Neste's (NTOIF) CEO Matti Lievonen on Q2 2017 Results - Earnings Call Transcript

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About: Neste OYJ (NTOIF)
by: SA Transcripts

Neste OYJ (OTCPK:NTOIF) Q2 2017 Earnings Conference Call August 4, 2017 8:00 AM ET

Executives

Juha-Pekka Kekäläinen – Vice President-Investor Relations

Matti Lievonen – Chairman-Executive Board, Chief Executive Officer and President

Jyrki Maki-Kala – Chief Financial Officer

Kaisa Hietala – Executive Vice President-Renewable Products

Panu Kopra – Executive Vice President-Oil Retail Business Area

Matti Lehmus – Executive Vice President-Oil Products

Analysts

Mehdi Ennebati – Societe Generale

Thomas Adolff – Credit Suisse

Giacomo Romeo – Giacomo Romeo

Henri Patricot – UBS

Artem Beletski – SEB

Olof Grenmark – ABG

Joshua Stone – Barclays

Peter Low – Redburn

Georgia Harris – BofA Merrill Lynch

Michael Alsford – Citi

Operator

Good day, and welcome to the Neste Second Quarter 2017 Earnings Report Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Juha-Pekka Kekalainen, Head of Investor Relations. Please go ahead, sir.

Juha-Pekka Kekäläinen

Thank you, and good afternoon, ladies and gentlemen. And welcome to this conference call to discuss Neste’s second quarter and half year results published earlier today. I’m Juha-Pekka Kekalainen. 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 Panu Kopra of Marketing and Services.

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’m pleased to hand over to Matti Lievonen to start with the presentation. Matti, please go ahead.

Matti Lievonen

Thank you, Juha-Pekka. Good afternoon, ladies and gentlemen. Very many quarters, there has been a lot of rumors and that how the business is going in oil products and renewables that all the regulation, everything is open. But I’d like to start today some good signs that, if you take the refining and refining margin they are expected to be healthy. Global product demand has been very strong. Distillates, our global growth is 2.1%, gasoline 1.5% up. And then also, the balance between the supply-demand is healthy in this year and also the next year.

Then if you think about in short term, there is refinery outages in Europe and also the other side and it’s supporting refining margin. And that probably you have seen in the late weeks.

Then renewable products, since President Trump was elected, there has been a turmoil and a lot of discussion that now the whole artifice will be buried and forget and that it was a bad thing. But in fact, EPA and this renewable fuel standard is going strong ahead to biomass-based diesel D4, where we are, this obligation has the 5% growth for this year and the next year, so very positive.

Also, the positive things is extension of California’s cap and trade program to up to 2030. And it’s confirmed the role of low-carbon fuel standard in California. So I think that there are a lot of things that investors, analysts has questioning and putting in a question, but are there any positive signs? And we have been – of course, we cannot say that we know how the regulators are doing. But we have been very confident. And that is the reason also that we have had a very solid performance. It’s continued well.

We post a comparable EBIT €236 million. CFO, Jyrki Maki-Kala will go more detail through. But all in all, if you look at the first quarter, second quarter and the first half, the result what we have posted is extraordinary good if you take account that we had a huge BTC last year, €167 million. So I’m very proud with my team here because – and all the people, those 5,000 people that we have posted so good result. Also, the oil products, even it was bit behind, the consensus posted good €122 million. And then remarkable is the renewable products, record high sales. There was a question after first quarter, can you sell the products? Yes, we can. We can place our products to the good markets because it’s the unique products. And very proud that we could post 674 kilotons.

Then after first quarter, there was a doubt that how is our marketing and service, is that now out of range? But it’s really back on track. We have improved sales and margin here in Finland, but also the Baltics and St. Petersburg.

So all in all, we’re very confident that – how this year has started, the first six months. And there is no reason that we should change our [indiscernible] that this year is not going to be good. It will be a good year.

And that have been also seen in our financial targets with enough capital after taxes, 16.2% and the leverage 19.6. And Jyrki Maki-Kala will go through. So there is also [indiscernible] that it’s going down. But this, we’re happy with the second quarter, happy with the first half of the year and looking very strongly to second half of the year.

Now I hand over to Jyrki Maki-Kala. Jyrki?

Jyrki Maki-Kala

Yes, thanks, Matti. Let’s start to discuss about the quarter two financials first, and then we’ll go also briefly about the first six months of 2017. If you think about the quarter itself, the volume growth, everything in the top-line growth, we posted more than 12% growth in our revenues, so basically boosting the profitability coming out of volumes and prices.

Our comparable operating profit was roughly €46 million below 2016 corresponding quarter. And like Matti mentioned, our annual BTC 2016 was roughly €170 million. So if you just divide that by four, you get the figure that more or less that kind of figure we basically need to compare to 2016 was really the BTC. And still renewable products quarter two €101 million was only €18 million below 2016 corresponding quarter. So really the volume growth, what we’re seeing in renewables and all the other activities around the whole global business has been very good in renewables.

Oil products, basically this €27 million below EBIT, comparable EBIT 2017, is really coming out of these facts that will be discussed later. Really, we have a lower utilization rate effective in Porvoo and really the additional margin got that effect. And that is basically the main reason for the lower profitability, but still a very strong solid quarter for oil products.

