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Edited Transcript of NESTE.HE earnings conference call or presentation 27-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Neste Oyj Earnings Call

Espoo Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Neste Oyj earnings conference call or presentation Thursday, April 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Juha-Pekka Kekäläinen

Neste Oyj - VP of IR

* Jyrki Mikael Maki-Kala

Neste Oyj - CFO and Member of the Executive Board

* Kaisa Hietala

Neste Oyj - EVP of Renewable Products and Member of Executive Board

* Matti Lehmus

Neste Oyj - EVP of Oil Products and Member of the Executive Board

* Matti Lievonen

Neste Oyj - Chairman of Executive Board, CEO and President

* Panu Kopra

Neste Oyj - EVP of Oil Retail Business Area and Member of Executive Board

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Conference Call Participants

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* Elena Malareva

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Georgia Emily Mabel Harris

BofA Merrill Lynch, Research Division - Research Analyst

* Giacomo Romeo

Macquarie Research - Analyst

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Joshua Eliot Dweck Stone

Barclays PLC, Research Division - Analyst

* Mehdi Ennebati

Societe Generale Cross Asset Research - Equity Analyst

* Pasi Väisänen

Nordea Markets, Research Division - Senior Analyst, Utilities and Energy

* Peter Low

Redburn (Europe) Limited, Research Division - Research Analyst

* Peter Testa

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Presentation

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Operator [1]

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Good day, and welcome to today's conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Juha Kekalainen. Please go ahead, sir.

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Juha-Pekka Kekäläinen, Neste Oyj - VP of IR [2]

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Thank you, and very good afternoon, ladies and gentlemen. Welcome to this conference call to discuss Neste's first quarter results published earlier today. I'm Juha-Pekka Kekalainen, head of Neste's IR. And with me here today are President and CEO, Matti Lievonen; CFO Jyrki Maki-Kala; and the business area heads, Matti Lehmus of Oil Products; Kaisa Hietala of Renewable Products; and 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.

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Matti Lievonen, Neste Oyj - Chairman of Executive Board, CEO and President [3]

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Thank you, Juha-Pekka. Welcome to this teleconference.

I'm very pleased to discuss about first quarter result because I feel that there is a lot of things that are very positive for Neste. And if we start, look at the business environment, so global oil products demand is increasing and that is third year that it's increasing. And what is remarkable is now that the distillates seems to be that it will increase 2.5% globally and gasoline 1%. So it's a good sign for the demand and especially the middle distillates.

Then if you look at the reference margins. So if you look at the forecast, so we feel that the reference margin will be around USD 5 per barrel, so it's very good. And then the [counting] top of that what is from margins. So the global environment around oil products looks good for us in our respective.

And then if you look at the renewables, so this change of precedents also helped keep the renewables volume (inaudible). And meanwhile and then there was of course the big case on what comes to demand and RIN values in the USA. But the EPA made a decision that this [simple] volume (inaudible) if in place in 2017 and 2018 was coming to advanced biofuels and there is a growth of 5% to 6% each year, so very positive.

There are other positive things what's happening around us, is Sweden and their policy proposal that is underlying really the CO2 reduction. And it's very much based on renewable diesel because the biggest part of the emissions comes from the heavy duty transportation.

And if you look at really local and it's the Finland, so heavy traffic increasing. Every month has increased and then there is good growth now in Finland what's coming to heavy traffic.

But all in all, very pleased. We had a good start of the year. But we knew it when we made our comments for this year. When we said this will be another good year, we knew it that it will be. And this first quarter is showing that it is really the case. If you take our comparable EBIT it's EUR 204 million, it's 17% higher than the last year.

Very happy that Oil Products, they put the really strong result in the first quarter, mainly coming from volumes and the additional margin. But Matti Lehmus will tell more.

And then the thing that was put on the table, the highly (inaudible) products, because there is no Blender's Tax Credit, how you could survive. And for us it's not sure what game it's really the game what we are playing. So we are always looking the best possible markets and really optimizing our sales. And once again we could post the same result than last year and without Blender's Tax Credit. And that's the remarkable achievement.

Then, Marketing and Service we saw that was a disappointment also for us because it has been a very good year by -- year-on-year, but this time there was a really increased competition in Finland and in Russia. But Panu Kopra will tell more, but we have always back to taking actions that we are coming back to the normal route.

All in all, we are very, very happy what's happening in the first quarter. And also, if you look at our balance sheet it's very strong. If you look our financial targets, return of capital after tax, so 16.6%. And the leverage is 15.3%. So we have a good balance sheet to really look at our growth and then also the being a good dividend payer also in the future.

So by this word I hand over to our CFO, who will go through the group financials.

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Jyrki Mikael Maki-Kala, Neste Oyj - CFO and Member of the Executive Board [4]

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Okay. Okay, so welcome also on my behalf. So I will go through a few slides concerning the group-level financials and also some of the (inaudible) I believe are in the presentation. But it's just like our CEO said, overall the first quarter delivered a good and solid start for the year 2017.

And it's really, if you look just on a broad level at first about our 3 businesses, it's really the Oil Products, they really made an excellent performance in quarter 1. If you looked at all of our refining (inaudible) barrels, it was really a good achievement. Refineries run with good utilization level. So this kind of outcome what they delivered, it is really based on the doings, what we are doing, here in our refineries and also with our supply chain as well.

