03 August 2018

Neste's Half-Year Financial Report for January-June 2018

Published in Releases and news

Neste Corporation, Half-Year Financial Report, 3 August 2018 at 9 am (EET)

Strong financial performance continued - Renewables leading the way

Second quarter in brief:

  • Comparable operating profit totaled EUR 277 million (EUR 236 million)
  • Operating profit totaled EUR 172 million (EUR 264 million)
  • Renewable Products' comparable sales margin was USD 508/ton (USD 270/ton)
  • Oil Products' total refining margin was USD 11.75/bbl (USD 10.67/bbl)
  • Cash flow before financing activities was EUR 140 million (EUR 82 million)

January-June in brief:

  • Comparable operating profit totaled EUR 679 million (EUR 439 million)
  • Operating profit totaled EUR 592 million (EUR 536 million)
  • Cash flow before financing activities was EUR 373 million (EUR 58 million)
  • Return on average capital employed (ROACE) was 20.8% over the last 12 months (2017: 17.5%)
  • Leverage ratio was 5.8% at the end of June (31.12.2017: 8.7%)
  • Comparable earnings per share: EUR 2.16 (EUR 1.24)
  • Earnings per share: EUR 1.88 (EUR 1.56)

President and CEO Matti Lievonen:

“Neste's strong financial performance continued in the second quarter. We posted a comparable operating profit of EUR 277 million, compared to EUR 236 million in the corresponding period last year. Renewable Products was again able to exceed the previous year's performance as a result of successful sales allocation and feedstock optimization, despite the scheduled maintenance activities. Oil Products' result was impacted by a weaker USD exchange rate year-on-year and a lower sales volume due to scheduled unit maintenances. The weaker USD had a negative impact totaling EUR 33 million on the Group's comparable operating profit compared to the second quarter of 2017. Neste reached a strong ROACE of 20.8% over the last 12 months and a leverage ratio of 5.8%.

Renewable Products posted a comparable operating profit of EUR 177 million (EUR 101 million). The renewable diesel market remained favorable in Europe and North America. Our additional margin was significantly higher than in the corresponding period last year, which had a positive impact of EUR 112 million on the operating profit. During the second quarter we implemented a scheduled five-week maintenance at the Rotterdam refinery, and our production facilities operated at an average 73% utilization rate. The negative impact of the Rotterdam maintenance on operating profit was approximately EUR 60 million, of which approximately 60% materialized in the second quarter. The remaining profit impact will materialize in the third quarter. Due to the scheduled maintenance activities our sales volumes were 589,000 tons, approximately 13% lower than in the corresponding period last year. During the second quarter 68% of sales were allocated to the European markets and 32% to North America. The share of 100% renewable diesel delivered to end-users was record-high 34% of total volumes. Feedstock mix optimization towards lower-quality raw materials continued successfully, and the proportion of waste and residue inputs was 92%. In May Neste agreed to acquire the share majority of IH Demeter B.V., a Dutch trader of animal fats and proteins. This is an important step for Neste in our strategy of building a global waste and residue raw material platform to secure raw material availability and competitiveness. Neste's cooperation with IKEA is also making progress as the first commercial scale pilot production of renewable, bio-based polypropylene plastic will start during the fall of 2018. In June there were positive developments in the regulatory area supporting Neste's strategy, as a preliminary agreement was reached on the post-2020 EU Renewable Energy Directive (RED II). Also the US Environmental Protection Agency (EPA) released its renewable fuel volume requirement proposal showing growth for 2019 and 2020.

Oil Products posted a comparable operating profit of EUR 92 million (EUR 122 million) in the second quarter. The overall refining market improved seasonally towards the summer period. The reference margin averaged USD 5.6/bbl, which was slightly lower than in the corresponding period last year. Oil Products' additional margin was strong at USD 6.1/bbl, supported by the new strategic investments being in full utilization. Our sales volumes were lower than in the second quarter of 2017, mainly due to the scheduled refinery unit maintenances. The negative impact of these maintenance activities was approximately EUR 30 million on the second-quarter operating profit. A weaker USD had a negative impact of EUR 19 million on the comparable operating profit year-on-year.

In Marketing & Services we were able to maintain our sales volumes at the second quarter 2017 level. The markets continued to be competitive, but average unit margins were slightly higher than in the corresponding period last year. The segment generated a comparable operating profit of EUR 20 million (EUR 19 million).

Renewable Products' additional margin is expected to be at a strong level in 2018. Sales volumes of the 100% renewable diesel delivered to end-users continue to grow from the levels in 2017 towards our 50% target in 2020. The vegetable oil market is expected to remain volatile, and Neste continues to expand the use of lower-quality waste and residue feedstock. Utilization rates of our renewable diesel facilities are expected to be high, except for a planned nine-week major turnaround at the Singapore refinery in the fourth quarter.

Global oil product supply and demand are anticipated to be balanced in 2018. Lower distillate inventories compared to last year are likely to support diesel margins. Oil Products' reference margin is expected to continue at a similar level on average as in the first half of 2018. We anticipate high reliability to continue in our refinery operations, noting that scheduled unit maintenances will be implemented in the autumn.

In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern.

As a conclusion, we expect 2018 to be a very strong year for Neste."

