala speaking. Let's look into the renewable products, Q2 result. It was an excellent quarter, and the whole renewables team was able to optimize over the value chain in a very, very good way. Our comparable EBIT was EUR119 million and the sales volume split between North America and Europe was roughly 40% to 60%. As you all remember, we had Rotterdam turnaround, the major turnaround that took place all together nine weeks. And the negative impact on EBIT was roughly EUR35 million. Very strong additional margin, and I will look into that a bit more later. So let's get back to that. But I would also like to highlight the share of waste and residues in our feedstock pool, which was as high as 93%. And as our CFO already pointed out, a strong result product, also very good return on net assets, some 28%. But let's look into the waterfall bridge from last year Q2 2016. And as you can see, the impact is mainly coming via volumes and the additional margin.
And let me now spend a little bit time with the volume topic and then let's look into the reference margin elements, and then finally into the additional margin. So as you remember at the beginning of this year, we have been announcing higher capacities at our renewable refineries. It is part of our capacity creep program and that is partly reflecting the fact that even though we had a turnaround quartile in renewables, we were still able to run other refineries at the higher capacities and therefore the volume difference is not as large as one might expect. And especially if we look at the first six months of this year and compare that to last year first six months, we are only 50 kilotons behind last year's volume performance. And this is reflecting the capacity creep additional volumes. So minus EUR25 million coming from the volume side due to the Rotterdam turnaround. Now I will go into the reference margin analysis, and for that, I would like us to look into the next slide which is the European biodiesel margins.
When we had our Q1 result call, the margins were really on the lowest level since January 2014, but since then, we have seen a nice recovery. The Q2 2016 volumes - sorry, European reference margin did not reach as high level as the last year, but still very good improvement. And also if we look at the feedstock price [indiscernible] on this very same page, we can see that the markets are softening especially the weather problems around El Nino, those are now behind us. And this is visible in both the CPO price, which has been coming down nicely during the quartile, but also when looking at the animal fat prices. Both of these are important references for us. So the European reference margin was not really supporting us or helping us if we compare this to last year second quartile. But if we then look into the US reference margin, which is also important for us, there we can see that the margin was better compared to last year Q2. And clearly gave us and to our US sales better reference margin points. And on the right hand side, you can also see the [indiscernible] values were improving almost throughout the whole quartile.
And they are now hitting very close to the $1 per gallon, which we haven't seen too often. In fact, I think the last time when this was seen was in roughly mid-2013. Let's then move to the additional margin analyses. As already said, our additional margin in renewables was very, very strong. And additional margin is containing all our activities throughout the whole value chain. It is about finding the cheapest and the right and the best raw materials for our customers and for our refineries. Then optimizing shipments, timings, hedging, everything very carefully, very high utilization of our refineries and in this time, especially in Singapore and Porvoo. And then finally finding the right pockets where to sell renewable diesel. And in Q2, our teams were able to optimize over the whole value chain very successfully. I don't think I have ever seen such a good match between the raw materials and the end sales, so I'm very, very pleased with that. In our additional margin, we are also recording the Blender's Tax Credit, which is the tax credit in USA and our share remains to be large in that respect. And also in the additional margin, we are recording the carbon credit sales in California, which our product is eligible for. And that market was very strong in Q2. Also, with the good performance of the refineries, we managed to push the production costs lower. And all these elements together gave us this very strong additional margin, I would say, record highs. And we keep working towards the maximum optimization over the value chain also in the future.
So with these words, let me know hand over to Panu Kopra to discuss our retail Q2 performance.
Thank you, Kaisa. Good afternoon, this is Panu Kopra speaking. I'll give you summary of retails result. It is during second quarter EUR1 million better result compared to last year. And after first half of the year, we are EUR6 million ahead of last year EBIT. Unit margins were healthy in all markets except in Estonia where the competition have been last week’s very tough. I'm satisfied that the volumes were growing almost in all market and in all segments. In the Baltics, volumes increased more than 10%, and in Finland, total volume grew more than 3%. In Finland, we were able to grow this volume in B2C segment by 7.6% and 3.5% in truck segment during the first half of the year. In terms of the marketing, the last quarter was active. We launched Futura products in Finland and [indiscernible] in Latvia. We continued that Neste name change project at stations it's obviously increased our fixed cost, which you can see in waterfall as well.