And if you look at Renewables, like Matti Lievonen mentioned, the comparable EBIT out of that business for the first quarter was exactly the same as was 2016 first quarter. And really think about without the BTC that was there in 2016. So you see that the thing what we mentioned in mid February when we came out with our 2016 figures is that we continue to optimize our volumes with Renewables and find the best margins and best market for our products. Well, that is exactly what we did and what we promised to do in February.

And then Marketing and Services used to be called Retail. So they have a little bit rocky start with the new name, but I think Panu Kopra will tell us a bit more about where we are with that one.

So if we turn to the page where we have the group financials, just a few comments out of this page. If you look to revenue at the top, we made more than EUR 3 billion sales for the first quarter. And it's really -- EUR 600,000 is coming off higher oil price. If you look at the quarter 1 2016 the oil price at the end of the quarter it was 38 and now it was 52 close, so the 36% higher oil price. So undoubtedly goes into the sales price. So that's basically the major thing in our turnover in our revenues.

Of course some volume development positive also took place with Oil Production and also in Renewables. So it's a combination of many things, but the oil price is a leading factor with our revenues.

The Oil Products, what I mentioned with their excellent start for the year, they improved their profitability 46% compared to 2016 first quarter. And it's really coming out of what took place with our operations. I'll talk a little bit more about the businesses with the [EBIT analysis].

I'll just mention this cash flow before financing activities. It was minus EUR 25 million. But we continue building sizeable contango inventories also in quarter 1. And those profits and also the change in working capital will take place later this year, mainly in quarter 3 and quarter 4. So there is some good to come for our free cash flow when we are entering the second half of 2017.

If you then move to this [EBIT] analysis, first like overall what the business looks like. Like I mentioned, the Oil Products had a very nice improvement, EUR 40 million compared to 2016 first quarter. And it's really coming part of this strong total refining margin. But it's really about the additional margin that was about USD 6 per barrel that really delivered the better results from the 2016.

But it's also -- if you look at the utilization rates both in Porvoo but also in Naantali, they were better than 2016. So the operational things were really strong in 2017.

Renewable, like I mentioned, they continued to deliver same kind of comparable EBIT and then 2016 first quarter. And we didn't have the BTC in place, like I mentioned earlier. So basically we delivered more to Europe versus North America compared to 2016. So it is looking like a (inaudible) story. We have markets also in Europe that are very favorable and that is exactly what we managed to capture for 2017.

And if you look also the comparable sales margin, that is pretty important for Neste. The quarter 1 comparable sales margin per ton was higher than quarter 4 2016 if you exclude the Blender's Tax Credit. So it's a positive story that we have the markets that really supports the story and the volumes what we are delivering to the marketplace.

And then Marketing and Services, this EUR 11 million lower profitability, it's really coming out of the lower margins in Finland and in Northwest Russia. But we have these things in place going forward with internal actions, et cetera, how things are getting better. Volume-wise, everything is okay. The volumes were higher compared to first quarter 2016.

But all in all, if you think all these actions and [leave this] behind, you go to the next slide, when this same profit is also split into these, let's say, items what we are basically commenting in our reports. The volumes mainly coming out of OP and RP, OP 5%-plus and Renewable Products 2%-plus. So it's really good, but there was also some shipments, especially in Renewable Products, that just leaked into the first days of April. So we are getting those in quarter 2. So it's not, like, lost volume; it's just a matter how the unloading takes place.

Reference margin, very strong in Renewables, up 21% year-on-year. And basically Oil Products more or less the same at the level of USD 5 per barrel.

And then the additional margin, I think that is something that it's very interesting to comment in that sense. Oil Products had a very strong additional margin, generating plus EUR 20 million more additional margin. But here you'll see the impact also of the BTC with the Renewable Products, because it was minus EUR 35 million additional margin in Renewables. Part of that is BTC. There are other items as well. But the overall you'll see that the picture is different in additional margin versus the reference margin what takes place in the marketplace.

FX change is very clearly US dollar impact, a positive things. Fixed costs were slightly higher, mainly coming out of fixed costs relating to marketing and headcount, et cetera, what we have in our businesses. And, finally, the Others, it's more about depreciation and also how are joint ventures are performing [in Nynas] and also Neste Jacobs.

So that's how we're basically landing from EUR 175 million to EUR 204 million in comparable EBIT. So 17% improvement year-on-year first quarter performance. So good and solid start for the year.

Now I hand over to Oil Products and Matti Lehmus to continue.

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Matti Lehmus, Neste Oyj - EVP of Oil Products and Member of the Executive Board [5]

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Thank you.

And I'll start with the comment that I'm really pleased with the start of the year. It was a good start of the year for oil products and we came out with good numbers, strong financial performance.

If I look at it from the perspective that we improved our EBIT from EUR 86 million to EUR 126 million I think it's important to note immediately that this did not come from the market. The market continued to be good, USD 4.9 per barrel, exactly like last year at this time of the year. But it's really the operational performance where we could actually then create the improvement.

And I'll just take 2 highlight stats on this slide already from the operational performance. I think the fact that we were able to sell 5% more is of course directly a result from higher utilization rates, 91% in Porvoo, more than 70% in Naantali.

But I think very important also what is mentioned here, the systematic work we have done to increase our crude oil flexibility paid off and we were able to use 73% of Urals, which is clearly higher than a year ago, 64% at the same time. And this results from, of course, optimization, but also the capability that we have with, for example, better sulfur removal capabilities.

Finally, we have continued our focus on working capital management. And I'll pick out the RONA number of 19.8% return on net assets for the last 12 months, so that continues to be a focus.

