Neste's Half-Year Financial Report for January-June 2019

Neste Corporation, Half-Year Financial Report, 25 July 2019 at 9 am. (EET)

Strong result supported by record sales in Renewable Products

Second quarter in brief:

• Comparable operating profit totaled EUR 367 million (EUR 277 million)
• Operating profit totaled EUR 358 million (EUR 172 million)
• Renewable Products' comparable sales margin was USD 568/ton (USD 508/ton)
• Oil Products' total refining margin was USD 9.42/bbl (USD 11.75/bbl)
• Marketing & Services' comparable operating profit was EUR 25 million (EUR 20 million)
• Cash flow before financing activities was EUR 132 million (EUR 140 million)

January-June in brief:

• Comparable operating profit totaled EUR 746 million (EUR 679 million)
• Operating profit totaled EUR 740 million (EUR 592 million)
• Cash flow before financing activities was EUR 140 million (EUR 373 million)
• Cash-out investments were EUR 189 million (EUR 194 million)
• Return on average capital employed (ROACE) was 21.1% over the last 12 months (2018: 21.1%)
• Leverage ratio was 5.7% at the end of June (31.12.2018: -1.5%)
• Comparable earnings per share: EUR 0.77 (EUR 0.72)
• Earnings per share: EUR 0.76 (EUR 0.63)

President and CEO Peter Vanacker:

“Neste's solid financial performance continued. We posted a comparable operating profit of EUR 367 million in the second quarter, compared to EUR 277 million in the corresponding period last year. Renewable Products' quarterly sales and production volumes were the highest ever. Oil Products' comparable operating profit was lower than in the second quarter of 2018, mainly due to a less supportive market. Marketing & Services improved its performance, and the segment's comparable operating profit was the highest ever second-quarter result. Neste reached a ROACE of 21.1% over the last 12 months, and had a leverage ratio of 5.7% at the end of June.

Renewable Products posted a comparable operating profit of EUR 286 million (EUR 177 million). The renewable diesel market continued to be favorable, but feedstock prices increased as communicated earlier. Our sales volumes were 745,000 tons, and this new quarterly record was also supported by the excellent operational performance at the refineries. The higher sales volume had a positive impact of EUR 79 million on the comparable operating profit year-on-year. The comparable sales margin averaged at USD 568/ton, which was 12% higher compared to the corresponding period last year, leading to a positive impact of EUR 32 million on the operating profit. During the second quarter 65% of volumes were sold to the European markets and 35% to North America. During the quarter our renewable diesel production facilities operated at a very high average utilization rate of 105%, based on the nominal capacity of 2.9 Mton/a. The share of waste and residues was 77% of the total renewable raw material inputs.

Oil Products posted a comparable operating profit of EUR 83 million (EUR 92 million) in the second quarter. The reference margin continued to be impacted by a weak product market and a narrow Urals-Brent price differential. The lower reference margin had a negative impact of EUR 18 million on the comparable operating profit year-on-year. Compared to the second quarter of 2018, Oil Products' additional margin was burdened by a lower currency hedging result, higher utility costs and the narrow Urals-Brent price differential, and it averaged at USD 3.4/bbl.

A stronger US dollar rate improved the comparable operating profit by EUR 14 million year-on-year. Sales volumes were higher and had a positive impact of EUR 19 million on the comparable operating profit compared to the corresponding period 2018.

Marketing & Services posted a comparable operating profit of EUR 25 million (EUR 20 million) in the second quarter. It was the best ever second-quarter performance for the segment, mainly as a result of improved unit margins.

The Others segment's comparable operating profit was EUR -28 million (EUR -11 million), mainly due to the weak financial performance of Nynas. Nynas continues to struggle with crude oil supply problems caused by the US sanctions against Venezuela.

We are making good progress in our strategy execution. The Singapore renewable production capacity expansion is proceeding as planned. The first commercial deliveries of renewable jet fuel and renewable polymers have taken place, and we expect sales volumes in these markets to slowly ramp up. We also continue to focus on our Operational Excellence program with a target to achieve at least EUR 100 million profit improvements by the end of 2022. Recruitment of the key people is ongoing, and we have nominated Ms. Mercedes Alonso as the new Executive Committee member responsible for Renewable Polymers and Chemicals.

Neste targets to become a global leader in renewable and circular solutions. In order to focus on our strategic priorities, we have agreed to divest our Russian fuel retail business to PJSC Tatneft. We have also agreed to create a strategic partnership with engineering consultancy services company Rejlers, which will strengthen the delivery capability and improve the focus of Neste Engineering Solutions (NES). As part of the partnership agreement, Rejlers will acquire the Regional Business Unit of NES. The divestments are subject to normal regulatory approvals."

The Group's second quarter 2019 results

Neste's revenue in the second quarter totaled EUR 4,057 million (3,745 million). The revenue increase mainly resulted from higher sales volumes. The Group’s comparable operating profit was EUR 367 million (277 million). Renewable Products' comparable operating profit was higher than in the second quarter of 2018, mainly as a result of higher sales volumes and sales margin. Oil Products' result was lower than in the second quarter of 2018, mainly due to lower margins. Marketing & Services' higher unit margins drove improvement in the segment's comparable operating profit year-on-year. The Others segment's comparable operating profit continued to be weaker than in the corresponding period of 2018, mainly due to the poor performance of Nynas, which was caused by the impacts of the US sanctions on the company's business.

