30 July 2009

Neste Oil's Interim Report for January-June 2009

Published in Releases and news
- Comparable operating profit in Q2 was EUR 47 million (Q2/2008: 181 million)
Second quarter in brief:
-          Diesel margins remained weak during the entire quarter
-          Neste Oil's total refining margin was USD 7.87 /bbl (4-6/08: 12.38
-          Comparable operating profit came in at EUR 47 million (4-6/08: 181 million)
-          IFRS operating profit was EUR 118 million (4-6/08: 290 million)
-          Cash flow from operations totaled EUR 223 million (4-6/08: 314 million)
-          Investments totaled EUR 210 million, of which 149 million was allocated to Renewable Fuels
-          The second NExBTL renewable diesel production plant was commissioned at the Porvoo refinery
President & CEO Matti Lievonen:
"Refining margins continue to be weak, dampened by depressed demand, and no rapid recovery seems to be in sight. Despite these difficult circumstances and the two-month maintenance shutdown at Production Line 4 at the Porvoo refinery, we were able to stay in the black. However, a quarterly profit of 47 million euros is not satisfactory and the current market conditions mean that we must further improve our cost and operational efficiency. This is something that we will continue to concentrate on during the second half of the year. We have already seen an improvement in our working capital management, and this has had a positive impact on our operating cash flow."
"We remain committed to proceeding with our strategic projects and I'm pleased to say that the start-up of our second NExBTL renewable diesel plant has been very smooth and the plant has reached its nameplate capacity. Our partners published some very promising results during the second quarter from long-term field tests of using NExBTL renewable diesel commercially. These field tests prove that NExBTL's quality is second to none when it comes to performance and emissions."
Further information:
Matti Lievonen, President & CEO, tel. +358 10 458 11
Ilkka Salonen, CFO, tel. +358 10 458 4490
News conference and conference call
A press conference in Finnish on the second quarter results will be held today, 30 July 2009, at 11:30 am EET at the company's headquarters, Keilaranta 21, Espoo. www.nesteoil.com will feature English versions of the presentation materials. A conference call in English for investors and analysts will be held today, 30 July 2009, at 3:00 pm Finland / 1:00 pm London / 8:00 am New York. The call-in numbers are as follows: Europe: +44 (0)20 3023 4426, US: +1 866 966 5335. A webcast of the call can be found at company's website. Use the password: Neste Oil. An instant replay of the call will be available for one week at +44 (0)20 8196 1998 for Europe and +1 866 583 1035 for the US, using access code 725434.

1-6/2009 and 1-6/2008 unaudited, full year 2008 audited
Figures in parentheses refer to the second quarter of 2008, unless otherwise stated.
EUR million (unless otherwise noted)