The cash flow that we posted in quarter two, it was below 2016. But remember that 2016, our cash flow was extraordinarily high because we got the Blender’s tax credit from 2015. And then quarter-on-quarter also the 2016 Blender’s tax credit can be seen in our cash flow. So overall, we are going to see higher cash flow when we go towards the yearend when we are unwinding the contangos in quarter three and also quarter four.

If we look a bit in comparable EBIT between these two years 2016 and 2017, you see that we have very positive trend in volumes. Basically, renewable product volumes were 40% higher compared to 2016. Of course, we had Rotterdam turnover at that time. But nevertheless, the volumes were really high when looking on quarterly basis. Oil products volumes were more or less the same as 2016.

Reference margins, oil products more or less same as 2016, but renewable products, like we promised that referential margin will be higher 2017 versus 2016. It was 20% higher in one single quarter, so very positive effect.

The currency change is mainly relating to USD, what you have been seeing now changing into a different direction, but that was positive between 2016 and 2017. So the big thing here is really about that is on margin in oil products and renewables. And renewables, basically out of this €103 million, €88 million is coming out of renewable products. And most part of that is about the BPC.

The rest is then about lower hedging, hedging profit coming out of the system, little bit higher production cost overall, et cetera, so nothing to worry about. I think that is – that was one quarter what we are comparing. And remember that 2016 second quarter was extraordinary because we had the Rotterdam turnaround. And the placement of the volumes was totally different compared to 2017. So that’s basically how we get from €282 million to €236 million in EBIT.

If we then move the next one looking at the full six months period of 2017, so basic the same story applies here that we had a very good sales compared to 2016 first half. We had higher reference margin, this time both in oil production and renewables. Looking about the additional margin, again below 2016, mainly the same reasons what I mentioned, BTC, et cetera, I will go a little bit deeper with the bridge analysis here. And again, these strategic investments, what we are going through in Neste, these are all progressing towards a final position later this year. So all these things, what we basically have promised, we have done. And we are following the same logic going towards the yearend.

So first six months, you’ll see the top line. So it’s a 21% growth year-on-year with our revenues, quite a big figure. And it’s not just coming out of the oil price. There’s a lot of other things behind that has been very, very successful with Neste.

If you look the comparable operating profit level, this year €439 million, so it’s very close to the 2016 corresponding. And remember, half a year Blender’s tax credit is out of that figure. So you can see that the first half year for Neste has been very, very strong. And I think that is the main thing looking overall how the profit has been developed.

And again, the same story here with the cash flow compared to last year. We are looking for the rest of the year how the contango unwinding will take place and getting more out of the working capital. And remember this close to €200 million on annual basis was about BTC concerning 2016 in the full year cash flow. So this year, we are following the same logic, but we don’t have real the BTC in our cash flow either 2017 in a bigger amount.

If we look the bridge between this half a year position, it’s basically the same apply here, good volume development. Reference margins are in a better shape. U.S. dollar is basically impacting positively in our figures, slightly higher fixed cost really coming out of the strategic project and also maintenance in some of our refineries. And then everything sum up with this additional margin differential in oil products and renewables. And in this half a year position, it’s mostly relating to renewable products. And more than €80 million out of that is Blender’s tax credit, just mathematically calculated.

But that’s basically how the financial overall came through. And we closed the month of June and the first half of 2017.

And then I hand over to Matti Lehmus to start with the segment reviews.

Matti Lehmus

Thank you, Jyrki, and good afternoon. So this is Matti Lehmus, and I’ll be commenting on the oil products second quarter. I’ll start also with the same statement that was made earlier for the whole company. Second quarter was a good solid quarter for oil products. We came in with an EBIT, comparable EBIT of €122 million. And it’s another strong, if you look at the five previous quarters, another strong quarter, more than €120 million result. And at the same time, of course, we can note that it’s not as strong as the €149 million one year ago second quarter. I’ll comment on those reasons a bit later.

The sales volume continued on a good high level of 3.6 million ton. And I also note that the work we have done to increase our crude oil flexibility continues to pay off. And we actually again had a high share of Urals in our feed of 74%, which clearly went up versus one year ago. And looking at it overall, it means that also our return on net assets stayed on a good level. And we are now at close to 19% over the last 12 months.

Well, then coming to the comparison versus last year and why the result then was €27 million lower than the second quarter, I would like to start with the statement that, from a reference margin perspective, there is no big change. We had almost identical reference margin now coming in at $5.7 per barrel.

So there are two main drivers for the change, and that’s the additional margin and the fixed costs. If I first comment on the additional margin, there is actually three things I would like to highlight versus one year ago.

First of all, the red differential versus Brent has clearly narrowed. And like those of you have followed Neste for longer know, this is also part of our additional margin contribution.

The second driver is that, one year ago, we had very high contribution also from contango profits. We continue to have that also in the second quarter 2017. But as the market structure has been less steep, it’s not as high as one year ago.

And the third driver indeed is that the second quarter 2017, we had more maintenance. We had scheduled unit shutdowns and also some unplanned. And if I compare that to one year ago, where we had a perfect quarter, that explains also the lower additional margin.