Then a quick look at the waterfall and perhaps making this very simple statement, that it is quite easy to see where the profit improvement came from -- 3 elements. It was volumes, 5% more sales, meaning EUR 9 million better profitability. It was EUR 20 million from additional margin. And I'll comment that a bit more in detail a bit later. And then also worth noting that the FX continued to develop favorably, so EUR 7 million from FX impacts versus a year ago.

It's also important to note those items which are not on the list. So we did continue to work on the fixed costs. We were able to [smartly] decrease versus a year ago. And also the reference margin, like we said earlier, did not have any significant impact year-on-year.

Then a couple of comments on the market. And I would say that I'll start with a comment that reference margin level of 4.9% for me is a healthy, solid market, very much in line with the average that we had last year.

If you look into the product side it's worth noting a couple of highlights. So first of all, diesel clearly has improved versus a year ago. In the first quarter we ended up having a diesel margin of USD 11.4 per barrel, which is clearly stronger than a year ago. The fuel oil would be the other part of the barrel, which has clearly improved versus a year ago.

And behind this trend I would say I would highlight a couple of things which impact the oil market. Global demand has been on a quite healthy level, more than 2% growth for distillates, 1.5% growth for gasoline.

If I look at the inventories I think it's important to note that after long period of builds we finally started actually decreasing inventory levels, especially in the North American market. And this is true for both gasoline and diesel. Worth noting, we are still on a relative high level but clearly different but clearly the trend has reversed.

If I then turn to the crude side, a couple of comments on the Urals versus Brent differential. So the first quarter ended up with a differential of minus 2.1. And while being slightly more narrow than a year ago, where it was 2.7, I would still say that the same fundamental drivers [who are keeping] this differential wide are still there.

So we continue to have a solid export level of REB out of the Baltic Sea. We continue to have also Middle Eastern imports into the Baltic Sea when it comes to medium, heavy grades. So we clearly see that the drivers for a wide Urals differential continue to be there. And at the same time it's worth noting there have been cuts by OPEC and also meaning that it seems natural that it's slightly narrower than a year ago.

And finally, some comments on the refining margin itself. So, like Mr. Maki-Kala commented, my first observation is we were again able to come in with a strong total refining margin, clearly above USD 10 per barrel. And I think this is something very important for the Oil Products business and Neste, that while the reference margin may be volatile, we are doing good actions, I would say, to always come out with an overall strong total refining margin.

And here of course the additional margin of USD 6.1 per barrel in the first quarter is a very good number. And I would highlight a couple of things which enabled us to come with this strong performance.

The first one is the high Urals share I mentioned earlier, 73% at the (inaudible) Urals differential. The second one is the high utilization, and especially the fact that we were able to increase overall utilization was important. But actually there's a third item I would also highlight, that we did have good sales and supply performance. And we were, for example, able to utilize seasonal opportunities to really optimize around winter qualities. We were also able to get the timing of our feedstock supplies very well. So this USD 6.1 is of course a very good level that I'm happy with.

Final comment here would be that when the refineries run relatively well, also the production costs can be kept well in check. So this level of USD 3.7 per barrel is quite well in line with what we have been targeting as a stable production cost level.

I'll finalize this presentation by mentioning that we are in a very interesting period of starting up the SDA unit. We expect that to be up and running during the first half of the year. So we're looking forward to the second quarter.

With these comments, I'll hand over to Kaisa Hietala to talk about the Renewable Products.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [6]

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Thank you, Matti. Good afternoon also on my behalf.

The Q1 result in Renewable Products is clearly reflecting the seasonality of this business. Especially now when we left behind the BTC year 2016, the Q1 sales volume and the sort of the demand supply, it was like last year Q1 and therefore showing that the Q1 tends to be the slow quartile for us.

If you look at the key performance indicators, one could easily say that the EBIT, sales volume, share of waste and residues, that this was a copy of last year. But then, looking at the market parameters behind this, this was very different compared to last year.

First of all, we reduced our sales to North America because they were attractive markets in Europe as well as the European reference margin was higher. And this enabled us to optimize the overall comparable EBIT to be on the same level as last year despite the fact that the US market was basically pretty oversupplied due to the maximized blending in Q4 because the BTC was ending. And then there was the administrative freeze, which I think eventually then hit the market quite strongly in the middle of the quartile.

If we look at the waterfall between the quartiles, 2016 and 2017, it is all about optimizing the reference, or maximizing the reference margin and then being able to compensate the loss in additional margin which was due to the US market situation. Otherwise, our volumes were slightly higher and, as our CEO already mentioned, there were timing issues. And then there was the ForEx exchange and the fixed cost impacts included in this.

But I would like us to look into the margin environment because this was definitely, this was the key for our Q1 performance. Here you see the European margin graphs. And as you can see, the European margin during the Q1 in 2017 was clearly better than what it was last year, and it was also pretty stable. I mean, it was above USD 200 per ton, a small fluctuation as always.

And then at the same time, if you look at the feedstock pricings which are here on the right-hand side, the vegetable oil prices, you can note that we started the quartile with clearly higher, roughly USD 50 per ton higher margin or price environment, which was reflecting the tightness of the vegetable complex. And then the prices have been easing up a little bit since then.

So this was the sort of the margin environment in Europe. And if we then compare this to the margin environment in USA, which you can see now on this slide, here you can see the massive volatility. And this was really hitting the markets around the mid Q1 and basically slowing down the demand.