We also continue to expand station network in Finland and Baltics. All in all, we were able to open 10 new stations during spring. In Russia, external environment have been somewhat challenging. But we have kept well number of customers and just slight decrease in gasoline volumes. But on the other hand, small increase in diesel volumes. Non-fuel business have been performing better than planned in rubles. However, big ruble had EUR2 million negative impact to our EBIT. But in spite of that, comparable rolling return on net assets reached almost 47% level, which is indeed excellent result. These were summary of retail in Q2.
Handing over to Matti Lievonen.
Thank you. It was really nice to listening to reports from the different business because all the businesses both did a good result. They did a fantastic job as they have done quarters before. It is always nice to hear, sort of stories. But if we go to current topics and if we look at outlook for 2016, as I mentioned earlier, we have informed any numerical guidance anymore because of this business environment. But the year has continued well, so we have posted a very good result the first six months and we are confident that full-year 2016 will be another successful one for Neste. So no doubt for that. And then if we briefly look the segment outlook oil products, so surely as Matti Lehmus described the second half of 2016 reference margin to be somewhat lower and based on the product inventories, they are very high level at the moment. But the same time, demand is there, so probably we see also the run cuts in European refineries because today's reference margin is not healthy for them. Utilization rate in the oil products we believe that it will be very high utilization rate and we haven't scheduled any major maintenance outages.
Renewable products, we expect that this reference margin will stay about the level of 2015, but we expect that we could really boost additional margin to be strong. And also, utilization rate will be very, very good, high level. And as Kaisa Hietala mentioned, so we have been able to bottleneck the production and very confident that we could still improve our production volume. Oil retail, as mentioned from Panu Kopra's presentation, so we believe that it will follow seasonality pattern, but we are fighting for the good volumes and the new concept for our customers. Then one announcement that we will have at Capital Markets Day 2016, it will be held in London, 14 September. So welcome and in fact, we will cover and update Neste strategy and businesses, we will also elaborate our growth ambition as we started to discuss last time and we was there. But please welcome, I'm sure that it will be very interesting occasion. Then we focus on the same thing that we had focused earlier, but giving few flavor like safety.
So last year second quarter, we were 2.6 total recordable incident frequency and now we are 1.5. Cash flow last year second quarter, EUR14 million, now EUR346 million. Refinery productivity, Porvoo did a 97% utilization rate. [Indiscernible] made a production record, customers and markets as Kaisa Hietala mentioned, so we could really found deep pockets for the good opportunities like in California and also oil products side and oil retail side, we found a new, very good accounts. Retail, they increase their sales in all segments. And then oil products and renewable products they have reorganized their sales and marketing, and the focus is so that we could better share our customer and this customer focus is still going forward much better way than it has been.
That was the Neste quarter two result overview and now we are ready for the questions.
Thank you, gentlemen. [Operator Instructions] We will take the first question from Mehdi Ennebati from Societe Generale. Please go ahead.
Hi, good afternoon, all, and thanks for taking my questions. The first question regarding the renewable fuel division, so you increased your additional margin as you said by nearly $100 per ton in Q1 '16. I wanted to know if this is mainly related to the increasing portion of sales to the U.S. which went up quarter-on-quarter meaning that you got more carbon credit and Blender's Tax Credit, or if this is more related to the cut side and some benefits from higher waste and residue share?
You said, Kaisa that you benefit from more carbon credit, but if I look at the carbon credit from Q1 to Q2, it has been more or less equivalent, so it can't only justify the very strong quarter-on-quarter increase in additional margins. Can you also tell us what should be the proportion of renewable fuel cells to North America during H2? Do we intend to increase it versus Q2, or should it decrease with a startup of Rotterdam.
And I finally have a question on the oil products division and your additional margin of $5.6 during Q2, sorry. I wanted to know at what extent this level is related to the strong in-house sales volumes other than the strong utilization rates. Because if I check the past, I can see that you've already had a very strong utilization rate at Porvoo in Q3 '15 and Q1 '15 without being able to generate such a high premium. So, my question is, should we consider that the in-house sales volume for Q3 and Q4 should be as high as Q2, given there is no materials and given the demand is relatively strong. Thank you.