On the fixed cost side, I would just comment a couple of items. First of all, we did indeed have more maintenance, which is reflected in the fixed cost. We are also preparing for some future infrastructure investments, which added some planning costs. And also, we’re in the middle of some quite large ICT programs, which is also reflected in the fixed cost in the second quarter 2017. This was exceptionally high in the second quarter 2017 compared to a normal level.

If I then move on to comment a little bit on the markets, I would start first with the products. And comparing the development over the year, we can see that the reference margin was at the same level, but clearly, there has been a trend that the diesel market has been strengthening. And in the second quarter 2017, we actually had a margin of $11.5 per barrel, which is $1 stronger than a year ago.

And this has been driven indeed by solid demand for diesel. The global number is coming in at over 2% growth. And at the same time, we of course had the shutdown periods ongoing both sides the Atlantic and in Asia in the second quarter.

The gasoline was still the strongest part of the barrel, coming in at a good $15 per barrel margin, but actually not quite as strong as a year ago. I think the biggest change actually is that the fuel oil market has appreciated considerably. And the margin is actually double the level than what we saw a year ago. And this is driven by strong demand for fuel oil currently plus the shutdowns.

The second thing that I want to comment from the market is that very important driver, is also the price differential between euros and Brent. And like you can see in the chart, here we have seen a clear market shift during the second quarter. That differential has narrowed. And we are now – we ended the quarter at an average of $1.6 per – sorry, $1.5 per barrel, whereas it was $2.6 a year ago.

There have been a number of drivers here. It’s the OPEC rights of heavy crudes. It is the strong fuel oil crack. And also, there was short maintenance in Primorsk pipeline system. So that is completed at the moment.

If I then complete it, I look at the total refining margin. We again had a quarter of good total refining margin level of 11 – sorry, $10.7 per barrel. And looking into the numbers behind it, perhaps some additional comments on the additional margin, we reached a level of 5.0. And this is in line with the targets we set ourselves earlier for average additional margin level. And we are still on track to reach that $5.5 per barrel after the completion of our strategic investments, which is going to happen in the course of the fourth quarter.

And indeed, like commented earlier, there are always issues in single quarters which can affect the additional margin level, things like contango income, whether there are, for example, winter premium for products or how we time the individual unit maintenance. So there will also in the future continue to be some variation in the quarterly levels.

The Porvoo utilization came in at 92%, which is similar level as in the first quarter and reflects some of the maintenance, like commented earlier. And finally, I note that the production costs came in at $4.3 per barrel. And here, the main change versus a year ago is that the utility costs have been going up because of the higher crude price level.

With these comments, I close the oil products part, and I hand over to Kaisa Hietala to comment on the renewable products.

Kaisa Hietala

Thank you, Matti. Good afternoon, everybody. This is Kaisa speaking. I would like to start the renewable products presentation by highlighting the fantastic sales volumes which we had in Q2. In fact, this is the record high quartile sales for renewables and quite nicely reflecting our new 2.6 million ton annual capacity, when – which equals to roughly 650 kilotons per quartile sales. And now when adding some of the Q1 volumes that were rolled over from Q – at the end of Q1 to Q2, we ended up at 674 kilotons, very, very nice sales volumes.

North America sales bounced back, as expected. The demand has been very healthy. We are now back to our typical sales split between North America and USA. So 32% went to North America. The share of waste and residue feedstock was 81%, roughly 10% higher than what we had in Q1 this year. So that’s in right direction and following our strategy also very well. All these activities led us into a comparable EBIT of €101 million in Q2 and a comparable RONA around 25%.

If we then look at the waterfall, compare quarter to quarter, the sales volume was contributing €46 million more than last year, and the reference margin close to €30 million more. Then we see the large decrease in our additional margin year by year, year-on-year. And majority of that is because of the BTC. And then there are production costs and lower hedging result elements also in this. Fixed costs slightly higher than last year, and this is related to our strategic growth projects. But all in all, I would say that very, very good performance in Q2, taking into consideration that the Blender’s tax credit was not in place.

Let’s then look into the markets. First, we have the European market graphs here. And as you can see, the European biodiesel markets have been relatively stable, some volatility, of course, but relatively stable this year. But comparing to last year second quarter, they have been on a more healthier level. And clearly, this is describing a better sort of a supply-demand balance.

If then looking at the vegetable oil and tallow prices, volatility continues. The palm oil price has been trending down, while at the same time, we have seen tallow prices hiking up, the same way as we saw last year at the same time, some seasonality over there.

Then if we look at the USA margins, which have been going through quite a lot of speculation since the beginning of this year, and the market has been sort of hesitant on which way the regulations will be moving the demand. But I think and as the CEO Lievonen also pointed out very well that all the regulative open issues have now been cleared. And we are expecting the market also react on this. And already in Q2, we started to see the margins, U.S. margins to improve. And we also have now started to see the difference between the D4 and D6 RINs to closing in.

And then finally, let’s look at our comparable sales margin. We were maintaining it roughly on the same level as in Q1, even though the additional margin was lower than in Q1.

Basically, the main impact on the additional margin decrease was, of course, the – if comparing to last year was, of course, the BTC. But then if comparing to January-March this year, we had the slightly lower utilization rate. We fall behind something like 15 kilotons from our 650 kilotons quarterly target.

We also had some small maintenance topics and hiccups. And then there was the lower hedging result compared to what we had in Q1 and as well as in Q2. And we are expecting now to – or aiming to improve the additional margin. And the situation has stabilized since Q2.

