Neste Oyj

Juha-Pekka Kekalainen - Head of Investor Relations Matti Lievonen - President, Chairman and Chief Executive Officer Jyrki Maki-Kala - Chief Financial Officer Matti Lehmus - Executive Vice President of Oil Products Kaisa Hietala - Executive Vice President of Renewable Products

Mehdi Ennebati - Societe Generale Matt Lofting - Nomura Joshua Stone - Barclays Yulia Veselova - Bank of America

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

I am Juha-Pekka Kekalainen, Head of Neste IR. And with me here today are President and CEO, Matti Lievonen; CFO, Jyrki Maki-Kala; Matti Lehmus, Executive Vice President of Oil Products; and Kaisa Hietala, who is the Executive Vice President of Renewable Products.

We will be referring to the presentation that can be found on our website. As always please pay attention to the disclaimer since we will be making forward-looking statements in this conference call.

With these remarks, I hand over to CEO, Matti Lievonen, to start with the presentation. Matti, please go ahead.

Thank you, Juha-Pekka, and welcome to the second quarter. Firstly I’m very delighted with the second quarter.

I think that it was very good for Neste Oil going through that [part] I could say so. It was dominated very much by the turnaround.

During the second quarter we did in Porvoo the largest turnaround in the history. We had over 5000 workers there, outsiders.

We did investment [works] and all went pretty well. So we’re now full up and running the refinery and then also what was very good was that the very strong refining margin environment and that is what we are really are pleased.

And also if we look at the forward margin now up to the end of the year, so we can see that they are at the level of 2007. So it is really a strong year for refining.

Of course there is a reason for that and for example, low crude price. It is helping the demand, but also it is helping the refineries that our utility costs are lower than with the high crude price environment.

Also the stronger US dollar had a very positive impact on the result even though we have hedging, but it gave us the positive impact. Then [Indiscernible] our guidance remains unchanged.

Of course, we don’t want to start to play with the wording. But if we look at where we are in April when we made a new guidance and we say that we are higher end of last year.

In fact the refining margin has improved very much since the announcement and we look very much positive what is going on with the margin. But if you look a bit deeper that where this high refining margin coming and definitely it will come – it has been coming and it will come now in the gasoline margin.

They are really clearly above the five-year range, and the reason for that is, of course, the global oil demand is up by 1.5 million barrels compared to 2014. And I think that this is some sort of price – how well the demand has improved.

And if you look at the supply demand balance, now in 2015 I haven’t seen this sort of balanced situation in my time and it is my seventh year. So if you look at the new capacity, it is 1.4 million barrel per day and then there is [Indiscernible] 0.7 million barrels per day and the demand growth is 1.5.

So we are in the situation that there is more demand that new capacity [Indiscernible]. It gives confidence that probably refining has positive times.

But this demand curve is really largely coming from gasoline and if we look at for example the USA, demand has reached that level seen in 2007. So it is very positive.

Also the gasoline inventory have decreased. I think that they are at low end of five-year average.

So it is really supporting us. Then we see in the market, the gasoline market likely remain strong in the coming quarters and that is very positive.

So we see that there is a change to the better direction, what we said in April when we made a guidance change. By these words, I will give to Jyrki Maki-Kala, who is our CFO, and then he will go through the second quarter and half year results.

So, good afternoon and early afternoon for all of you. So I will very briefly go through the quarter two and also the half year financials, but if we start with the quarter two financials, it is really we had these three elements affecting our financials, which also our CEO mentioned.

The largest turnaround in the history of Neste in [Porvoo] and very successful start-up when that was over in late quarter two. It had a huge effect on EBITDA and also cash flow I will talk a bit later, the stronger refining margin, 8.7.

It was more than double compared to last year’s second quarter and then finally the strong US dollar, which is getting stronger for us as we go towards the year end due to our hedging activities. And of course in the background you always have to remember [Indiscernible] element, you need to have also the normal day-to-day operations everything in place that you can really secure and guarantee the good profitability what we made in our quarter two.

If you look the figures what is here, I will talk first about the revenues because it looks like a huge drop, which in fact it is, 1.5 billion in sales and next page tells you the break down, how it basically came through. If we start with 4.1 quarter two 2014 and take into account the turnaround effect, 1.1 billion euros and then the change in the crude oil price in the background.