And this is also visible in the RIN price development, which only started to recover at the end of the quartile when the freeze was over and the EPA was basically announcing that the renewable mandates for 2017 and '18 are in place and no changes were done. So the implementation continued and that meant plus 5% more demand this year compared to last year, and then another plus 5% going forward to 2018.

And this led us to optimize between the markets such a way that our share of sales to Europe was 72%, while our share of sales to North America was 18%.

And then if we look at the comparable sales margins, how it was divided between the reference margin and the additional margin, here you can see that by optimizing the sales allocation between the markets we were pushing up the reference margin compared to Q1 2016, and then the additional margin was clearly less than in Q1 because the BTC and the low demand season in USA.

But all in all, we were able to compensate the disappearance of the BTC. And the optimization worked well. And the timing issues for the sales volume, those will be then visible in Q2. And so far what we have seen regarding the US market after the freeze, the sales have been picking up very well.

So with these comments regarding Renewable Products, I will now hand over to Panu Kopra to discuss the Marketing and Services.

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Panu Kopra, Neste Oyj - EVP of Oil Retail Business Area and Member of Executive Board [7]

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Hello to everyone.

Let's have a look of this. (inaudible) indeed unsatisfactory rates started for the year. Comparable EBIT dropped from EUR 22 million to EUR 11 million. We faced very tough competition both in Finland and in Northwest Russia, which cut our net unit margins significantly. In addition to that, there were some one-offs in year 2016. For us this year our fixed costs were slightly higher than last year. And when we put all these elements together, we landed to this disappointing result.

However, I am pleased that the sales volumes did not decrease, and we were able to keep the number of customers and customer transactions and there is even a few [thousand] increase in the sales of diesel volumes, which is mainly from the heavy truck segment and is the outcome of active good sales work.

Like I mentioned previously, we launched in January new diesel product in Finland. It's called Neste (inaudible) diesel, refined without any drop of fossil crude oil. Instead of that the feedstock is waste and residues. We started with sales at 6 stations and now it is available in 15 stations around southern part of Finland. And roughly 15,000 to 20,000 of diesel car users, customers of those stations are using this product. So we are satisfied with the product launch and looking new ways to increase the sales of this unique product.

We had active marketing conference and focused for new customer acquisitions. We gained roughly 8,000 new customers in Q1. In Baltics it was signed new contracts with several big trucking companies and truck plus service (inaudible) was installed to more than 400 trucks during Q1.

Mobile payment was on their piloting in Finland and perhaps next time I can give more details about the launching of mobile service in Finland.

We opened 5 new stations and continued renewing program of existing ones to (inaudible). Currently there are almost 30 new Neste K stations in Finland.

If you look back 5 years period and compare Q1 to Q2, always Q2 have been better than the Q1 and, again, Q3 better than the Q2. So based on our historical performance, our internal actions relate to boosting sales and sales margin, focus for the working with the customers and acquiring new customers, cut of the costs, we expect final sales performance to improve.

Thank you and with these words, I hand over to Matti Lievonen.

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Matti Lievonen, Neste Oyj - Chairman of Executive Board, CEO and President [8]

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Thank you, Panu.

Let's discuss about the outlook 2017 now. Pretty clear that strategy implementation proceeding well, and that's really how it's doing.

So we had the Capital Markets Day and then there be also launch the strategy, our initiatives. And there was the (inaudible) biochemicals. And I'm very happy to say that first time we have done during the Q1 a industrial-scale trial with the bioplastics. And it went really well. And the next step is at the end of the year. Our aim is to the bigger industrial scale bioplastic production.

Then the biosolvents, we have found a lot of new customers and then also the application where we could use, or the customer could use our biochemicals.

Also, the strategy implementation, the focus was very much on customers and [across] initiatives, and those will continue. But the customers (inaudible) happening in the Marketing and Services side.

But I'm really pleased at how we have been able to increase 100% the Renewable diesel space. It has increased already -- quarter 1 it was 18%. Our target's 25%. The feedback from the customers are excellent globally, where we are serving.

Then the other thing is that very pleased at how we have taken this key account management in the company. So both Oil Products, Renewable Products, and also the Marketing and Services are doing well. And we are measuring really all those things by Net Promoter Scorecard. And very happy that we have a positive trend. And I don't know how many companies in our sector really are focused so much customers. But we see that this is the only way to the profitable and [swapping] within the different markets when you have a strong customer commitment.

Then what's coming, this investment initiatives. So first priority is of course that we will take this 3 million out of existing Renewable units. It's a good way under the [call] and it's really -- it means that we are increasing Renewable Product capacity 5% per year up to 2020.

Then this bigger investments in what we announced, at either Singapore or USA. It's a investment that we are doing for 20, 25 years. So you never do ad hoc decision when you are speaking about so long investments. So it's always a really -- it needs to start from the profitability. We are looking to markets, how the markets is developing. What is the feedstock availability? How it's fit in our Renewable system in this facility? Political framework -- but there is not 1 single thing that it's dictate that, yes, we are doing an investment in that place or in that place.

So it's really under really thoroughly thinking, and we are doing very much on the work. And we have a group that has been working on this issue. But I'd like to say that we are not taking any additional pressure from outside, because this is our decision. We are doing that. We define ourselves and that it's really fit in our strategy. So please be patient and we will inform when we have something to tell you.

But all in all, so we are very confident, I repeat, very confident that the year 2017 will be another successful one for Neste.

If you look, the segment outlooks are -- it has mentioned several times that we expect that the reference margin will be level from USD 4.9 to USD 5 as it was last year. And this additional margin over USD 5.5 when we have done all those (inaudible) investment. Of course you might ask the question, "But you are already USD 6." But the USD 6 there is the seasonality that is on margin. But after this investment we will be quarter-by-quarter over USD 5.5.