So with these words, I would now like to hand over to Panu Kopra to discuss the marketing and services.

Panu Kopra

Thank you, Kaisa. Good afternoon. This is Panu Kopra speaking. First of all, happy to say that marketing and services are back on track. Like said previously, we had a very tough and challenging start for the year. Especially our home market Finland was very, very tight.

Now during the second quartile of the year, market has been improving. And it’s much more healthier now, even though not as successful than the last year. Comparable EBIT was €19 million, which is €4 million less due to mainly lower unit margins. Additionally, there were some one-offs last year included.

About the volumes, gasoline volumes were slightly less. However, these volumes grew from last year. And all in all heavy truck segment continued to grow. Last time I informed about Neste MY Renewable Diesel launch here in Finland. It’s now available in – at 20 stations. And both private and corporate customers have welcomed this new unique product. And the sales results have been promising.

In June, the first city in Finland Porvoo started to use this product in all city fleet. Also, some big transportation companies, like Schenker, have started to use this. And now currently, over 20 trucks of Schenker trucks are running by this fuel. Number of customers also continued to grow, especially in the Baltics, but also in Finland compared to last year. It looks that our activities and tailored marketing campaigns for the small and medium size of companies are working quite well.

Network growth continued to be moderate during second quartile. We have now 200 stations in the Baltics, and we bought two stations in St. Petersburg from the local player. Number of Neste K stations is now 40 in Finland and up creating project proceeds according to expectations and schedule.

Neste mobile payment was launched first for the Neste private card users, and now it is available for all debit and credit card holders in Finland. And we continue also to develop our services for B2B customers. And I believe, next time, I have somewhat more to tell about those services. All in all, quite satisfactory second quartile. Volumes, number of customers, customer satisfaction were all good, but margins still tight.

Thank you. And now handing over to Matti Lievonen.

Matti Lievonen

Thank you. Current topics or outlook for 2017, so we feel that our strategy implementation proceeding well. We focus on customer. As Kaisa and Matti and Panu told, customers are the centric part of our success. And we will continue that.

Also, the crowd [ph] initiative continues. And this capacity creep up to three million tons, we had a new production record in Rotterdam in the last month. So they are also proceeding. And then this bigger capacity growth, we have said that we are studying the Singapore and then the USA possibilities to increase our capacity. It’s proceeding well. And that you can see also in the fixed cost in renewables. So we are taking very seriously.

And I’m sure that you understand that we cannot open the discussion and details before we have agreed everything with authorities, with the suppliers. And of course, that’s important that you are not opening the issues that are still open. But it’s proceeding well.

And you heard about the business leaders. Our CFO, so and myself, and we are really confident that year 2017 will be another successful one for Neste.

Segment outlooks for first the oil products, we said that the refer margin is in 2017 expected to be average, similar to 2016. It’s probably conservative saying, but we wanted to say it. But clearly, if you look at now the forwards, it looks pretty good.

And also, this additional margin target at least 5.5 after this strategic investment completed, and now we are doing that. This STA unit has been started up. It’s running some 80% operating rate. And the second half, we will get 100% operating rate there. And then Naantali conversion will be [indiscernible] in October.

So and it was mentioned already this Production Line 4 decoking in October. And it means that, when we are doing that in October, Production Line 4 has the longest running period since we started up, so also positive thing.

Renewables, we said that reference margin is higher than 2016 and also that we are aiming at higher additional margin. And there is clear reasons, as Kaisa mentioned, that it’s always this allocation, but also the operation was come to feedstock [ph] and operational issues. And we are expecting that our refineries are running very high utilization rates.

Marketing and services, so we are expecting that it will follow the previous year seasonality pattern, and also positive [ph].

Another info is that we have the Capital Markets Day 2017. We will host that in London, 19th September. And the program will be covering an update on Neste’s strategy and the businesses. And more you get the information neste.com/investors.

Then I mention to our personnel that we are probably [indiscernible] company because we have had this focus on safety, cash flow, refinery and customers at least seven years. And seems so that it’s paid off. So we keep it.

So now we are ready for the questions. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Mehdi Ennebati of Societe Generale. Please go ahead.

Mehdi Ennebati

So good afternoon, all, and thanks for taking my questions. And I will ask two questions, please, the first one on the renewable fuels additional margins, which have been pretty low during Q2. I wanted to know if this is more related to the pricing of your next BTL product, meaning that you preferred to maximize the volumes other than the value. And this led to lowering the price of your product, or is it more due to the cost of feedstocks, which have been more expensive than in Q1, as you talked about, for example, the tallow?

So I know that there is – this is a mix, but please can you tell us what’s the main reason of the declining margins? And should we expect the next BTL sales volume to remain that high in the quarters to come? You talked about 650,000 tons per quarter. So should we consider that, in Q3 and Q4, you will be able to sell the same – similar amount of volumes? So this is the first question.

The second question relates to renewable fuel again. So the European Commission might finally decide to authorize Argentina and Indonesia to export [indiscernible] to Europe. If this happens, do you think that the increasing supply of biodiesel in the European market could lower the renewable fuel reference margins, and then your renewable fuel [indiscernible] margins, particularly during the summer season, or do you think that there will be no impact at all for some pricing reasons? Thank you.