Thank you for the question. This is Kaisa speaking. Let me start with the additional margin question. And sort of the split of the additional margin, how much was because of the better sales allocation, or is it more related to costs or sort of feedstock base. Well, it's a combination. And, unfortunately, we have not broken it down into individual elements. And I need to highlight that none of these elements can independently create the additional margin because this is a value chain business. A good raw material, which gives us benefit, has to have the right customers who want it and has to have the right regulation who approves it and so on.
So, without giving a detailed breakdown, I would say that all the elements throughout the value chain are very important and we keep optimizing all of them and they build together the strong additional margin.
Then there was a question regarding the carbon credit pricing in California. And yes, indeed, I was referring to last year Q2 when saying that the carbon price has been higher than this year. But already in Q1, we have seen a strong carbon credit prices in USA - sorry, in California. And now we have started to see the prices coming down. And this is indeed a supply demand balance, and not impacted by the other tax credit system that the BTC in the USA. However, we were able to capture a very nice share of the carbon credit price as well during Q2 and that is adding our additional margin on top of the other value chain elements.
Then there was one more question around the sales allocation going forward, and do we see that the current sales allocation between Europe and North America will remain throughout the second half of the year. And indeed, I mean we will continue to optimize against the best margins. I'm not expecting the sales volumes between North America and Europe to change too much. I think we are pretty well there. So, I would say that the current levels are quite a good guidance also for the second half.
And now there was - then there was a question for oil products.
Yes, thank you. This is Matti Lehmus on the additional margin question and oil products. First comment I would make, first of all, yes, $5.6 is a really good additional margin. It's sort of when everything goes really well, what we clearly can reach in this type of market environment. At the same time, you will remember we have given ourselves as a target that in the longer term, once we have completed our investment program that is ongoing, we will be able to reach an over $5 per barrel margin in all different types of market environments.
So, I think to your oil question, it is not only the utilization rate. That is a very important factor. The moment there are hiccups, it immediately makes production costs go up, it makes production - mix optimization difficult, it makes feedstock optimization difficult. So I would say high utilization rates, smooth operations is a really important driver to get to high additional margin. But at the same time, that's not the only explanation why we had such a good second quarter. Indeed, we had a particularly good pesos contribution, we did monetize contangos, we had some contribution from FX hedges, and the rep was wide which also help when we have a high rep share. So it's a number of factors.
Thank you very much.
[Operator Instructions] And we now move to Josh Stone of Barclays. Please go ahead.
Yes, hi guys. Thanks for the presentation. I've got - I have three questions please. First, if I just follow with Kaisa on the sales volumes answer, am I right in saying that you - were you talking about the proportion that won't change or the absolute volumes that won't change being sold into Europe and North America over the rest of the year? And I would have thought sales would increase post maintenance there.
And then secondly on contango, are you able to give any idea of what the earnings impact was during the second quarter? Maybe not an exact number, but maybe is it tens of cents per barrel? And then presumably that will increase over the rest of the year?
And then lastly on the leverage ratio, it's now right at the bottom of your range. Would you consider updating that? Thanks.
Thank you. This is Kaisa speaking. Indeed, good question regarding the sales allocation for the second half. I wasn't clear enough, so thanks for that. So, the North America sales volume, I think we are going to be pretty much within the same ballpark, also during the second half of 2016.
And on the contangos, we haven't disclosed the exact monetary impact, or the exact impact on the additional margin. I think it's clear to say that it's a substantial volume, but this is not the only backdrop factor obviously affecting our additional margin.
And then there was a question about leverage. I think that when we have this Capital Markets Day, we will give new guidances also for what's coming to the - what the financial targets and measures.
Yes, fair enough. Thanks so much.
And we now move to Thomas Adolff from Credit Suisse. Please go ahead.