Then the utilization rate in our Oil Products will be high utilization rate. PL 4 we have a decoking in autumn. That's what we need to do once per year. Hopefully it will be then extended when we have the SDA unit in the full run. And then we have Naantali units scheduled for the maintenance, 2-month turnaround when we are moving this, more like a unit for using a feedstock to power our refinery.

Renewable Products we expect that the reference margin is higher than 2016, and utilization rates expected to stay high.

And I think that Panu Kopra told very precisely what we are going to do that Marketing and Service will deliver a good result also this year.

Then the one that we're advising that we will have our Capital Markets Day 19 September in London. So welcome; we will send invitation soon.

And last, we are a very dull company, so we haven't changed our focus. So we focus still safety and the safety figures has improved. When we started this year cash flow was explained that we are utilizing our storage facilities and we have built up a contangos, but cash flow will be very strong also this year. Refinery productivity, both in the RP and OP side, we see the refineries doing well, and better than the last year. Markets and customers, I already talked.

So those are our focus areas. And we feel that really doing those, implementing our strategy and keep our eyes on the ball so we are posting good results also for this year.

Thank you, and now we are ready for the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mehdi Ennebati from Societe Generale.

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Mehdi Ennebati, Societe Generale Cross Asset Research - Equity Analyst [2]

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So I will ask 2 questions, please. First, on renewable fuels reference margins, so you guide higher reference margins in 2017 than 2016. However, Q1 '17 has been in line, more or less in line, with 2016 average. And since beginning of April the reference margin that you published on your website is going down. So what makes you think that the renewable fuel reference margin are going to rise? And when do you think this will happen, despite the California tax is currently much lower than last year? Second question regarding your (inaudible) fuel additional margins, which were at 125 (inaudible) in Q1 '17. So looking at the best, we can see that in general Q1 additional margins are lower than the rest of the year. So should we consider that this kind of seasonal impact is still valid, meaning that from Q2 '17 the additional margins should improve? I also noticed that last year from Q1 to Q3 '16 you've increased your additional margin by [15] (inaudible). Is that kind of figure still valid?

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [3]

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Thank you for the question, sir. This is Kaisa Hietala speaking. The first question was around the reference margin outlook and the fact that we believe the reference margin in 2017 to be on a higher level than 2016. And the basis driver for this -- of course there is a volatility, absolutely. But the basis driver for this is that we have now seen the whole [retro] complex, which his sort of a driving feedstock element for all biofuels, starting to become much more healthier than what it was. Maybe you remember the weather problems called El Nino hitting the South America and Southeast Asia in late 2015 and lasting well to 2016. And the yields and the harvests have been suffering from this greatly in 2016. And that was putting quite a lot of pressure on tightness of veg oil inventories. And now the new harvests and the yields, for example for palm oil, that we are seeing is showing a clear recovery. And typically -- it has taken time and that it is how it is typically. So basically we are basing our view on the overall veg oil market recovery and the availability of raw materials impacting the reference margin in a positive way this year compared to last year. Then there was a second question regarding additional margin development and the fact that whether the Q1 last year and this year is sort of reflecting the rest of the year, or whether the growth typically seen in Q2 to Q4 is sort of something which could be forecasted to happen also in 2017. And here I have to say that our additional margin is a combination of feedstock sourcing, the overall asset performance or operational excellence, and then the sales allocation and lots of details, which unfortunately we cannot share with you. And therefore it really depends on how these different elements are developing during the quartiles. Unfortunately we do not give a guidance on the additional margin development at this time. We wanted to give our view on the reference margin development. Thank you.

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Mehdi Ennebati, Societe Generale Cross Asset Research - Equity Analyst [4]

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So please, just maybe for April, if you don't want to (inaudible) anything, just regarding April as we are at the end of the month, did you observe higher additional margin than in average Q1?

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [5]

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Unfortunately we do not give other than quartile-based information.

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Operator [6]

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We take our next question from Peter Testa from One Investments.

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Peter Testa, [7]

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Two questions, please. One is on Renewable. If you look at Q2 last year you had quite low volumes in the quarter. And you talked about this year spillover volumes from Q1 to Q2. Was wondering whether you would expect that to have a significant benefit on the volume growth or even the operating leverage effect on the margin in Renewables. And then the second was just on the Oil Products business and the high proportion of Urals used. Wondering whether you had any views based upon OPEC compliance on your ability to maintain that supply and comments or thoughts about the Ural differential margin impact year-over-year going forward. Thank you.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [8]

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Thank you very much. This is Kaisa Hietala speaking. Let me take the first question, which was about the Q2 2016 low volumes and also sort of a view on volume development for 2017. I think it's good to remember that we had a major turnaround in Rotterdam in Q2 2016. Our Porvoo refinery, which is a 1 million ton refinery, was down for 9 weeks altogether. And therefore the Q2 2016 volume as a reference is not -- it's not a good reference for this year, because this year we are not having any major turnarounds. And the Q1 is typically a slow quartile. And the mandates are [being] fulfilled for the previous year and especially now with the BTC expiring there were lots and lots of banking of -- or lots of branding and lots of banking of credits. And this is the seasonality of this business. Going forward, I'm expecting the volumes to grow. And based on what I have seen after the freeze was ended in USA, we have seen the demand picking up. And Europe we have a healthy demand typically throughout all the quartiles of a year.