Kaisa Hietala

Thank you for the questions. This is Kaisa Hietala speaking. Let’s start with the additional margin. As we have said, it is really a combination over the whole value chain, depending on the feedstock selection and the price and the processing cost how well we are utilizing our refineries, and then eventually what is our sales mix.

I can confirm that we have not been dumping the product in the market. The demand has been very healthy and continues to be good. I mean, renewable diesel seems to now become like an own segment of products, especially when we are selling it at the 100% blend or as a pure product. And clearly, we have been moving away from the bulk sales and the biodiesel-based sales for quite a while. And now it’s really visible. So good demand for renewable product in the market. And the sales volume, we would not have gone this high sales volumes if it would not been well optimized. So I’m not concerned about the product price.

When it comes to the feedstock cost, volatility was pretty high in Q2. And of course, when we have a global sourcing organization, and it is constant optimization, getting the vessels in right places at the right time and so on, so it was not as optimal as it could have been in Q2. But also, there, I think it’s a very robust system we have in place. So I would mainly look into these elements which were already discussed, the Blender’s tax credit, the fact that our utilization was 96% and then the lower hedging result.

There was a question regarding sales volumes going forward. We are really targeting the 2.6 million tons renewable diesel capacity. And that equals roughly to 650 kilotons sales per quarter. Of course, there is the seasonality in this market very typically visible in Q4 and Q1. But the – all in all, I think the current level which we reached in Q2, we keep pushing the volumes in the market. The market is very well accepting them. And the demand has been good. So I’m not expecting big volatility when it comes to sales volumes going forward. Expect the seasonality which we have seen.

Then there was a question regarding the European Union antidumping situation. So just to give a quick background, so the WTO has put a request on the table to European Union to correct their import duties for biodiesel from Argentine and Indonesia. There are duties based on company by company for biodiesel coming from those countries. And now European Union was supposed to take a decision on this at the end of July, but decided to postpone the voting.

There is already quite a lot of palm oil methyl ester and soya bean oil methyl ester in the European market. It’s been processed here in Europe, but the raw material base is exactly the same what the Argentinean and Indonesian producers are doing. In fact, some of the producers are even Indonesian and Argentinean companies, but they operate in Europe.

So in that respect, of course, the change of the duties might impact the supply-demand balances short term. But eventually, I believe that it would just shift the PME and FME production which is taking place currently in Europe shifted it back to the origin countries.

And therefore, it remains to be seen what is the long-term impact on FAME market in Europe. And it is also very good to highlight here that the renewable diesel, our sales, this is becoming such a different category that we are pricing – our pricing on FAME-based sales is relatively margin or already now.

Mehdi Ennebati

Thank you very much.

Operator

Our next question comes from Thomas Adolff from Credit Suisse. Please go ahead.

Thomas Adolff

Good afternoon. Three quick questions, please. Firstly, just on refining in 2018 and the premium of at least $5.5 per barrel you target. Perhaps, if you don’t mind, can you share what sort of a Brent/euro spread do you assume for that?

Secondly, if you had to do a scorecard for the first half, I wondered whether anything has diverged from the budget. And I’m referring to operational performance. Nothing ever goes 100% according to plan. So I would be very interested to hear from you what your key learnings are from the first half.

And finally, just thinking out loud, you’ve talked about this greenfield project on the renewable side [indiscernible] Singapore, and you’ll be able to update the market, excuse me, by the end of the year. So I wonder why bother doing a strategy update in September. Thank you.

Matti Lehmus

Thank you for the questions. This is Matti Lehmus. I’ll start with the refining questions. So your first question was on the rep [ph] differential outlook for 2018. And that’s how I would comment is that, if you look at 2016, the average differential was $2.5 per barrel, which is historically relatively wide. And if you see at the factors which are currently affecting the rep differential, we have some which are probably a bit more permanent in nature, like the cuts of heavy OPEC crude. We also have a strengthening of the fuel oil market. And then we have had some short-term impacts, like the maintenance.

So I don’t have an exact number for next year, but I would – my view would be for this year, for example, that I would expect us for the full year to be rather the $1.5 level than at the $2.5. So that’s – at the moment, it looks like the rep differential is somewhat tightening versus the 2016 numbers that we saw.

Thomas Adolff

So the $1.5…

Matti Lehmus

That doesn’t change our guidance on the additional margin of $5.5. That is something we have taken as a target that we are committed to, knowing that there is some volatility in the market.

Thomas Adolff

So $1.5 will still get you $5.5 premium for 2018, in your view.

Matti Lehmus

That is our target for the average. And I reiterate my comment earlier. There may always be some quarterly variation because of seasonal product premium, because of the timing of the turnarounds, but yes, we maintain that as our average target for the additional margin.

Thomas Adolff

Thank you.

Matti Lehmus

Then the second question was a reflection on our first half operational performance, our scorecard. And I would say I’m quite pleased overall with the first half performance. You could actually, if you look at, for example, the additional margin average first half, we have been coming in at $5.5 already now before the completion of the strategic investments. There are, of course, areas where we can do even better. There have been some unplanned maintenance. And that has been then also reflected in some additional fixed cost. So I think that this is clearly areas where we are continuing to push ourselves to do even better in the future.