Hi, thanks for taking my questions, and congratulations. I just wanted to go back to - obviously you don't want to talk about leverage and the potential shareholder distribution that might be associated to it. But I do want to talk about your ROACE which was 19.1%, versus your longer term target of 15%. So, I guess my question is when you set those longer term targets, did you have very different expectations for 2016. Or were your expectation for 2016 more or less in line with what you've delivered so far? And then your expectation longer term was one of a more normalized environment? That's question one.
And the second question is going back to the renewable side. And you did mention in your prepared remarks that you've never seen such a good match between the feedstock and sales optimization. So my question I guess here is what has taken you so long to optimize it? Or what is it you're doing now that you weren't doing last year or last quarter? Thank you.
Thank you. Here is Matti Lievonen. Concerning the ROACE, of course ROACE targets, they are long term targets, and it has been established for first semester oil, 10 years back and the 15%, that's a ROACE. It's an extremely high in the process industry. I don't know any oil company, even the oil majors that they are close to 15%. They're probably half of the 15% than the - but we have been very - doing the things and building the new businesses, improving our existing businesses. That we have been very confident that we could do this.
I remember 2012, '13, Capital Markets Day, when I launched that we will do this 15%. There is very few people in the audience really believe that we can do 15%. Now we have posted that last year, and this year also, the ones rolling is really 19.6%. So, I think that it's a fantastic result. And it's not that we are operating at every year or quarter. And you'll need to remember that this really after tax. So, it's fantastic result and we are very happy with that.
Now, I turn to Kaisa.
Thank you. So there was a question around the feedstock and production and the sales optimization and why we have not been able to reach such a good match before. It is a continuous improvement. And I think it's only depending on one part of the value chain independently. But it is about how well we are able to develop our feedstock pool, our feedstock sourcing, feedstock approvals, and then link to the production facility and asset development, how well we can process those. And then eventually, where do we find the best paying customers for these products.
And we have been working very hard over the past years to get all these parts together. And now in Q2, I would say that our previous investments and the work we have been doing, they were very, very good successes, and the timings were very well optimized. I mean, we are moving some 5 million tons of either feedstock or products globally on an annual basis. And that requires quite a lot of continuous improvement to get it right. So, a good quartile in that respect that our previous activities were really bringing the maximum results.
Should I risk the additional margin you realized going forward? Or do you think that's actually something sustainable, this perfect match quarter and quarter?
We do not give guidance on the additional margin. It varies, and our aim is always to maximize over the whole value chain.
Okay, perfect. Thank you.
Moving now to Henri Patricot with UBS. Please go ahead.
Yes, hello, everyone. Thank you for the presentation. Two questions; first on the renewable product side. I see you mentioned that the U.S. relations were very spotty for you in the second quarter. So I was wondering if you could give us an update on your views, what was on the EPA mandate, if you expect to see some changes with the final mandates by the end of the November.
And then secondly on the Blender's Tax Credit, what do you hear that the likelihood and timing on the renewal for the credit? And then secondly, just since - you've done now the turnaround at Rotterdam, should we expect any improvements in terms of cost efficiency of the plant and the kind of [indiscernible]. Thank you.
Thank you. Let's take the question around regulations first. First of all, the EPA mandate; as you remember, it was late May when the EPA came out with the proposal to introduce renewable fuel volume requirements for 2017 and for 2018, and especially for the biomass-based diesel category where renewable diesel is a part of it. And those mandates we're proposing 5% increase year-on-year basis for both years. And of course, we are welcoming this proposal. It fits very well on the U.S. ambitions towards climate change. So far, we have not received any additional information on that. And EPA has communicated that they will give the final confirmation in November. So, we will be waiting for that.
The second topic around regulations was BTC, and the likelihood, and timing, and so on. And unfortunately, we do not have any additional information on that either. The current tax credit package is ending at the year-end, 2016. And most probably there will be decisions before that. And as always, it has taken until December before the industry has heard the final decisions. But let's remember that the BTC is a part of a large tax extenders package, and therefore we are following how this - how processing of this overall extender's package is progressing in the Congress, but no additional information on the BTC either.
Then, there was a question around Rotterdam turnaround and are we expecting higher efficiencies. Indeed, when we did the maintenance turnaround, we also made investments to improve the refinery, and one of the investments is linked to the capacity creep. So, we are expecting higher production volumes from Rotterdam after this turnaround and that will then have an impact on the unit costs. So, these were my answers.