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Peter Testa, [9]

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And the view on the this next year volume on margins, the extent to which you're even trying to think about the comparison, because we obviously have the benefit of coming out of the Rotterdam shutdown year-over-year, plus the (inaudible) volume effect. So wondering whether this should be something we see impacting the margins just mechanically.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [10]

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Well, we have now the capacity to produce 2.6 million tons over all the assets that we have. And then eventually the sales volume and then the impact on the additional margin, that is a combination of what feedstock we are using at each refinery, how well we are then cost efficiently managing all the operations and then eventually to which market and to which segment we are selling the products. And this is the element which we do not really give any forward-looking views.

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Matti Lehmus, Neste Oyj - EVP of Oil Products and Member of the Executive Board [11]

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And then this is Matti Lehmus from Oil Products. So on the second question, which was around REB and the Urals-Brent differential -- so first I'll start with a comment that those who have followed Neste and the Oil Products for longer know that we have worked systematically on improving our crude oil flexibility. And I think it's good to see that we clearly now have reached already an ability to go over the 70% of Urals. Always economic optimization, but the capability is there. And looking forward, it's of course positive that now with the startup of the new feedstock unit for our production line 4, we expect to further drive that flexibility. And like we said in last year's Capital Markets Day, the target is to clearly create a capability to go over 75% capability of REB usage. So that's sort of positive from a flexibility perspective. Then just commenting briefly on the market outlook a bit more, I think if you look at the first quarter of this year, 2017, it actually shows already for me the impact of the cuts that have been taking place from OPEC and also non-OPEC countries. If the average of the REB, Urals differential was USD 2.5 last year with many factors driving a wide differential, the fact that we now ended up USD 2.1 already includes those impacts. So for me, I think it's clearly something where we'd expect that we still continue to have a wide Urals-Brent differential. Could be slightly narrower than last year, but still clearly attractive from a Neste perspective.

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Operator [12]

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Our next question is from Henri Patricot from UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [13]

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I have a few more questions for Kaisa on the renewables. First one is on the potential antidumping duties in the US on imports from Argentina and Indonesia. If these were to be implemented should we expect to see much higher exports from yourselves to the US? And where do you see the price of (inaudible) in the US reacting to these duties? And secondly on this topic, do you see any connection with the attempt to switch to producer tax credit? Is it a case of kind of either we get the antidumping issues or we go more aggressively for a producer tax credit for the US (inaudible) producers? And then finally, just want to get an update on the (inaudible) unit in the Netherlands, when you expect this to start up and have an impact on the operations. Thank you.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [14]

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Thank you. Let me start with the first question, which was about the antidumping duties, the consideration in USA. So basically in USA there has been an initiative and now under authority review that some of the biodiesel imports, namely from Argentine and from Indonesia, are benefiting from the lower duty levels from the destination countries and therefore creating sort of an unfair competition situation in USA. This review is fully focusing, first of all, on biodiesel. And secondly, it is looking into 2 countries, Argentine and Indonesia. What would be the impact on markets? I mean, of course both of these countries have been exporting biodiesel to USA, especially last year when they were also eligible for the BTC. However, we have already now seen that without the BTC, for example in January, the imports from Argentine were down a lot. So let's see how this review develops. We are expecting it to take still quite a long time. But naturally, this is an important topic also for us to follow, because there will be market impacts for sure. Then the second question was related to antidumping duties and is there a link to the PTC or BTC? I mean, these discussions between the Blenders Tax Credit traded versus Producers Tax Credit -- and these are two totally different processes. The antidumping duties is an initiative brought on the table due to the high import numbers in 2016, while the BTC versus PTC discussion is a part of the extenders tax package discussion taking place almost on an annual basis in USA. So unfortunately I'm not able to give you an answer whether these are linked or whether there is some kind of connection between these. We are following both of these very closely. And then the last point was about our pre-treatment facility in Netherlands in Sluiskil, which we bought at the end of last year. We were concluding the deal in late January. And now we have been taking over the site. We are developing a maintenance plan and doing necessary modifications so that the unit is serving our purpose. And we will be starting it up still this year. Let's see how it goes exactly. But it's a very interesting opportunity for Neste to continue our feedstock strategy to increase waste and residue share, as well as move towards lower quality raw materials, which are also very important element for [multi] bio customers and the policymakers.

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Operator [15]

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We take another question and it comes from Pasi Vaisanen from Nordea Bank.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst, Utilities and Energy [16]

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I have 2 short questions. Firstly, so are you able to compensate this [missing] Blender's Tax Credit in second quarter and also into third quarter? And secondly, about this recent weakness in the retail business -- so is the relative weakness going to stay regardless of the seasonal improvement in the second quarter? Or what was precisely the guidance for the short future? Thanks.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [17]

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Thank you for the question. This is Kaisa Hietala speaking. The BTC compensation as such, it's part of our global optimization of our value chain. We optimize the feedstock selection and then the refineries where we operate or process those raw materials and then finally the end customers. And I think Q1 was showing quite well that we have the right levers in place to manage the situation.

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Panu Kopra, Neste Oyj - EVP of Oil Retail Business Area and Member of Executive Board [18]

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This is Panu Kopra about the second question. Like I mentioned earlier, that if you look back our performance, 5 years back, for example, so it looks that in this business area there's clear seasonal patterns and there is a clear trend that the second quarter have been always better than the Q1, like the third quarter always better than the second quarter. And with our focus of boosting the sales, adjusting the cost lever, and then focusing the work with the customers, we expect that the final sales performance will improve. And it looks now already that in Northwest Russia that the margins are getting back to normal level.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst, Utilities and Energy [19]

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So you're answering to -- because (inaudible) the second quarter as [a normal] (inaudible).