Matti Lievonen

And thank you, Thomas. Your question about the growth strategy and I don’t know where you get this that we are not getting any information before end of the year. And this CDM what we are organizing is much more other also that not only the one investments. There’s other strategical issues what we are telling and showing that how we going forward.

And as I mentioned, there is always the things that you need to go through. You cannot be too open before you have finalized those things. And as we are speaking, we always tell the things when there is a proper time.

Thomas Adolff

Perfect. Can I just go back to the second question? I got the scorecard for refining. Perhaps a scorecard on renewables as well?

Kaisa Hietala

All right. So basically, you were asking sort of lessons learned from –

Thomas Adolff

Yes.

Kaisa Hietala

The first half? Okay. I would say that we have been implementing our strategies very well. We have been managing the seasonality when it comes to sales volume. We have been increasing the production and the sales volumes also accordingly. We have been widening our feedstock pool and especially the waste and residues. Of course, utilization is always an area where we can improve. And then the – how do we optimize and how well we get the timings right so that we are not slipping sales volumes from Q2 to Q – Q1 to Q2 and these kind of things, operational things, are definitely – we can always improve. But otherwise, I’m pleased with the progress in – during the first half of the year.

Thomas Adolff

Perfect. Thank you very much.

Operator

Thank you. Our next question comes from Giacomo Romeo of Macquarie. Please go ahead.

Giacomo Romeo

Yes, good afternoon. Thanks for taking my question. Two questions for me. The first one is on additional margin. Kaisa, in the fourth quarter call, you mentioned that you were targeting an additional margin for the renewable fuels business higher than what you achieved in the fourth quarter. And so far, you are tracking below. Just wondering if you still believe that you can achieve a higher level.

The second question is also on renewable fuels. And I can see that your volumes were at record level this quarter. However, if we look at the increase in the level of inventories you recorded last quarter of just over 100 KT, you only reduced this by 40 KT. I was just wondering if market condition limited you for – from selling more or if there is any particular reason why you haven’t fully unwinded this inventory build.

Kaisa Hietala

Very good. Thank you for the questions. This is Kaisa speaking. Going back to the additional margin and the trend which has been there, maybe the Q1 seasonality and all the regulatory uncertainty in USA, especially the EPA freeze and so on, was sort of a bit surprising also for us. And that was impacting our sort of the Q1 also sales allocation. And now in Q2, it is mainly on top of the BTC. It has been the production cost and the hedging result topics. But we are now aiming to change the trend. We – unfortunately, we do not give a guidance on what is sort of the level we are targeting. But clearly, we have identified the roadmap, how to get there. And as said, the situation has been stabilized based on this – so far the production issues and the hedging result for Q3. So we are aiming at increasing the additional margin.

Then the second question was about the volumes and the comparison, the sales volumes and the comparison to our level of inventory. The demand has been good in the market. And this was – this sales volume was optimized. So we were really looking into this level of sales. And our inventory levels are – there is a variation.

It’s not only a seasonal variation, like for example that [indiscernible] season is currently ongoing in the Asia. And therefore, we have to have a bit higher palm refineries because the trade is not that active. But there is also the new activities, like the Sluiskil pretreatment unit, the fact that we are setting up sort of waste and residue collection hubs and going into lower quality crates and so on. It has an impact on our inventories.

Not only on the feedstock, but then also on the sales side, we are then looking at the optimum sales allocation. And some of our cargos might be floating and therefore part of the inventories. And so lots of timing issues there as well. So I would say that the Q2 sales volume was well optimized. And the demand in the market has been good for our product.

Giacomo Romeo

Thank you.

Operator

Our next question comes from Henri Patricot of UBS. Please go ahead.

Henri Patricot

Yes, hello, everyone. Thank you for the presentation. Two question from me on renewable products. Was wondering if you can give us an update on the development of the biopropane unit. And secondly, if you can give us an indication of how much the increase in the sale of this 100% blend of mixed BTL can contribute to the improvement in the additional margin. Thank you.

Kaisa Hietala

All right. Very good. So two questions. Thank you for that. Biopropane unit construction getting close to end. We are now sort of like tying all the pieces together. And our plan is to start up this year and get the product out to the market. So basically, compared to what you saw in the – if you were visiting Rotterdam Refinery in May, we have basically followed the construction program and getting the unit completed, so sort of nothing to add from that side.

And then there was a question regarding the 100% renewable diesel sales increase. In Q2, we reached 22%. And our target for this year is 25%. And unfortunately, we do not give information regarding the additional margin impact. But these are the niche segments and the niche customers. These are the municipalities. These are the Googles and UPSs and so on and definitely an attractive segment for us because, otherwise, we would not be setting increasing targets for this. So I’m very pleased to have these pure renewable diesel sales increasing, not only in Finland, like Panu was discussing, but also elsewhere. And the 22% is according to our plans.

Kaisa Hietala

Okay. Thank you.

Operator

Our next question comes from Artem Beletski of SEB. Please go ahead.

Artem Beletski

Yes, good afternoon, and thank you for taking my questions. Actually, three questions for Kaisa regarding renewables. So first one, starting with tallow market, which has been pretty tight in Q2, is it fair to assume that there is some type of seasonality because it has been also the case a year ago?