Renewable Products’ second quarter comparable operating profit was EUR 286 million (177 million), Oil Products’ EUR 83 million (92 million), and Marketing & Services' EUR 25 million (20 million). The comparable operating profit of the Others segment totaled EUR -28 million (-11 million); Nynas' net profit accounted for EUR -13 million (-5 million) of this figure.

The Group’s operating profit was EUR 358 million (172 million), which was impacted by inventory valuation gains of EUR 36 million (losses of 62 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -30 million (-38 million), mainly related to margin hedging. The contractual dispute in relation to the marketing of the joint venture base oil plant in Bahrain has been resolved. Profit before income taxes was EUR 346 million (154 million), and net profit EUR 293 million (133 million). Comparable earnings per share were EUR 0.40 (0.29), and earnings per share EUR 0.38 (0.17).

The Group's January-June 2019 results

Neste's revenue in the first six months totaled EUR 7,826 million (7,374 million). The increase resulted from higher sales volumes, which had a positive impact of approx. EUR 300 million, and a stronger USD exchange rate, which also had a positive impact of approx. EUR 300 million on the revenue. Lower sales prices resulting from a lower oil price had a negative impact of approx. EUR 200 million on the revenue. The Group’s comparable operating profit was EUR 746 million (679 million).

Renewable Products' sales volumes and sales margin were higher compared to the corresponding period of 2018. Renewable Products' 2018 result was also supported by the positive impact of the retroactive US Blender's Tax Credit decision. Oil Products' comparable operating profit was lower than in the first six months of 2018, mainly due to weaker refining margins. Marketing & Services was able to increase its unit margins, which lead to a higher comparable operating profit compared to the first six months of 2018. The Others segment's comparable operating profit was significantly lower than in the corresponding period of 2018, mainly due to the poor performance of Nynas, caused by the impacts of the US sanctions on the company's business.

Renewable Products’ six-month comparable operating profit was EUR 623 million (473 million), Oil Products’ EUR 156 million (191 million), and Marketing & Services' EUR 38 million (33 million). The comparable operating profit of the Others segment totaled EUR -71 million (-20 million); Nynas accounted for EUR -44 million (-10 million) of this figure.

The Group’s operating profit was EUR 740 million (592 million), which was impacted by inventory valuation gains of EUR 107 million (losses of 30 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -118 million (-50 million), mainly related to margin hedging. Profit before income taxes was EUR 694 million (551 million), and net profit EUR 587 million (480 million). Comparable earnings per share were EUR 0.77 (0.72), and earnings per share EUR 0.76 (0.63).

Outlook

Developments in the global economy have been reflected in the renewable fuel, feedstock and oil markets; and volatility in these markets is anticipated to continue. Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks. Global oil product demand growth is expected to continue at a lower rate than in 2018, while global refining capacity additions are expected to grow driven by large projects in Asia and the Middle East. Based on our current estimates and a hedging rate of approx. 80%, Neste's effective EUR/USD rate is expected to be within a range 1.14-1.16 in the third quarter of 2019.

Renewable Products' sales volumes and utilization rates of our production facilities are expected to remain high in the third quarter. We have scheduled a catalyst change at the Rotterdam renewable products refinery in the fourth quarter. The catalyst change is currently estimated to have a negative impact of approx. EUR 50 million on the segment's comparable operating profit in the fourth quarter.

Oil Products’ third-quarter reference margin is expected to be higher than in the first half of the year, driven by a seasonally stronger product market and refinery outages. Utilization rates of our production facilities are anticipated to remain high in the third quarter, except for normal unit maintenances. We have scheduled a four-week decoking maintenance at the Porvoo refinery Production Line 4 in September-October. The scheduled maintenance is currently estimated to have a negative impact of approx. EUR 15 million on the segment's comparable operating profit, mainly in the fourth quarter.

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

Conference call

A conference call in English for investors and analysts will be held today, 25 July 2019, 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 4245 0806, rest of Europe: +44 (0) 2071 928000, US: +1 631 5107495, using access code 6370196. The conference call can be followed at the company's website. An instant replay of the call will be available until 1 August 2019 at +44 (0) 333 300 9785 for Europe and +1 917 677 7532 for the US, using access code 6370196.

Further information:

Peter Vanacker, President and CEO, tel. +358 10 458 11
Jyrki Mäki-Kala, CFO, tel. +358 10 458 4098
Investor Relations, tel. +358 10 458 5292

Neste in brief

Neste (NESTE, Nasdaq Helsinki) creates sustainable solutions for transport, business, and consumer needs. Our wide range of renewable products enable our customers to reduce climate emissions. We are the world's largest producer of renewable diesel refined from waste and residues, introducing renewable solutions also to the aviation and plastics industries. We are also a technologically advanced refiner of high-quality oil products. We want to be a reliable partner with widely valued expertise, research, and sustainable operations. In 2018, Neste's revenue stood at EUR 14.9 billion. In 2019, Neste placed 3rd on the Global 100 list of the most sustainable companies in the world. Read more: neste.com

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