Neste's Half-Year Financial Report for January-June 2020

Neste Corporation, Half-Year Financial Report, 23 July 2020 at 9 a.m. (EET)

Another strong quarter in Renewable Products while Oil Products was hit by an unprecedentedly weak refining market

Second quarter in brief:

• Comparable operating profit totaled EUR 255 million (EUR 367 million)
• Operating profit totaled EUR 208 million (EUR 359 million)
• Renewable Products' comparable sales margin, including BTC, was USD 625/ton (USD 674/ton)
• Oil Products' total refining margin was USD 4.76/bbl (USD 9.42/bbl)
• Cash flow before financing activities was EUR -246 million (EUR 132 million)

January-June in brief:

• Comparable operating profit totaled EUR 663 million (EUR 746 million)
• Operating profit totaled EUR 405 million (EUR 741 million)
• Cash flow before financing activities was EUR -366 million (EUR 140 million)
• Cash-out investments were EUR 555 million (EUR 189 million)
• Return on average capital employed (ROACE) was 24.5% over the last 12 months (2019: 26.6%)
• Leverage ratio was 8.8% at the end of June (31.12.2019: -3.3%)
• Comparable earnings per share: EUR 0.76 (EUR 0.77)
• Earnings per share: EUR 0.47 (EUR 0.77)

President and CEO Peter Vanacker:

“Despite the market turbulence due to the COVID-19 pandemic, Neste's performance was solid during the second quarter. Renewable Products business proved to be very resilient and reached a new quarterly sales volume record. Oil Products' suffered from an unprecedentedly weak refining market caused by the global COVID-19 related demand destruction, and the segment was loss-making. Marketing & Services performed well in the circumstances also considering the earlier divestment of our Russian business. We posted a comparable operating profit of EUR 255 million, compared to EUR 367 million in the corresponding period last year. Neste reached a ROACE of 24.5% over the last 12 months, and had a leverage ratio of 8.8% at the end of June.

Renewable Products exceeded last year’s second quarter result by posting a comparable operating profit of EUR 314 million (EUR 286 million). The renewable diesel demand remained good, and our sales volumes reached a record 773,000 tons. This new quarterly record was also supported by very good operational performance at the refineries. Our nameplate production capacity for Renewable Products has been increased to 3.2 million tons per annum. The catalyst change at the Singapore refinery had to be slightly rescheduled due to the COVID-19 related lockdown measures by the local government, but it was successfully completed in the first half of July. As expected, the feedstock markets remained very tight. That combined with the low oil product prices created some pressure on the comparable sales margin, which averaged at USD 625/ton, a still very healthy level. The share of waste and residues was 78% of the total renewable raw material inputs.

Oil Products posted a comparable operating profit of EUR -60 million (EUR 83 million) in the second quarter. The COVID-19 pandemic caused significant demand destruction globally. The reference margin, which reflects the general market conditions, was impacted by an exceptionally weak product market and unfavorable Urals-Brent differential. The reference margin averaged at USD -0.3/bbl compared to USD 6.0/bbl in the second quarter of 2019, which had a negative impact of EUR 165 million on the comparable operating profit year-on-year. Due to the COVID-19 restrictions in Finland, we were forced to postpone the scheduled Porvoo refinery major turnaround to 2021, and only critical unit maintenance was performed during the second quarter. The unit maintenance had a negative impact of approximately EUR 20 million on the comparable operating profit. Several measures have been and will be taken to improve the segment’s profitability in the short term.

Marketing & Services posted a comparable operating profit of EUR 19 million (EUR 25 million) in the second quarter. Sales volumes were impacted by the COVID-19 related travel restrictions, but we were able to improve unit margins. Divestment of the Russian business had a negative impact totaling EUR 8 million on the comparable operating profit year-on-year.

The Others segment's comparable operating profit was EUR -16 million (EUR -28 million), mainly due the Nynas minority shareholding not having a negative impact on the segment’s financial performance any more.

Neste continues to take the risks relating to the COVID-19 pandemic seriously. Our primary objective is to ensure the health and safety of our employees, customers, contractors and other partners as well as to ensure the continuity of our operations and secure supply of products to our customers.

Despite the market turbulence we continue to focus on our strategy execution. The Singapore renewable production capacity expansion is proceeding, but the progress in the second quarter has been negatively impacted by the lockdown measures of the local government. Our further renewables capacity expansion plans are in a pre-study phase and progress as planned. We have completed the acquisitions of Mahoney Environmental in the US and Count Terminal in the Netherlands, which are important building blocks in developing our Renewables Platform. Discussions with customers in Renewable Aviation and Renewable Polymers and Chemicals are proceeding well, and we are agreeing on new contracts and partnerships. We continue to focus on our Neste Excellence program with a target to achieve at least EUR 225 million profit improvement by the end of 2022. Unprecedented uncertainty on the further development of the COVID-19 pandemic and its impact on the global economy continues."