Those two are the negative things, 1.8 billion euros less revenue, and then we have the positive effect coming out of the US dollar, the euro FX rate, and that is how we landed with 0.6 billion euros in the second quarter. So that is how the revenue basically worked in the background.

And then if we go to the next, if you look at these figures little bit closer and in a broad picture if you look at the comparable EBITDA and EBIT, they are pretty close to last year’s figures, despite this 130 million turnaround effect in our operating EBIT. That is in the background.

Renewable was very positive, Oil Retail improved. Oil product has turnaround and they had the strong reference margin in the background.

So that is how their figure at the end of the day came through. I’m very pleased to see the net cash positive what we had in the second quarter and more is coming towards the year end as our [Indiscernible] will be basically solved during quarter 3 and quarter 4.

And our comparable earnings per share, it was at the same level as last year. So that is why we can say that it was a good quarter for us despite the major turnaround what we had in the background.

And then if we look the [Indiscernible] overall between these two quarters from 86 last year to 78, we have tried to illustrate here how big their effect is coming out of the turnaround. The market really helped reference margin.

That is mostly oil product 106 million better impact coming out of the market and then the turnaround effect basically divided into volume and also the additional margin, 130 million in the quarter. And then all the other positive things, FX changes like I mentioned and also little bit better additional margin.

That is basically how we at the end of the day landed into $78 million level, more or less same as last year but many different things happened during the quarter that are totally different compared to last year, but it was a good quarter for us at the end of the day. And then looking little bit about the financial targets, our two targets that we are basically communicating every quarter, our return on average capital employed it is in good level too, 12.5, 15 is our target.

So like you see it has a good trend going forward, and the target remains at the 15% certainly going forward as well. And then to leverage the comfortable area for us is between 25 and 50.

We are at the level of 40 and certainly it will improve as our capital employed goes slightly down and our cash flow will be better during the second quarter – second half of this year. So target setting wise we are doing exactly the right things today.

So that is basically how this quarter two basically at the end of the day came through, but then looking at the first half of the year, that is a little bit kind of story because we basically doubled our comparable EBIT compared to last year’s first half, and basically of course the reasons are the same, strong reference margin, Porvoo turnaround, and then again talking about strong US dollar in the background. But that is basically how oil came through at the end of the day, how we managed to create very solid half year result in the background, and if we start with the figures again the next table, where you will see the drop in our revenues of 2.3 billion euros and again if you split that into three elements.

Here you will see that the change in oil price is the biggest single element in talking about revenues of 1.9 billion and then the same turnaround effect 1.1 and then the currency exchange positive 700 million. That is how we basically landed into 5.3 billion revenues for our first half of the year.

Then if you look a little bit about the figures in the table and you will see here what I mentioned if you look at the comparable operating profit. It is more than double compared to last year.

Extremely positive for oil products despite again the turnaround effect 130 million, Renewable product more than doubled their operating profit and retail very steady improvement in the background. So that is very good.

And then the net cash from operation after all these high Capex fees and on this time around effect, it was positive, and it was moreover at the same level as last year. So very good and the comparable earnings per share last year, 0.30 per share, this year 0.80 per share.

So very strong development in the background. And then finally talking about the bridge between these two years, so here you will see the impact coming out of the marketplace, reference margin, 190 million and then again 130 million with the effect coming out of the turnaround and then the other positive things, the strong US dollar certainly help us – additional margin, meaning what we are doing with our refineries and operation and then the others, that is basically we are doing pretty well with our base oils and also with our operation in our fleet.

So that is how we landed at 293 million comparable operating profit in the first half of this year. So it was a good start for the year.

And now I hand over to our segment heads, and Matti Lehmus from our Oil Products will start.

So this is Matti Lehmus speaking and some of the highlights with the Oil Products were already covered in the earlier part. I think the highlights to be made is that the exceptionally strong refining margin environment was driven especially by the gasoline.

We have seen global gasoline demand grow strongly, in particular in regions like the US and that has resulted in a very strong market environment for gasoline. From an oil product operational perspective the second quarter was, of course, impacted by the major turnaround and the fact that the EBIT impact is 130 million negative reflected by the particularly strong market when we compare it to our schedule, we can say that they were slight delays of roughly one week, but that in itself is still a good outcome that we are now up and running, and looking forward it is important to state also that at the moment the refinery is [Indiscernible] running very well and we have, for example, started up and isomerization unit.