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Panu Kopra, Neste Oyj - EVP of Oil Retail Business Area and Member of Executive Board [20]

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It's not (inaudible). It's [tough of course] depending that how is the market. But as mentioned, so there is nothing special. There was in the first quarter very intense competition in different places. And we see that we could adapt in those situations and then most importantly in the (inaudible) that is always to keep the volumes. And you need to remember that it's a captive volumes here in Finland and so it's very good for us that we have a captive [channel].

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst, Utilities and Energy [21]

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The last one, if I may, is still related to Renewable business. I mean, last year you said that Norway was [a big deal] in Europe. And now there have been no mentions about that. So which are the best markets in the first quarter '17 when looking at the European biodiesel?

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [22]

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Yes. This is Kaisa Hietala speaking. You are right. We were addressing Norway in Q4, because that was the time when Norway published their new regulation towards -- the mandates toward 2020. Now we were mentioning Sweden because the proposals just came out. I think the result and the sales allocation shows that we have very good markets in Europe. Unfortunately, we do not give a more detailed distribution of sales within Europe, or within the member states.

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Operator [23]

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Our next question is from Josh Stone from Barclays.

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Joshua Eliot Dweck Stone, Barclays PLC, Research Division - Analyst [24]

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Firstly, on Renewables, there's very good production performance for the sales there, around 100,000 tons -- slightly more than 100,000 tons less. You mentioned some timing differences on the [call] or delay into Q2. I was wondering if you could maybe give us -- should we expect all of those 100,000 tons to come back? Or is it half or -- some sort of indication of the size of the cargoes that were -- how many cargoes that were (inaudible)? And then second, on the Other line was in the P&L, quite a large loss relative to previous quarters, even reference to Nynas losing money. Do you expect to recoup some of those losses later in the year? Perhaps you can give how much of that was one-off. And then very lastly, just slightly broader, if I look back at the quarterly earnings run rates, 1Q is typically the low point of the year for Neste. Is there any reason to think that that seasonality doesn't occur again and that earnings should sequentially improve from here? Thank you.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [25]

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Thank you. This is Kaisa Hietala speaking. The first question was about the successful Q1 production. Thank you for that. I fully agree, 99% utilization. But then the sales being clearly lower, on the same level as in Q1 of 2016. And then there was a question whether we are expecting sort of a sales volume increase, 100 [kilotons] in Q2 and how many cargoes we're sort of slipping over the quartile break and so on. As you probably remember, Q4 was our sort of a sales record quartile. And of course that was because everybody knew that the Blender's Tax Credit was expiring. So also we were basically reducing our inventories quite a lot because we sold much more than we produced. That was also due to production issues in Rotterdam. So we have been replenishing some of our inventories. And at the same time, so knowing that the Q1 has been a slow quartile, we were not expecting selling the full increased production either. But clearly, based on the good demand in Europe and also on the demand pickup that we see in USA after the freeze, we are expecting higher volumes going forward. Unfortunately, sort of a detailed information around exact kilotons between the quartiles and so on, we are not publishing that information.

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Jyrki Mikael Maki-Kala, Neste Oyj - CFO and Member of the Executive Board [26]

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Yes. And then so you had a question about the Nynas and the Other segment, [in particular] if we are reporting Nynas as quarter 4 2016. And there were some issues with the startup of the [harbor] refinery in Germany. And now we know already now today that things are getting better and everything is in shape in that sense. So it was bad quarter 4, what they (inaudible). But, like I mentioned, we are continuing to look at different kind of environment now going forward.

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Operator [27]

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We move now to our next question, from Georgia Harris from Bank of America Merrill Lynch.

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Georgia Emily Mabel Harris, BofA Merrill Lynch, Research Division - Research Analyst [28]

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Just firstly, on the Oil Products additional margin, you're guiding to USD 5.5 of midyear, [whilst] the investments are finished. But you've already been achieving quite a bit above that. Is it reasonable to think that that USD 5.5 might be a bit conservative and there is upside to that? And then, secondly, I was wondering if you could talk a little bit on the California fuel credit market, because the price has fallen. Do you see that increasing again throughout the year? Thanks.

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Matti Lehmus, Neste Oyj - EVP of Oil Products and Member of the Executive Board [29]

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Thank you for the question. This is Matti Lehmus, on the additional margin for OP first. So perhaps the comment I would make is that when we guided that already last autumn that our target is to get above USD 5.5 on the additional margin. It indeed means that that is the average level over the quarters that we guided that we will be reaching. And as there is some seasonality between the quarters, it mean that sometimes we have stronger quarters, sometimes weaker. What particularly guides this quarterly differences is, for example, unit shutdowns. If we have a shutdown in a big unit, like to production line 4, for example, obviously it typically has an impact. But I think importantly it is to note that we have put USD 5.5 as the average minimum target that we expect to reach after mid of this year. And needless to say that we are, of course, doing everything we can do get even higher than that. So you know that Neste has had a track record of keeping its promises and then hopefully working on further improvement.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [30]

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There was a second question regarding California low carbon fuel standard credit price. This is Kaisa Hietala speaking. The California regulation is an independent regulation from the -- a federal regulation and therefore they have developed a sort of a credit system where biofuels, for example, they generate credits based on their carbon intensity number. And basically these credits are then being traded. And the credit price is clearly -- it's a supply/demand balance. And what we have seen during the Q1 has been sort of a decrease in the credit prices. And it's interesting now to follow, for example, how the EPA freeze and the slow biofuel demand in Q1 might be impacting on the credit prices. Also, the overall sort of supply of biofuels to California will be definitely then part of the supply/demand picture of the credits and therefore impacting spread prices. So this is something that we are following.