Then the second one on North American sales, could you provide some comment whether there has been any mix shift, or is it still the case that California represents a key part of sales, what you’re delivering there? And the last one is regarding European import duty situation. Is it fair to assume that the European prices is – to very limited extent are related to palm oil pricing or palm spreads or so?

Kaisa Hietala

All right. Thank you for the questions. First question was around the seasonality of tallow price, especially like we saw from the cracks, the situation in Europe. That’s also something we have started to observe because this is already a second year in a row when the market seems to get tighter in Q2. That’s why it’s very important for a player like Neste to have a global reach for tallow. And we are buying tallow from different continents and sort of moving between the different tallow markets when needed. So – but seasonality, let’s see. But now for two years in a row, it has happened.

Then there was a question about U.S. sales. Have we changed the mix? Is California still the key market? And a very simple answer, we haven’t really changed the mix. California has great programs on top of the federal programs, where they are pushing for the low-carbon fuels. And it’s a very attractive market for us and interesting to see how other markets in USA and in Canada might be following California because they have been successful in creating the greenhouse gas reductions.

And then the last question was the European Union import duty. And if I got it right, the question was that – is it going to impact since the margin related to palm oil – did I get it right?

Artem Beletski

Yes, so it’s basically, what comes to European prices and renewable diesel, whether you have some exposure in terms of pricing being linked to palm oil spreads.

Kaisa Hietala

Yes, okay. So basically, renewable diesel as a product, it can go beyond the blend wall. It’s a unique niche product. So our value sales efforts over the past years have really paid off. And we are not really pricing that much of our volumes based on the European biodiesel pricing. So in that respect, not really expecting a major impact. But of course, we are following all these regulatory topics pretty actively and seeing how they develop.

Artem Beletski

Okay. Very clear. Thank you very much.

Operator

The next question comes from Olof Grenmark of ABG. Please go ahead.

Olof Grenmark

Yes, good afternoon. It’s also please a clarification on the renewable side and the additional margin. It – the additional margin dropped from $125 in the first quarter to $101 in the second quarter. And if I understand you correctly, you referred to extra costs and negative hedging effect. Would it be possible to split how much was cost and how much was hedging? And also, when you say that the situation has stabilized, what do you refer to? Is it both costs and hedging, or what is it that you refer to then? Thank you.

Kaisa Hietala

Thank you for the question. Unfortunately, we do not give an exact split of our additional margin impacts. And when I was saying that the situation has stabilized, I’m talking about the production wise. We have had a good month behind us in July. And secondly, the volatility in the feedstock market seems to be calming down. And that has been one impact both on the production cost as well as on the hedging side. So that was my sort of explanation for using the word stabilized. So hopefully that…

Olof Grenmark

Thank you.

Kaisa Hietala

That helps.

Olof Grenmark

Thank you.

Operator

The next question comes from Joshua Stone of Barclays. Please go ahead.

Joshua Stone

Hi, good afternoon. I’ve got two questions, please, hopefully quite quick. The first one, just on the hedging and renewables, can you remind us how far ahead you hedge margins in renewables and in what quantity? And then secondly, can you update us on when you expect to start up the pretreatment facility in the Netherlands? Thank you.

Kaisa Hietala

Thank you for the questions. For the hedging, not really detailed information to share with here. Maybe I need to clarify that the – what we are hedging is the margin, not necessarily the absolute feedstock levels and so on. But the hedging result comparison now between the Q1 or between the Q2 and Q2, it wasn’t that considerable. But we felt that it was clearly a single topic which was not visible there in Q1 and in Q2 last year. So it’s good to mention. But we are not disclosing sort of exact numbers on that.

Regarding the second question about our pretreatment – new pretreatment facility in Sluiskil in Netherlands, we are targeting a yearend sort of production. Preparations are ongoing. Maintenance is all – maintenance works are almost there, then starting up, getting the new systems tested and so on, but full contribution towards the end of the year.

Olof Grenmark

Great. Thank you.

Operator

The next question comes from Peter Low of Redburn. Please go ahead.

Peter Low

Hi. Thanks for taking my questions. The first one’s just on the Californian renewable diesel market. So the low-carbon fuel standard credit has actually declined in price this year. How should we interpret that? Does it mean there’s adequate supply of renewable diesel there currently? And what do you expect to happen when the required carbon intensity reduction increases next year?

The second question was just on fixed costs more generally. They came in high year-on-year in both refining and renewables. I guess, particularly given the growth program in renewables, should we assume they remain at this high level going forward, or should we expect that they will normalize over time? Thanks.

Kaisa Hietala

Okay. So let me take the first question regarding California and the LTFS. This is Kaisa speaking. The current LTFS market is clearly reflecting the supply-demand balance. And like our CEO Matti Lievonen was mentioning, one of the debated California regulation, the cap and trade, was decided some time ago. And LTFS, even though being a totally different program from that, was sort of following what happens in – with the cap and trade program. And that might have been sort of putting some uncertainty in the market. But now it’s been cleared.

And LTFS is firmly in place. And it remains to be seen how the trade is developing when we go towards the yearend since the targets, as you said, they are increasing also for next year. So we are following this closely. But now basically, these hurdles should be over. And the LTFS market price should be reflecting a real supply-demand balance in the market.