So that investment was also completed during the turnaround. Moving forward, if you look at the bridge again the main highlights are that the reference margin improved our results by 107 million euros, whereas the total impact of the turnaround [Indiscernible] volume and additional margin was 130 million euros.

FX changes had a positive impact of 20 million euros year-on-year and like commented earlier here, we are seeing the impact of the hedging policy, and moving forward we will of course be getting closer to the current market rate. And then finally a comment on the additional margin, the fact is that the strong reference margin of $8.7 per barrel is reflected in the total margin.

The additional margin was at $2.1 per barrel, but again this reflects mainly the turnaround. If you look at other factors impacting the additional margin, there were a lot of positive operational influences.

Just for example a good performance in the base oils business, also product contangos were already unwound in the second quarter. So I’m quite pleased with the $2 per barrel level during the turnaround quarter and it looks good going forward for the [additional market].

One market comment, so the special feature of the second quarter and the current market environment in general is the exceptionally strong gasoline margin. I think also looking forward it is good to state that the fact that we’re in the middle of the driving season, the demand increase is there.

We expect the strong gasoline margin also to continue during the summer period and also looking into next year the fact that supply, growth and demand [Indiscernible] that the fundamentals are quite good for the gasoline market also next year. On the crude side, the REB differential average $1.5 per barrel, which is a very typical level and here the interesting thing to follow is, of course, to what extent the possible growing volumes are that Iran will influence the market.

Tangentially, of course, this should increase the supply of medium to heavy crudes like REB and could widen the differential going forward. These are the comments on the oil product side and now I will hand over to Kaisa Hietala, to go through Renewable Products.

Thank you Matti. So good morning and good afternoon everybody.

I am very pleased to present the Renewable Products Q2 summary. As stated earlier, we’re focusing on our own activity to improve the additional margin of this business.

The market has not been too supportive over the past three months, however, we were very successful in our optimization and were able to increase our comparable operating profit by 22 million euros compared to last year Q2. Our utilization rate was roughly 86%, despite the Porvoo turnaround, which took down also both of our units in Porvoo.

63% of the sales went to Europe and 37% to North America during Q2. And we were also able to increase our use of waste and residue feedstock by 5% ending up to 67% in Q2.

If we then look at the comparable operating profit bridge from Q2 last year to this year, it clearly shows that additional margin improvement coming from our supply and sales optimization as well as from our margin management, improved the result, as well as the strong US dollar. So we were able to increase the operational profit by 22 million euros compared to last year.

Here you can see the picture of our additional margin as well as the reference margin and as stated earlier the reference margin and the market didn’t really help us. It is still on a historically low level.

However, we were able to keep the overall sales margin at the same level as last year this time, and our additional margin was $168 per ton and this was achieved mainly by our oil activity. Let us then look into the two key markets.

Here you can see the European market drivers. We have seen the European biodiesel market picking up quite a bit in the June July time period and this is definitely a healthy sign and we’re looking forward to seeing this trend to continue, and at the same time the vegetable oil and animal fat prices have been following the crude oil price trend and we have also seen that the spread between rapeseed oil and palm oil has been strengthening.

Both of these movements are positive for the business and we will follow it closely how this will continue towards Q3 and Q4. Then if we look at the USA market, the Soy Methyl Ester margins have been remaining a bit disappointing, however, the biomass-based diesel (D4) RIN values have remained strong for this year.

Naturally this is an important element for us and we are welcoming the strong (D4) RIN in USA, and let us see how the Soy Methyl Ester margins level up towards the year end. I would now like to give it back to our CEO, Matti Lievonen, to introduce the Oil Retail performance in Q2.

Thank you, Kaisa. Oil retail’s good performance continued and, of course, this is the summer period.

So it is reflected very much the volume and margin. We could increase the volumes in Baltic countries and also having a pretty good margin in our markets.

We did a 22 million comparable EBIT compared to 20 million a year before and we had a 2 million negative impact from weaker ruble. But all in all, the Oil Retail is performing well and then steadily.

If you look at for example Russia at the moment we don’t see any other things that the exchange rate. This is lowering our result, but the volumes and the [sales] is developing pretty normally there.