* Comparable operating profit is calculated by excluding inventory gains/losses, capital gains/losses, and unrealized changes in the fair value of oil and freight derivative contracts from the reported operating profit. As from 1 April 2009, the calculation of comparable operating profit has been amended by including the change in fair value of all trading inventories to inventory gains/losses. This amendment has no effect on previously reported figures.
** Rolling 12 months
Revenue at the Neste Oil Group totaled EUR 2,592 million in the second quarter of 2009. The substantial reduction from EUR 4,420 million in the same quarter of 2008 resulted from lower petroleum product prices.
The Group's comparable operating profit was EUR 47 million (181 million) in the second quarter. The significant drop compared to the same quarter in 2008 was largely due to a lower total refining margin, which was negatively affected by an approximately 75% reduction in the diesel margin year-on-year and a narrow differential between Urals and Brent crude. This was only partially compensated for by a stronger gasoline margin. The Group's hedged EUR/USD exchange rate was 1.43 in the second quarter.
Oil Products' second-quarter comparable operating profit was EUR 37 million (162 million), Renewable Fuels' EUR -7 million (13 million), Oil Retail's EUR 14 million (11 million), and Others' EUR -1 million (-4 million). Others includes profits from associated companies and joint ventures (mainly Nynas AB), which totaled EUR 9 million (10 million).
Operating profit under IFRS was EUR 118 million (290 million) in the second quarter, as inventory gains were just half those booked in 2008.
The second-quarter profit before taxes was EUR 109 million (284 million), net profit for the period was EUR 89 million (213 million), and earnings per share were EUR 0.35 (0.83).
The Group's January-June financial results
Revenue at the Group during the first six months amounted to EUR 4,645, compared to EUR 7,717 during the same period in 2008. The decrease resulted from lower oil product prices.
Neste Oil's comparable operating profit in January-June was EUR 103 million (1-6/08: 300 million). This reduction resulted primarily from a weaker total refining margin. The company's hedged EUR/USD exchange rate was 1.44 in January-June.
Oil Products' six-month comparable operating profit was EUR 101 million (1-6/08: 275 million), Renewable Fuels' EUR -14 million (1-6/08: 15 million), Oil Retail's EUR 26 million (1-6/08: 20 million), and Others' EUR -12 million (1-6/08: -12 million). Others includes profits from associated companies and joint ventures (mainly Nynas AB), which totaled EUR 2 million (1-6/08: 11 million).
Given the capital-intensive nature of its business, Neste Oil uses return on average capital employed after tax (ROACE) as its primary financial target, based on comparable results. At the end of June, the rolling twelve-month ROACE was 8.8% (30 June 2008: 12.7%).
Capital expenditure and financing
Investments totaled EUR 384 million during the first six months (1-6/08: 192 million). Oil Products' capital spending was EUR 94 million (1-6/08: 72 million), Renewable Fuels' EUR 273 million (1-6/08: 77 million), and Oil Retail's EUR 10 million (23 million). Depreciation was EUR 111 million (112 million).
The Group's interest-bearing net debt was EUR 1,409 million at the end of June (31 Dec 2008: EUR 1,004 million). Net financial expenses between January and June were EUR 23 million (19 million). The Group will capitalize interest expenses related to major investment projects during 2009. The average interest rate of borrowings at the end of June was 2.3%, and the average maturity 3.4 years.
Net cash from operating activities between January and June was EUR 240 million (1-6/08: 201 million). This increase in cash flow was largely the result of more effective working capital management. Around EUR 85 million was tied up in contango storages of petroleum products at the end of June. The equity-to-assets ratio was 41.3% at the end of June (31 Dec 2008: 46.3%), the leverage ratio 39.7% (31 Dec 2008: 31.5%), and the gearing ratio 65.7% (31 Dec 2008: 46.1%).
Cash and cash equivalents and committed, unutilized credit facilities amounted to EUR 1,357 million at the end of June (31 Dec 2008: 1,536 million). Short-term financing needs will continue to be met by revolving credit and overdraft facilities. There are no financial covenants in existing loan agreements.
In accordance with its hedging policy, Neste Oil has hedged the majority of its net foreign currency exposure for the next 12 months, mainly using forward contracts and currency options. The most important hedged currency is the US dollar.
Market overview
Crude oil prices strengthened during the second quarter, following the rise of equity and commodity prices and the weakening of the US dollar. Brent Dated reached USD 70/bbl in mid-June after OPEC decided to keep its production quotas unchanged and crude oil inventories started to draw down. Price differentials between heavier and lighter grades were narrow throughout the quarter.
Refining margins were weak, leading to low refinery runs because of maintenance activity and economic run cuts.
Gasoline margins continued to improve as demand increased seasonally and production cuts reduced supply. In late June, margins fell again due to increasing production and a buildup of inventories.
Margins for middle distillates suffered from reduced demand caused by the global economic recession and sank to their lowest level in five years. Despite lower refinery runs, inventories continued to build. In June, margins gradually recovered.
Fuel oil margins were relatively strong, supported by demand in Asia and cuts in refinery runs. In addition, due to reduced crude oil use, some fuel oil was used in crackers to produce light products.
On the Finnish retail market, demand for gasoline fell by approximately 4% and diesel by close to 10% during the second quarter compared to the same quarter in 2008. The drop in diesel demand from trucking companies has been even greater. Demand has also fallen in the Baltic countries, in line with the decline of their GDP.
Biofuel prices remained lower and the price difference between biofeedstocks were narrower year-on-year. The price premium of higher-quality renewable fuels remains healthy.
Oil freight rates collapsed in both the crude and product market compared to the second quarter of 2008.
Key drivers
*Product  margins Platt's fob Rotterdam