The Group's second quarter 2020 results

Neste's revenue in the second quarter totaled EUR 2,572 million (4,057 million). The revenue decline mainly resulted from the lower crude oil price, which had a negative impact of approx. EUR 1.1 billion, and lower sales volumes of oil products, which had a negative impact of approx. EUR 400 million on the revenue. The Group’s comparable operating profit was EUR 255 million (367 million). Renewable Products' comparable operating profit was EUR 314 million (286 million), showing the segment’s resilience in the turbulent market. Oil Products' comparable operating profit was EUR -60 million (83 million), mainly due to the unprecedentedly weak refining market caused by the COVID-19 pandemic. Marketing & Services comparable operating profit was EUR 19 million (25 million), mainly as a result of the divestment of the Russian business in the late 2019. The Others segment's comparable operating profit of EUR -16 million (-28 million) was better than in the corresponding period of 2019, mainly as a result of the minority shareholding in Nynas having been fully written-off in 2019.

The Group’s operating profit was EUR 208 million (359 million), which was impacted by inventory valuation gains of EUR 127 million (36 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -172 million (-30 million), mainly related to inventory and margin hedging. Profit before income taxes was EUR 197 million (347 million), and net profit EUR 161 million (294 million). Comparable earnings per share were EUR 0.26 (0.40), and earnings per share EUR 0.21 (0.38).

The Group's January–June 2020 results

Neste's revenue in the first six months totaled EUR 5,842 million (7,826 million). The revenue decline mainly resulted from the lower crude oil price, which had a negative impact of approx. EUR 1.6 billion, and lower sales volumes of oil products, which had a negative impact of approx. EUR 500 million on the revenue. A stronger US dollar had a positive impact of approx. EUR 100 million on the revenue. The Group’s comparable operating profit was EUR 663 million (746 million). Renewable Products' six-month comparable operating profit was EUR 644 million (623 million), supported by higher sales volumes and a stronger US dollar than in the corresponding period of 2019. Oil Products' comparable operating profit was EUR 14 million (156 million), mainly due the exceptionally weak refining market and the planned refinery maintenance. Marketing & Services comparable operating profit was EUR 27 million (38 million), mainly due to lower sales volumes compared to the first half of 2019 and divestment of the Russian business. The Others segment's comparable operating profit of EUR -25 million (-71 million) was significantly better than in the corresponding period of 2019, mainly as a result of the minority shareholding in Nynas having been fully written-off in 2019.

The Group’s operating profit was EUR 405 million (741 million), which was impacted by inventory valuation losses of EUR 166 million (gains of 108 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -91 million (-118 million), mainly related to inventory hedging. Profit before income taxes was EUR 400 million (696 million), and net profit EUR 362 million (588 million). Comparable earnings per share were EUR 0.76 (0.77), and earnings per share EUR 0.47 (0.77).

Outlook

Visibility in the global economic development remains very low due to the COVID-19 pandemic. As a consequence, we expect volatility in the oil products and renewable feedstock markets to remain high. Based on our current estimates and a hedging rate of 85%, Neste's effective EUR/US dollar rate is expected to be within a range 1.10-1.15 in the third quarter of 2020.

Sales volumes of renewable diesel are expected to remain relatively stable in the third quarter despite the market impacts of the COVID-19 pandemic. We expect the waste and residue feedstock markets to remain tight as their demand continues to be solid. Global availability of used cooking oil has gradually recovered during the second quarter, but still remains below pre-COVID-19 levels. The utilization rates of our renewables production facilities are expected to remain high, except for the scheduled catalyst change in one of our Porvoo units in the third quarter and at the Rotterdam refinery in the fourth quarter. These catalyst changes are estimated to have a negative impact totaling EUR 60 million on the segment’s comparable operating profit during the second half of 2020.

Oil Products’ third-quarter market demand is expected to improve, but still be severely reduced by the COVID-19 pandemic. The reference margin is expected to remain low and very volatile.

In Marketing & Services the COVID-19 pandemic is expected to have some negative impact on the demand and sales volumes in the third quarter.

Based upon our business continuity plans, we continue to focus on short term cost reduction activities.

Implementation of the Singapore expansion project continues. The project progress has been impacted by the nationwide stop of construction activities ordered by the Singapore government starting from mid-April due to the second wave of COVID-19 infections. The permit to re-start construction work was successfully obtained in early July, but restrictions related to the execution of works during the COVID-19 pandemic will have an impact on productivity and manpower availability. Without taking possible new waves of infections into consideration, the estimated start-up of the plant is moved from the middle of 2022 to the first quarter of 2023. The capital expenditure is estimated to be approximately EUR 100 million higher compared to the earlier communicated budget of approx. EUR 1.4 billion.

Neste expects the Group’s full-year 2020 capital expenditure to be approximately EUR 850 million, excluding possible M&A. Previously the full-year capital expenditure was estimated to be approx. EUR 950 million.

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

Conference call

A conference call in English for investors and analysts will be held today, 23 July 2020, 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 3170949. The conference call can be followed at the company's website. An instant replay of the call will be available until 30 July 2020 at +44 (0) 333 300 9785 for Europe and +1 866 331 1332 for the US, using access code 3170949.

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 2019, Neste's revenue stood at EUR 15.8 billion. In 2020, Neste placed 3rd on the Global 100 list of the most sustainable companies in the world. Read more: neste.com