But now I’ll turn to current topics and I start with the outlook. And guidance remains unchanged as I mentioned from the beginning.

So we estimate that our 2015 comparable EBIT to remain robust and to be higher than 2014. As I mentioned earlier, we see the situation pretty positive because the forward reference refining margin outlook is stronger than seen in April that I described, and we see that there is more positive than negative to come to Neste.

Then this will be a discussion of surely is Blender’s Tax Credit in renewable side if there is reintroduction of US Blender’s Tax Credit it could have a positive impact on comparable EBIT. That’s not including in our guidance [Indiscernible].

So, from the beginning I said that, there is a very positive things if we look at the refining at the moment, so lower crude price has increased the demand. We could enjoy that then also the gasoline [indiscernible] very strong.

Of course diesel could be stronger but this is also that – it’s not the diesel season, but there is a lot of diesel imports coming from USA, Middle East and Asia, and Europe but our product slate is pretty good because we have diesel, we are very strong also in gasoline and very minimum compared to European refineries and having few [more parts]. But this is the market but it’s also important that we could open the new things with the leading brands and I am very happy that we could say a few things there.

So UBS one of the biggest logistics company in the worldwide their target is to decrease their emission and they have [Indiscernible] contract with us and then they will start using NEXBTL in their fleet operating in the USA. Also Google, they start to use our NEXBTL fuels in personal shuttle buses in Silicon Valley.

Then the other things from California the Mayor of San Francisco came out last week and said that the City of San Francisco will move to renewable diesel to lower the emission and – CO2 emission and tailpipe emissions. That is very good.

And we discussed last time in our Capital Markets Day this bio-based chemicals, now we have a few examples. So total fuels we have made progress on the bio-based chemicals and also the [Indiscernible] is the second one.

And we have discussed with the big brand owners that how we could go for -- go on in the future. Then in the local markets Neste and Kesko.

Kesko is the second biggest retailer here in Finland. We have created a corporation that we will be [Indiscernible] doing that new kind of station in Finland to improve the customer preferences and then customer that they really valued to new type of [station] here in Finland.

Then the other thing is that we have a 15 of -- 15 September Capital Markets Day and we will be very delighted if most of you and all of you could come and then see us. We will give progress made in Neste’s strategy implementation and we could also – and we are updating on the company business and operations.

So, please go our website and register yourself there. Our focus is the same that we have had.

So safety, cash flow, refinery productivity markets and customers, and I hope that despite [Indiscernible] we did cover all the other things on the safety side, we also are moving forward on our target [Indiscernible] the best quarter in [Europe] what is called the refining sector in Europe. With these words I will end and we are happy to take the questions.

I will ask quick questions please. The first one on Porvoo refinery, SO given benefited probably two months and half, turned should we expect higher efficiency than up till now to now meaning positive impact on refinery rate utilization rate and OpEx from Q3 so you could quantify that will be very helpful.

The second question related to your refining margin premium, in your presentation you highlighted that you are strong refinery margins and by that meant you too gather correct now I suspect your refining margin premium tends to be low when strong refining margins is due to get incorrect. So should we still consider from Q3, let's say during Q3 that your margin premium should be at target level of $5 per barrel at this level, and finally one last question regarding the working capital provision.

So in Q1 2015 you had [indiscernible] increase in working capital due to the maintenance preparation and as you wanted to benefit from low crude oil price to be get in but should we consider on this working capital increase to reverse deferral at the end of the year.

First question was on the Porvoo efficiency and the impact of the shut down going forward and I fully agree with your logic that now that we have completed the major shutdown which takes care every five years is of course means that we do expect that this has provide a good basis for high availability, high efficiency also. So it is very difficult that in the first year it has this kind of shut down and positive impact on energy efficiency.

And in that sense yes we do expect that this provides a good basis for a good run at the refineries in terms of utilization of availability and process efficiency. It is perhaps also worth nothing that there are no schedules maintenance this now for example for the remainder of the year at refineries.

The second question was on the additional margin and our outlook I think it's obviously first of all valid that what we have seen in the last year capital market to say that we are targeting $5 per barrel additional margin at least that remains valid. Now with the refinery back on stream we of course expect good solid performance to continue on the additional margin.