Production and sales
The proportion of Russian Export Blend in Neste Oil's total refinery input was 57% (54%) in the second quarter.
Diesel fuel accounted for a lower-than-normal proportion of Neste Oil's sales due to a shutdown at Production Line 4 at the Porvoo refinery and gasoline sales from contango storage.
At the end of June, Neste Oil's contango storage consisted of 170,000 tons, or approximately 1.3 million barrels, and mainly consisted of middle distillates. Sales from contango storage were quite large in the second quarter, as storage volumes stood at 550,000 tons at the end of March.
Neste Oil's sales from in-house production, by product category (1,000 t)
Neste Oil's sales from in-house production, by market area (1,000 t)

As of 1 April 2009, Neste Oil's businesses have been grouped into four reporting segments: Oil Products, Renewable Fuels, Oil Retail, and Others. Quarterly figures for 2008 based on these segments were published on 23 April 2009.
Oil Products
Key figures

Oil Products' second-quarter comparable operating profit was EUR 37 million (162 million). This decrease was mainly due to a lower total refining margin of USD 7.87/bbl, which compares to USD 12.38/bbl in the same quarter last year. The total refining margin was depressed by significantly weaker middle distillate margins and a very narrow price differential between Urals and Brent crude.
Contango sales of both crude and products had a positive impact on the total refining margin and made a major positive contribution to Oil Products' comparable operating profit.
The result of the base oils business was roughly flat year-on-year but margins were softer compared to the first quarter. Gasoline components showed a slightly lower profit than last year.
The oil tanker chartering business suffered from record-low freight rates during the second quarter.
Oil Products' 12-month comparable return on net assets was 15.4% (17.9%).
Renewable Fuels

Renewable Fuels' second-quarter comparable operating profit was EUR -7 million (13 million). Although sales volumes developed positively, lower sales price and the termination of a fixed-priced feedstock contract earlier this year put pressure on renewable diesel margins. The price premium of NExBTL renewable diesel over conventional biodiesel remained healthy. While the first NExBTL plant at Porvoo posted a profit, the segment's costs continued to increase as a result of the expansion of the business and R&D.
Renewable Fuels' 12-month comparable return on net assets was -7.0% (7.9%).
Oil Retail
Key figures
*includes both station and terminal sales
Oil Retail's comparable operating profit increased to EUR 14 million (11 million) in the second quarter, supported by somewhat better margins on the Finnish market than in 2008 and reduction of fixed costs in the Finnish organization. Russian operations generated a slightly lower level of profit compared to the same quarter in 2008, while performance in the Baltic Rim was flat.
Sales volumes were lower on the Finnish market than during the second quarter of 2008, with the exception of diesel sold to private motorists. The largest reduction has been seen in trucking, which reflects domestic industrial production. Lubricant sales have also been hit significantly.
Neste Oil's volumes were roughly flat outside Finland, while demand was down significantly. This was supported by the new stations opened around the Baltic Rim in 2008 and the efficiency of the unmanned station network.  
Oil Retail's 12-month comparable return on net assets was 8.2% (14.1%).
Shares, share trading, and ownership
A total of 73,768,025 Neste Oil shares were traded in the second quarter, totaling EUR 0.8 billion. The share price reached EUR 11.53 at its highest and EUR 9.46 at its lowest, and closed the quarter at EUR 9.90, giving the company a market capitalization of EUR 2.5 billion as of 30 June 2009. An average of 1.2 million shares was traded daily, equivalent to 0.5% of shares outstanding.
Neste Oil's share capital registered with the Company Register as of 30 June 2009 totaled EUR 40 million, and the total number of shares outstanding is 256,403,686. The company does not hold any of its own shares, and the Board of Directors has no authorization to buy back company shares or to issue convertible bonds, share options, or new shares.
At the end of June, the Finnish state owned 50.1% of outstanding shares, foreign institutions 15.0%, Finnish institutions 20.6%, and Finnish households 14.3%.
Neste Oil employed an average of 5,328 (5,099) employees during the first half of the year. At the end of June, the company had 5,547 employees (30 June 2008: 5,477).
Health, safety, and the environment
The company's safety performance has developed positively. The indicator for safety performance used by Neste Oil - total recordable injury frequency (TRIF, number of cases per million hours worked) for all work done for the company, combining the company's own personnel and contractors - stood at 2.8 (5.2) at the end of June 2009. The target for 2009 is below 4.
Lost workday injury frequency (LWIF) stood at 2.0.  LWIF for 2008 was 3.2. The target for 2009 is below 2.