Jyrki Maki-Kala

Yes, sorry, this is Jyrki Maki-Kala. And you had a question about the fixed cost overall in Neste. And if you looked at quarter one and quarter two, we were slightly above like €10 million per quarter compared to last year’s fixed cost. And we have had more activities now during the first half compared most probably for the second half. You never know about the maintenance. But overall, thinking about activities, what we are running, so the fixed cost will be higher than last year. That’s for sure. The final figures certainly will be then available in February, not to comment anything more about the level where it will land. But it has been higher in first half of 2017.

Peter Low

So to clarify, and you think it will continue to be higher in the second half. Is that right?

Jyrki Maki-Kala

It will most probably because we have these strategic activities going on. But the level, what remains to be seen where we’ll land in quarter three and quarter four.

Peter Low

Sure. That’s great. Thank you.

Operator

The next question comes from Georgia Harris of BofA Merrill Lynch.

Georgia Harris

Hi. Thanks for taking my questions. Just a couple of quick ones. For the refining division, can you clarify please what maintenance you had in Q2 and how much of that was unplanned? And also, are you seeing any indications currently that the Blender’s tax credit might be reinstated later on this year? Thank you.

Matti Lehmus

Okay. Thanks for the question. This is Matti Lehmus [indiscernible]. So if you look at utilization rate, Porvoo has one good indicator. Last year 2016 when we didn’t have basically any planned or unplanned maintenance, it was 97%. Now we came at 92%. And I would say roughly half of that was planned unit maintenance at 5%, and the other half was unplanned, so some hiccups in some units. So that’s roughly the split.

Matti Lehmus

And then there was a question regarding Blender’s tax credit and whether it will be reinstated later this year. Currently, we do not have any detailed information on the BTC decision-making process. Typically, it has been landing, the decision, towards the end of December. And at the moment, unfortunately, there is no information given regarding the timeline. So it’s going to be wait and see, unfortunately.

Georgia Harris

Okay. Thank you.

Operator

Our final question comes from Michael Alsford of Citi. Please go ahead.

Michael Alsford

Thank you for taking my questions. I’ve just got two, please. Just on the Sluiskil on the pretreatment unit, I think it’s difficult I think from the market perspective to get a sense as to how much of a benefit from a feedstock cost you can generate from obviously running that facility. So I don’t know if you could perhaps give us a sense as to if that was running in the quarter, what would be the sort of the cost benefit that you would’ve realized?

And I think, if I remember rightly of Sluiskil, it was about a 250,000-ton unit. I’m just wondering whether there’s plans to expand that to again make the cost benefit even better. That was my first question.

And then just secondly, just on the refining market, clearly, you’ve talked about the short-term margin progression and what’s been driving it. I just wondered if you could give a sense as to what you’re thinking into 2018 in terms of sort of diesel and gasoline market. Thank you.

Kaisa Hietala

Thank you for the question. The first question was regarding the pretreatment unit and whether we could give some kind of an estimate on the cost benefit. Well, basically, the reason why we decided to go for this acquisition is, of course, that we want to expand our feedstock full. And one way to do it is to go – to be able to pretreat lower quality raw materials. We have a pretreatment unit at the refineries. But what we are now developing in Sluiskil is even – is capable to handle even lower quality feedstock.

So the benefit is coming not only from the cost point of view, but also from the point of view that our availability is increasing. And then the price versus availability situation improves. And from that point of view, it’s very difficult to give any exact numbers. And as probably know, we have not been really disclosing detailed information regarding our feedstock cost split or the feedstock mix and so on.

Kaisa Hietala

This is Matti Lehmus on the second question, some reflections on the 2018 refining reference margin outlook. That’s how I would comment is that, if you look at 2016, if you look at the first half of 2017, we have been somewhere in this range around $5 per barrel if you take Neste reference margin as an indicator. And if I look at the general supply-demand trends into next year, I would say demand actually looks at the moment healthy. We expect this year gasoline demand globally to grow 1.5%. Diesel seems to be growing even more, more than 2%. So from the demand side, the outlook is quite encouraging.

At the same time, of course, there is also capacity additions, new investments coming on stream expected. And it in the big picture looks like the demand growth of roughly 1.5 million barrels and the upcoming capacity additions would be relatively balanced. So I think my best view would be that the demand looks quite constructive. And we will have to come back to this closer towards the end of the year. But I don’t see a reason why the dynamic would be dramatically different from 2016 and 2017.

Michael Alsford

Great. Thanks for your help.

Operator

We have a follow-up question from Mehdi Ennebati of Societe Generale. Please go ahead. Your line is open.

Mehdi Ennebati

Thanks very much. Just another question, last question regarding the potential stake sale from the Finish state. Can you please make a quick update? If I remember well, I read on Reuters that the first stake sales will start by 2018. Do you think you will be part of these first sales? Thank you.

Matti Lehmus

Thank you, Mehdi, for your question. Unfortunately, we are not the owner. We don’t know their timetable. So we cannot comment.

Mehdi Ennebati

All right. Thank you.

Operator

Thank you, all. As there are no further questions in the queue, I would like to turn the call back to Juha-Pekka Kekalainen, Head of IR, for any additional closing remarks.

Juha-Pekka Kekäläinen

Thank you, operator. If there are no further questions, we would like to thank you very much for your attention and participation. Our third quarter results will be published on the 26 of October. Until then, have a nice rest of the summer, and goodbye.

Operator

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