There are also things like completion of summarization unit which support the additional margin so we are well on way towards the $5 per barrel target but we are not giving any guidance for the coming quarters. Final comment perhaps on the working capital question, it is so like we commented in the last quarter that we have actually built up contangos in the beginning of the year part of that was in preparation of the shutdown and indeed we have unwound part of the contangos mainly the products for supply our customers.

We do expect to continue unwinding contangos in the second half of the year which are then more typically crude contangos brought up contangos and that will then be visible in the coming quarters.

Thank you very much.

I am just one question left please if I could just ask you about how you see the effective FX evolving through the next few quarters I guess this is sort of the spread of the differential between the effective from the market rate actually moved against a bit further in Q2 compared to Q1. I have seen differential should narrow as we go forward and legacy contracts on the hedging side roll-off et cetera but if you could just give us a sense perhaps if the pace at which you think that could happen and where you see that differential going through the rest of the year.

Thanks.

You made a good question. Thanks for that.

And it's really we have some of the hedge which still what we did in quarter 3 and quarter 4 last year 2014 and those impact will start to disappear here in quarter 3 and quarter 4 this year. So I do expect that this effective rate of gross 1.23 for the first half of this year will go significantly down.

It will not be the market rate 1.10 as we are saying today but it will get positive benefit for us following the closure [indiscernible] according to our hedging policy.

I have couple of questions on the refining business. The first one you mentioned during the presentation that we are seeing very high gasoline margins at the moment but a bit of pressure on diesel margin.

So I was just wondering how much flexibility you have to switch your product yield more towards gasoline rather than diesel and secondly just to fill up on something Matti mentioned on the DI summarization unit, I was wondering, this unit is running at the moment just gets running according to your plans and what the contributions could be in the current environment. Thank you.

Indeed first question was on the gasoline and diesel margin dollar flexibility with respect to yield I think I would state that given that we have over an extended period increased the conversion at our refineries we combine both the high diesel yield and the high gasoline yield at our refinery. So diesel yield have been around 50% and gasoline yield clearly about 30%.

so there is short term limited flexibility we always maximizing both product groups but it's also good to state that this kind of environment where we have a very strong gasoline margin and then average diesel margin also suits us very well. So that is reflected in the strong reference margin.

The question on the high summarization unit, the unit is now up and running. The startup has been very successful and in that sense if you look at the gasoline market and the price differential for example between the North [indiscernible] and the gasoline that is exceptionally strong so it is very good timing for that unit to enter.

We have not quantified the exact impact on the additional margin but it has been an 80 million Euro investment and we have commented that we expect to be back to be good and they are clearly under [indiscernible].

Three questions if I may. The first one is just on the refining earnings if I adjust to the maintenance of 130 million Euros.

The earnings are down quarter and quarter despite an increase in reference margins looking at this perhaps the high production cost through [indiscernible] but are you able to just clarify why that was? My second question on the outlook your outlook on gasoline you are talking about the strong outlook to coming quarters can you just going some of the reasons why and when you say strong is that strong seems last year or how does that compare with second quarter and then my last question on the renewable side looking at the feed stock prices that the palm oil, are you opening up the spread, do you have an outlook for how about going to trend over the next couple of quarters as well.

Thanks.

On the questions on refining. First question was on second quarter versus first quarter and I think it's clearly we have quantified clearly the impact of the maintenance shutdown and perhaps the other one that could be mentioned from the second quarter is that we did have fire at refinery which also resulted in some production impact during that quarter that impact is around 10 million Euros, for the rest the performance in the second quarter was very good.

And I think it's also worth stating that the reference margin environment in the second quarter was of course clearly stronger than in the previous quarters. Commenting on the gasoline and the outlook in particular I think what mainly drives this is the combination of the stronger demand which is clearly linked to the lower crude price and I think there are some numbers that have been published like the fact that in the U.S.

the demand during the driving season has been, as much as 4% to 5% higher year-on-year even globally growth has been around 2% which is clearly a positive development for gasoline and I think obviously possible to forecast exactly the crude price development going forward but it looks very much like the type of local environment continue and also in that sense we do expect the positive development to continue for gasoline demand. So from a gasoline perspective the fundamentals look healthy also for the rest of the driving season and even for next year.