Strategy implementation
Neste Oil's current capital projects consist of new plants designed to increase production of renewable diesel and high-quality base oil.
Strategic projects
Construction of renewable diesel plants in Singapore and Rotterdam has proceeded according to plan. Mechanical completion of the Singapore plant is expected to be achieved in summer 2010. The project is proceeding in line with its original budget of EUR 550 million. The Rotterdam plant is scheduled for completion in the first half of 2011. The project is proceeding according to schedule and its original budget of EUR 670 million.
In June, Neste Oil - together with Daimler AG, Deutsche Post DHL, the energy group OMV, and the Stuttgarter Straßenbahnen AG public transportation company - published the initial results of a joint pilot test project focusing on the use of NExBTL renewable diesel in commercial transportation. The test shows significant emission reductions and a positive CO2 balance when the fuel and its feedstock are produced sustainably. It was also shown that NExBTL performs very well and is tolerated very well by diesel engines currently in use.
Also in June, Neste Oil and Stora Enso took an important step in efforts to convert forest residues into transportation fuels with the inauguration of a demonstration plant at Varkaus, Finland for biomass to liquids (BtL) production. The companies' 50/50 joint venture will develop and test the necessary technology and plans to produce biocrude for renewable diesel subsequently.
A joint venture between Neste Oil and the Bahrain Petroleum Company (Bapco) is continuing construction of a high-quality lubricant base oil plant in Bahrain. The plant will have an annual capacity of 400,000 tons of VHVI (Very High Viscosity Index) base oil for use in blending top-tier lubricants. Completion is scheduled for the end of 2011. Neste Oil's share of the JV is 45% and its estimated share of the investment cost is EUR 115-135 million.
Construction of an isomerization unit at Porvoo was postponed in April.
Potential short-term and long-term risks
The oil market has been very volatile. Oil refiners are exposed to a variety of political and economic trends and events, as well as natural phenomena that affect the short- and long-term supply of and demand for the products that they produce and sell.
The largest uncertainty continues to be the slowdown of the world economy, which is reducing the demand for petroleum products. This has already materialized during the last couple of quarters and has significantly decreased the demand for diesel, which is Neste Oil's most important product. The problems on the international financial market have also increased the level of uncertainty. As a consequence, managing customer receivables risks has become even more important. Sudden and unplanned outages at Neste Oil's production units or facilities continue to represent a short-term risk.
Rapid and large changes in feedstock and product prices may lead to significant inventory gains or losses, or changes in working capital that may have a material impact on the company's IFRS operating profit and net cash from operations.
Over the longer term, access to funding and rising capital costs, as well as challenges in procuring and developing new competitive and reasonably priced raw materials, may impact the company's growth plans.
The implementation of biofuel legislation in the EU and other key market areas may influence the speed at which the demand for these fuels develops.
The key market drivers for Neste Oil's financial performance continue to be international refining margins, the price differential between Russian Export Blend (REB) and Brent crude, and the USD/EUR exchange rate.
For more detailed information on Neste Oil's risks and risk management, please refer to the company's Annual Report and Financial Statements for 2008.
The overall picture for oil refiners has not changed since the previous outlook published in April. The global economy has not improved over the last few months. The International Energy Agency's global oil demand forecast for 2009 remains at -2.9%, with the steepest reduction predicted for OECD countries.  

Low demand and new refining capacity coming onstream in 2009 are likely to keep refining margins below those seen in recent years, unless serious disruptions occur on the supply side. Diesel margins are expected to stay under pressure until economical activity picks up. High inventory levels will continue to put pressure on diesel margins. On the other hand, the indications are that diesel margins could improve a little towards the end of the year. Seasonal support for the gasoline market is anticipated to diminish during the second half.
Demand for base oils has shown a slight recovery, but margins have weakened. Neste Oil has again shut down its PAO plant in Beringen, Belgium for four weeks in July-August and made temporary lay-offs. Freight rates for oil tankers are set to stay low throughout 2009.

Production volumes at Renewable Fuels will increase during the second half, thanks to the start-up of the second NExBTL plant. This will be offset, however, by increasing costs linked to the expansion of the business.
Low demand will continue to be the key feature of the Oil Retail business.