We're now moving to Mukhtar Garadaghi with Citi. Please go ahead.
Good afternoon and thanks for taking my questions. I’ve two slightly long questions for Kaisa and Matti. So, Kaisa, can you please describe the competitive landscape in renewable diesel in your key markets. Do you see anyone challenging your sort of monopolistic position, and do you think that changes as you - second gen capacity comes on stream in '17 and '18 elsewhere?
And my second question is for Matti, could you please comment on how your product level is normalizing and the sort of inventory dynamic playing out, especially vis-à-vis U.S. competition. Have Europeans made substantial cuts before, especially now when the bottom of the barrel is relatively profitable. Thank you.
Thank you. Let me take the renewables question first. It was about the competitive landscape and, first, I need to comment on the - comment regarding monopolistic stages. I mean, this is a biofuel, but it happens to be very good in quality and gives much more opportunities for our customers. So, we do compete within the biofuel industry, so there is plenty of competitors, but however, we do have quite an advantage that comes with the product qualities.
So, recent additions to the competitive landscape is that the U.S. producer Diamond Green Diesel, which is a joint venture between Valero and Darling, they have announced quite recently to expand their facility in Louisiana by 350 kilotons by 2018. Also, we are following up the E&I’s plans in Europe to convert their refinery in Gela in Sicily into a bio-refinery as well as Total's plans to do the same in their La Mede refinery in France. So, these are the most recent additions to the competitive landscape.
And then, this is Matti Lehmus, on the other question, which was around what would happen, what would need to happen, and how inventory levels could normalize. I think perhaps the comment is look back at 2015, we had a year of really high margin environment, and for example, in Europe, the utilization rates went really high. We have seen levels, still in this first half of all the way to 85%, which is quite exceptional if you take a longer term history. And if I go back in time, for example, two years ago into spring 2014 when was the last time when we actually had some type of similar environment of having high inventories, very low hydroskimming margins in particular.
At that time, for example, there was a clear response of utilization rates going down. So, it would not be surprising to see in this kind of environment, that in particular, European utilization rates would go down. Another comment I would make, the other one to watch apart from run cut is of course, normal shutdown season, we do expect quite an active shutdown season, particularly in North America in anticipation of next year's software spec changes. And then of course, in general, it's good to see how smoothly the operations go, there can always be also unplanned. Thank you.
Thanks for the answer. One small follow-up to Kaisa, when does capacity does come to stream, do you think that will affect your ability to generate the margin premium, do you expect some of that [indiscernible] Thank you.
Thank you. So there was a question regarding the additional capacity that we are expecting to be built, do we see or do we expect the market situation to change. At the same when our competitors are expanding their production, we also see, for example, USA is increasing the blending obligations. Also in Europe, the 2020 10% target, we are still far away from that, if we look at Europe as a whole, we are somewhere probably between 6% to 7%, so the demand is also increasing, and therefore I would say that the new capacity that we are expecting to be there probably finds its home.
And we now move to Peter Low with Redburn. Please go ahead.
Thanks for taking my question. Just another one on the renewables additional margin. Were there any one-offs in that during the quarter, or is it at least kind of theoretically sustainable to keep it at that level going forward?
And then the second on refining, again on the sustainability there, that 97% utilization rate at Porvoo, is that kind of a record quarter or is it feasible for it to stay at that level as we move forward and into 2017? Thank you.
All right. So this is Kaisa speaking, there was a question around the additional margin, whether there were any one-offs or do we see that this is sort of the sustainable level. As said, we are aiming at maximizing the additional margin throughout or over the value chain. It has increased mainly by our own actions, but it can vary. And we are doing - what we are doing on a daily basis, it's really to try to find the best optimum for maximum additional margin. So, we will continue that work, but unfortunately, we do not want to indicate any absolute numbers as a guidance for the additional margin.
And this is Matti Lehmus on the second question, which was on the sustainability of Porvoo's utilization rate. The first comment I would make, we have really systematically worked on reliability improvement for a time already, and looked at very important areas such predicted maintenance for critical equipment, operator skills, learning from incidents. And I'm positive that while this work is ongoing and we are definitely not ready yet, it is already starting to show results and I'm confident about our ability to run with high reliability.