And there was third question regarding the feed stock spread and especially our outlook for the rate residual spread. There has been a tightness in residual market over the past months while at the same time the CPO production and high inventories have been increasing in South East Asia.

Now we are getting closer to the new harvest season in great seed and therefore it remains to be seen how the outlook is developing but if we look at the CPO as such currently there is no strong evidence that production levels would be lower and the inventory levels have been creeping upwards continually and reaching the 2 million tonnes levels. So depending on the [indiscernible] harvest in Europe for the coming months we will definitely then be able to comment on that more in detail.

I have got three if I may. The first one is just on the CapEx guidance for the full year, I am sorry if I missed it but I was just wondering what are your current views compared for 50 million you guided at the start of the year so that’s the first question.

The second one just to confirm you have already refereed to the FX hedging and I put down basically two notes and just want to confirm and the first one that in the second half of the year you will be more exposed to the spot rate and the second one that I have got is that there it won't be the market rate but you will get positive effect. So please confirm if that’s right and then lastly on the renewable margins and if look at just the U.S.

reference margins, it’s the margins for differentials need to soybean oil price what was the key driver why they were relatively subdued this quarter and then if you could just maybe expand a little bit on the healthy size that you mentioned you are seeing in Europe thank you.

So I will take the two of the prior first two questions. Talking about the CapEx guidance now that our maintenance CapEx for our turnaround was slightly higher than we originally thought.

I think we are getting close to the 500 million level with our CapEx for the full year 2015. I think that is a safe level to talk about and then you referred to these FX issue that I also commented little bit earlier our work is basic at every quarter you have roughly 60% hedge and 40% unhedged and certainly we are looking to use for the coming quarters that expecting that dollar stays stronger at the level of 1.20 as an average.

So certainly we will get the totally different kind of second quarter of the first quarter was 1.3 effective rate and then the second quarter market rate is 1.20 and then we have still some hedge seeds coming out of the first and second quarter of this year but it's certain will be much better for us the second half of the year compared to the first half of the year 1.23, so that is basically what I can comment, but we are continuing our hedging according to our policy and that’s basically how all these comes to at the end of the day.

Then there was a question regarding the biofuel margins, biodiesel margins both in USA and Europe. If I first cover the positive develop in Europe, which we have seen over the past weeks, the biodiesel price increasing from $830 per ton all the way up to $900 per ton clearly gives a sign that there has been a positive demand supply balance development in Europe.

Either this is caused by lower production or then which tends to be typical for the biofuel business is that the obligated parties who need to blend the biofuel are now starting to wakeup when they look at the overall annual obligation they have. However, the Europe has been showing -- Europe margins have been showing a good development and definitely we hope that that would remain also in the future.

Then looking at the U.S. margins and there was a question that what could be the reason for the Q2 margin development it has been on a low level despite the fact that for a coupled EPA came out with a proposal to introduce the blending mandates for -- up to 2017 and still we didn’t see a strong reaction in the market.

This is probably a combination of higher production rate as well as some imports. However, which is still a positive element for next and NExBTL and for the biomass based diesel producers is that [indiscernible] got support from the EPA mandate proposal and has remained on a higher level that for example what we saw last year.

Thank you.

Okay.

Yes hi, just to come back for a question on your CapEx side and for full year 2015 because I am not sure you had the question and maybe just to come back on the isomerization unique and the payback time, you said an EUR80 million investment and payback time paid after four years and that five year if I remember well during September, so do you think -- do we -- if we and I think we -- if we consider this quarterly that represents only EUR5 million positive impact that you are do you think you could do much better than this in the current environment? Thank you.

Yes, maybe repeating with regard to [indiscernible] comment your question around the CapEx, what I said it’s really that for 2015 our outlook for the full year CapEx it’s around EUR500 million.

Thank you.

And Matti Lehmus there, I summarization -- yes thank you for the correction already in last autumn we said, we expect the payback on the four years I would just state with this strength in the gasoline market it’s clear that it looks very positive for that we do expect. We maintain that should be clearly under that.

Thank you very much.

Okay this is Juha-Pekka Kekalainen speaking. If there are no further questions, we thank you for your attention and participation.

Neste’s third quarter results will be published on the October 23 October. As mentioned, our Capital Markets Day will be held in London on September 15 and you know very well.

Until then thank you and goodbye.