Performance at Neste Oil's refineries should be better in the second half of 2009. Production Line 4 at Porvoo, which was shut down for maintenance during the second quarter, is expected to operate normally.
Neste Oil does not expect to book major contango profits during the third quarter. As a result, if refining margins stay at the level seen in July, the Group's third-quarter comparable operating profit will be significantly lower than in the second quarter.
The Group is currently working on an additional cost-savings and efficiency program to reduce its fixed costs.
The Group's investments are estimated to be around EUR 890 million in 2009. Maintenance investments will account for around EUR 160 million, productivity investments around EUR 40 million, and strategic investments around EUR 690 million.
Capital Markets Day 2009
Neste Oil will hold a Capital Markets Day for investors and analysts on 29 September 2009 in Finland. Details will be published on the company's website soon.
Reporting date for the third-quarter 2009 results
Neste Oil will publish its third-quarter results for 2009 on 29 October 2009 at approximately 9:00 a.m. EET.

Espoo, 29 July 2009
Neste Oil Corporation
Board of Directors
The preceding information contains, or may be deemed to contain, "forward-looking statements". These statements relate to future events or our future financial performance, including, but not limited to, strategic plans, potential growth, planned operational changes, expected capital expenditures, future cash sources and requirements, liquidity and cost savings that involve known and unknown risks, uncertainties, and other factors that may cause Neste Oil Corporation's or its businesses' actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements.  In some cases, such forward-looking statements can be identified by terminology such as "may,"  "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," or "continue," or the negative of those terms or other comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Future results may vary from the results expressed in, or implied by, the forward-looking statements, possibly to a material degree. All forward-looking statements made in this report are based on information presently available to management and Neste Oil Corporation assumes no obligation to update any forward-looking statements. Nothing in this report constitutes investment advice and this report shall not constitute an offer to sell or the solicitation of an offer to buy any securities or otherwise to engage in any investment activity.
Operating profit = Operating profit includes the revenue from the sale of goods and services, other income such as gain from sale of shares or non-financial assets, share of profits (loss) of associates and joint ventures, less losses from sale of shares or non-financial assets, as well as expenses related to production, marketing and selling activities, administration, depreciation, amortization, and impairment charges. Realized and unrealized gains or losses on oil and freight derivative contracts together with realized gains and losses from foreign currency and oil derivative contracts hedging cash flows of commercial sales and purchases that have been recycled in the income statement, are also included in operating profit.
Comparable operating profit = Operating profit -/+ inventory gains/losses -/+ gains/losses from sale of shares and non-financial assets - unrealized change in fair value of oil and freight derivative contracts. Inventory gains/losses include the change in fair value of all trading inventories.
Return on equity, (ROE) % = 100 x (Profit before taxes - taxes) / Total equity average
Return on capital employed, pre-tax (ROCE) % = 100 x (Profit before taxes + interest and other financial expenses) / Capital employed average
Return on average capital employed, after-tax (ROACE) % = 100 x (Profit for the period (adjusted for inventory gains/losses, gains/losses from sale of shares and non-financial assets and unrealized gains/losses on oil and freight derivative contracts, net of tax) + minority interest + interest expenses and other financial expenses related to interest-bearing liabilities (net of tax)) / Capital employed average
Capital employed = Total assets - interest-free liabilities - deferred tax liabilities -provisions
Interest-bearing net debt = Interest- bearing liabilities - cash and cash equivalents
Leverage ratio, % = 100 x Interest- bearing net debt / (Interest- bearing net debt + Total equity)
Gearing, % = 100 x (Interest bearing net debt / Total equity)
Equity-to assets ratio, % = 100 x Total equity / (Total assets - advances received)
Return on net assets, % = 100 x Segment operating profit / Average segment net assets
Comparable return on net assets, % = 100 x Segment comparable operating profit / Average segment net assets
Segment net assets = Property, plant and equipment, intangible assets, investment in associates and joint ventures, pension assets, inventories and interest-free receivables and liabilities allocated to the business segment, provisions and pension liabilities
Earnings per share (EPS) = Profit for the period attributable to the equity holders of the company / Adjusted average number of shares during the period
Equity per share = Shareholder's equity attributable to the equity holders of the company/ Adjusted average number of shares at the end of the period
Cash flow per share = Net cash generated from operating activities / Adjusted average number of shares during the period