The Group's second quarter 2018 results

Neste's revenue in the second quarter totaled EUR 3,745 million (3,280 million). The increase resulted from higher sales prices, which had a positive impact of approx. EUR 800 million on the revenue. Lower sales volumes due to scheduled maintenance activities had a negative impact of approx. EUR 100 million, and a weaker USD exchange rate had a negative impact of approx. EUR 200 million on the revenue. The Group’s comparable operating profit was EUR 277 million (236 million). Renewable Products' comparable operating profit was significantly higher than in the second quarter of 2017, mainly as a result of higher additional margin. Oil Products' result was lower than in the second quarter of 2017, mainly due to a weaker USD exchange rate and lower sales volumes. The scheduled maintenance activities in Renewable Products and Oil Products had a negative impact of approx. EUR 70 million on the operating profit. Marketing & Services was able to increase its unit margins, which lead to a higher comparable operating profit compared to the second quarter of 2017. The Others segment's comparable operating profit was weaker than in the corresponding period of 2017, mainly due to Nynas' lower result.

Renewable Products’ second quarter comparable operating profit was EUR 177 million (101 million), Oil Products’ EUR 92 million (122 million), and Marketing & Services' EUR 20 million (19 million). The comparable operating profit of the Others segment totaled EUR -11 million (-6 million); Nynas accounted for EUR -5 million (-1 million) of this figure.

The Group’s operating profit was EUR 172 million (264 million), which was impacted by inventory losses of EUR 62 million (70 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -38 million (82 million), mainly related to margin hedging. Profit before income taxes was EUR 154 million (240 million), and net profit EUR 133 million (200 million). Comparable earnings per share were EUR 0.87 (0.68), and earnings per share EUR 0.52 (0.78).

The Group's January-June 2018 results

Neste's revenue in the first six months totaled EUR 7,374 million (6,351 million). The increase resulted from higher sales prices, which had a positive impact of approx. EUR 1,200 million, and higher sales volumes despite the scheduled maintenance activities, which had approx. EUR 200 million positive impact on the revenue. A weaker USD exchange rate had a negative impact of approx. EUR 400 million on the revenue. The Group’s comparable operating profit was EUR 679 million (439 million). Renewable Products' additional margin was significantly higher compared to the corresponding period of 2017, and the retroactive US Blender's Tax Credit decision in February supported the first half year result. Oil Products' result was lower than in the first six months of 2017, mainly due to a weaker USD exchange rate and lower reference margin. At Group level the weaker USD had a negative impact totaling EUR 84 million on the comparable operating profit compared to the first half of 2017. Marketing & Services was able to increase its sales volumes and unit margins, which lead to a higher comparable operating profit compared to the first six months of 2017. The Others segment's comparable operating profit improved from the corresponding period of 2017.

Renewable Products’ six-month comparable operating profit was EUR 473 million (181 million), Oil Products’ EUR 191 million (248 million), and Marketing & Services' EUR 33 million (31 million). The comparable operating profit of the Others segment totaled EUR -20 million (-23 million); Nynas accounted for EUR -10 million (-8 million) of this figure.

The Group’s operating profit was EUR 592 million (536 million), which was impacted by inventory losses of EUR 30 million (28 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -50 million (105 million), mainly related to margin hedging. Profit before income taxes was EUR 551 million (477 million), and net profit EUR 480 million (402 million). Comparable earnings per share were EUR 2.16 (1.24), and earnings per share EUR 1.88 (1.56).

Outlook

Developments in the global economy have been reflected in the oil, renewable fuel, and renewable feedstock markets; and volatility in these markets is anticipated to continue. According to current market estimates, the US dollar in 2018 is expected to stay weaker than last year.

Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks. Market volatility in feedstock prices is predicted to continue, which will have an impact on the Renewable Products segment's profitability.

Renewable Products' additional margin is expected to be at a strong level in 2018. Sales volumes of the 100% renewable diesel delivered to end-users continue to grow from the levels in 2017 towards our 50% target in 2020. The vegetable oil market is expected to remain volatile, and Neste continues to expand the use of lower-quality waste and residue feedstock. Utilization rates of our renewable diesel facilities are expected to be high, except for a planned nine-week major turnaround at the Singapore refinery in the fourth quarter. The Singapore turnaround is currently estimated to have a negative impact of approx. EUR 80 million on the comparable operating profit.

Global oil product demand is expected to remain strong in 2018, driven by a solid macroeconomic growth. Recent oil demand growth estimates for 2018 vary between 1.4 and 1.9 million bbl/d with distillates leading the growth. Global oil product supply and demand are anticipated to be balanced in 2018. Lower distillate inventories compared to last year are likely to support diesel margins. Oil Products' reference margin is expected to continue at a similar level on average as in the first half of 2018. We anticipate high reliability to continue in our refinery operations, noting that scheduled unit maintenances will be implemented in the autumn. The scheduled unit maintenances are currently estimated to have a negative impact of approx. EUR 50 million during the second half of 2018, mainly in the fourth quarter.

In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern.

As a conclusion, we expect 2018 to be a very strong year for Neste.

Conference call

A conference call in English for investors and analysts will be held today, 3 August 2018, at
3 p.m. Finland / 1 p.m. London / 8 a.m. New York. The call-in numbers are as follows: Finland: +358 (0)9 7479 0361, rest of Europe: +44 (0)330 336 9125, US: +1 646 828 8193, using access code 4610564. The conference call can be followed at the company's website. An instant replay of the call will be available until 10 August 2018 at +358 (0)9 8171 0562 for Finland, +44 (0)20 7660 0134 for Europe and +1 719 457 0820 for the US, using access code 4610564.

Further information:

Matti Lievonen, President and CEO, tel. +358 10 458 11

Jyrki Mäki-Kala, CFO, tel. +358 10 458 4098

Investor Relations, tel. +358 10 458 5292