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Operator [31]

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We take our next question from Giacomo Romeo from Macquarie.

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Giacomo Romeo, Macquarie Research - Analyst [32]

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Couple of questions from me. The first one is on your use of crude palm oil as percentage of total feedstock went up -- well it was quite up reference to last year, higher than it has ever been last year. Just wondering if you can talk a little bit about the dynamics there. Obviously there wasn't any I guess [plant]-related reason. So if it's just (inaudible) optimization if you can talk about why crude palm oil was affected relative to other feedstocks in this quarter. Second question I have is, again, on your reference margin guidance for being up in 2017 relative to 2016. And I see obviously on your website that it's continued to go down. I also noticed that the same prices in Europe are in the (inaudible). I was wondering if you would expect a recovery in margin to be more something you will see in the second half. Thank you.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [33]

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Thank you for the questions. Let me first clarify. When you were talking about the reference margin in your second question, were you referring to oil products, fossil reference margin or the renewables reference margin?

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Giacomo Romeo, Macquarie Research - Analyst [34]

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The renewable.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [35]

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Renewables, okay. Fine. Thank you. So indeed, the crude palm oil share was slightly higher in Q1 compared to the earlier quartiles. And this is part of the optimization that we do. Different markets and different customers have different requirements for raw materials. And therefore when we are moving our sales allocation between the markets, it has an impact also on the feedstock portfolio. There was no other reason than basically the feedstock optimization behind this. The difference is just a couple of percentages. And the second question about the reference margin guidance, as you said, the [degradation] in the veg oil markets, which is quite strong and being led by the soybean oil high harvest expectations as well as the recovering crude palm oil production in Southeast Asia, this is the main driver for the improved reference margin guidance.

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Operator [36]

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Our next question is from Peter Low from Redburn.

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Peter Low, Redburn (Europe) Limited, Research Division - Research Analyst [37]

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Just one quick follow-up on Renewables. Do you expect the sales mix to switch back towards the US from Q2? Or does the lack of the BTC mean that your share will likely remain higher than last year for the entire year? Thanks.

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [38]

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Thank you. Based on what we have seen after the freeze ending in USA in late March, the demand has been picking up. We are [roughly] stating in our reference margin calculation that the sales allocation split between North America and Europe is 30% versus 70%. And I would say that's probably roughly right also for 2017, as far as [indiscernible].

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Operator [39]

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We now take our final question from Elena Malareva from Goldman Sachs.

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Elena Malareva, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

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So my first question on the fixed cost -- maybe you mentioned it already, but I could miss it. I see that fixed cost maybe somewhat high in the first quarter compared to the previous quarters. Can you explain why it was the case? And the second question actually is rather theoretical. So my understanding is that, like theoretically again, in the market where BTC is not in place, other mechanisms should work out to compensate producers for their lost profits, like in [theory] and to return the market to more like a -- more balanced situation. So in theory probably the [real] prices should have increased or the reference margins should probably cover it to compensate for the BTC loss to bring supply/demand into balance. But we obviously saw that that's not [something] happening. So, like, why do you think that's the case? And maybe my thinking about, like, the market mechanism is not fully correct. How do you think about it?

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Kaisa Hietala, Neste Oyj - EVP of Renewable Products and Member of Executive Board [41]

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Thank you. This Kaisa Hietala answering. The first question was about the increasing fixed costs in Renewable Products. We had a EUR 5 million increase year-on-year. This is mainly due to the strategy implementation. We are currently putting quite a lot of time and effort and resources into the capacity growth programs, the capacity (inaudible) programs, also bringing the 100% renewable diesel to new segments and markets. So this is related to our long-term strategy implementation mainly. The second question was about the BTC. And I fully agree with you that the market reaction should be compensating the loss of BTC in the form of RIN prices increasing and so on. I think the reason why we didn't see this happening so clearly in Q1 was the administrative freeze. There was a risk that the EPA would have decided to keep the mandates on a 2016 level and basically scrap the original plans to increase the mandates for 2017 and '18. However, their decision was firmly to stick to the original plan and implement the 5% growth for 2017 and the 5% growth for 2018. So this is clearly what's probably one reason why the market was behaving sort of a slightly odd way, like you also described, in Q1. The second thing we have to keep in mind is that it was -- the Q4 blending was extremely high in USA. There is -- all the obligated parties have a right to roll over from 2016 to 2017. And since everybody knew that there is no certainty on BTC in 2017, so I think all the tanks and the harbors were full of blended product already. And this has been now sort of been delivered to the markets and could be sort of one reason why the RIN prices have not reacted. Thank you.

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Operator [42]

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Just advising that that was the last question. We have no further questions in the queue. So I'll turn the call back for any additional remarks. Thank you.

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Juha-Pekka Kekäläinen, Neste Oyj - VP of IR [43]

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Thank you. This is Juha Kekalainen again. If there are no questions we thank you very much for your attention and participation. Neste's second quarter and half year results will be published on the 3rd of August. Until then, thank you and goodbye.

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Operator [44]

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Thank you. Ladies and gentlemen, just to confirm, this now concludes today's conference call. Thank you for your participation. You may now disconnect.