The other comment is, of course, that - of course, there are also planned maintenance, unit maintenance from time to time. One example would be our Production Line 4 and why we do not expect any significant unit maintenance for the remainder of 2016, of course, again, next year, we will need to have some unit shutdown, since that of course has a natural impact.
And the final question comes from Elena Malareva from Goldman Sachs. Please go ahead.
Thank you very much, and congratulations with great results. I have a few questions. The first one, on the Blender's Tax Credit, so you have mentioned previously that you managed to capture high share of the Blender's Tax Credit in the second quarter. Can you give maybe more color on how you managed to achieve that and how do you agree on the Blender's Tax Credit split currently?
Apart from this, on the feedstock renewables, can you give any color on how the feedstock mix changed in the second quarter compared to the previous quarters, so palm oil was just 6%, maybe you can give color on what are the key components and the key underlining kind of components of the current feedstock mix there. And probably the last one, is of the refining segment and the oil product segment, so what are the other good types, apart from euros you used in the second quarter, was it any different from the previous quarters as well?
All right, thank you, thank you for the questions. Let's start with the BTC and how do we agree on sharing the BTC in practice and then how do we manage to keep such a high share of the BTC. Well, this year, when BTC was announced before the year started, it became a normal part of sales negotiations. So every time when we are selling our product to our customers, we are also negotiating that, okay, how should we share the BTC?
And unlike, with the biodiesel producers, who are reporting lower share of BTC, our product quality gives so much advantages to our customers, I mean, no blend limit, no need to have additional installations or tank storage or pipelines or anything, can basically use it as a fossil diesel. So, these are such high value elements to our customers that they also value us as a partner and a supplier and that has been helping us to keep the major share of the BTC.
Then there was another question around the feedstock mix and what are the sort of the components, and unfortunately, I mean this is the split that we are publishing, the share of palm oil, CPO and then the share of waste and residues, and unfortunately, we are not breaking down the detailed components of our feedstock pool.
And the change between Q1 and Q2, it's part of our optimization and all the time, we have been increasing the waste and residues share, but of course, then the impact of the different refineries and their performance and so on, it's also reflected in the mix, but they're extremely high waste and residues share, 93%, yes.
And then there was question on what other crude types we used apart from Russian crude. Quite typical situation, we do typically use some lighter less sour crudes in our mix as part of our normal optimization. Typically, we are using either [indiscernible] country origin crudes, and this was also the situation in Q2.
Thank you very much.
We have received one further question, would you like to take it?
The next question comes from Giacomo Romeo from Macquarie. Please go ahead.
Good afternoon, and congratulation for a great results, just two follow-up questions. First one on the renewable side. And if you could provide some clarity whether you think you will be able to keep this level of percentage of renewables feedstock for the second part of the year? Obviously, you have a target for 2017, you are already very close to that, just wondering if that's the type of percentage that we should see in the second part of the year?
And the second question is on oil products, just was wondering if you could provide a bit of a guidance on what is the expected impact on the working capital side from the reversal of the contango trade so far?
Very good. So the question was about the waste and residue share going forward, that do we see - or what kind of levels do we see during the second half of the year. Well, basically, we are optimizing the feedstock pool based on our sales allocation, based on what our customers value most as a raw material. We do have a technical capability to process 100% waste and residue raw materials, and then against that, we are optimizing, basically, month by month, customer by customer, market by market. So, we do not give a guidance on - numerical guidance on our waste and residue share target, but the target is now very high and we keep optimizing it further.
And then Matti Lehmus on the contango question, exactly like I commented earlier, yes, we do expect to release the working capital in the second half of the year, in particular in the fourth quarter of the year. We haven't given any exact numbers, but it's fair to say it's substantial volume, more than half a million ton.
And there are no further questions in the queue. So, I'd like to turn it back over to your host.
Okay, thank you. This is Juha-Pekka Kekäläinen again. If there are no further questions, we thank you very much for your attention and participation. Neste's third quarter results will be published on the 25th of October. Wishing you a nice rest of the summer season. Thank you, and goodbye.
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