Neste's Half-Year Financial Report for January–June 2022

Neste Corporation, Half-Year Financial Report, 28 July 2022 at 9 a.m. (EET)

Excellent performance in exceptional market conditions

Second quarter in brief:

• Comparable EBITDA totaled EUR 1,085 million (EUR 377 million)
• EBITDA totaled EUR 927 million (EUR 599 million)
• Renewable Products' comparable sales margin was USD 865/ton (USD 700/ton)
• Oil Products total refining margin was USD 30.0/bbl (USD 9.7/bbl)
• Cash flow before financing activities was EUR -8 million (EUR 261 million)

January-June in brief:

• Comparable EBITDA totaled EUR 1,663 million (EUR 806 million)
• EBITDA totaled EUR 1,843 million (EUR 1,184 million)
• Cash flow before financing activities was EUR -968 million (EUR -384 million)
• Cash-out investments were EUR 428 million (EUR 657 million)
• Return on average capital employed (ROACE)* was 24.6% over the last 12 months (2021: 18.3%)
• Leverage ratio was 15.5% at the end of June (31.12.2021: 0.6%)
• Comparable earnings per share: EUR 1.41 (EUR 0.62)
• Earnings per share: EUR 1.61 (EUR 1.05)

* Calculation formula has been adjusted effective 1 January 2022; and the figure for 2021 restated.

President and CEO Matti Lehmus:

“Neste posted an excellent financial performance in the second quarter in exceptional market conditions. Our comparable EBITDA reached a record-high EUR 1,085 (377) million with last year’s comparison figure materially impacted by the scheduled major turnaround at the Porvoo refinery. We raised our second-quarter outlook on 14 June, and the favorable market conditions continued for the rest of the quarter. 

The war in Ukraine has had a significant impact on international energy markets, leading to volatile and significantly higher oil product and natural gas prices in Europe. Renewable Products business performance was strong and we achieved an excellent sales margin. Oil Products' strong result was driven by exceptionally high diesel and gasoline margins, and benefited from our ability to maintain high reliability of operations. Marketing & Services also performed strongly with unit margins supported by inventory gains resulting from the continued oil price increase. Our cash flow before financing activities was negatively impacted by inventory build-up to secure business continuity and by the market price increases for feedstock, energy and finished products. A stronger US dollar had a positive impact of EUR 92 million on the Group’s comparable EBITDA year-on-year. We are tracking well against our financial targets: ROACE over the last 12 months was 24.6% (target: over 15%), and our leverage ratio was 15.5% (target: below 40%) at the end of June.

Renewable Products posted a comparable EBITDA of EUR 538 (341) million in the second quarter. The comparable sales margin averaged USD 865/ton, which is a new quarterly record. While the waste and residue feedstock market remained tight as expected, our sales margin was supported by the exceptionally strong diesel market, good sales performance, as well as more favorable feedstock prices than anticipated towards the end of the quarter. This resulted in our sales margin exceeding the previously estimated range. The demand for renewable products remained robust throughout the quarter and our sales volumes were 808,000 tons. We continued to optimize our feedstock mix and the share of waste and residue inputs increased to 96%. 

Oil Products posted a comparable EBITDA of EUR 529 (8) million in the second quarter. As stated in our updated outlook on 14 June, the Northwest European gasoline and diesel margins had increased to exceptionally high levels. In addition, our successful mitigation actions to replace Russian crude oil and natural gas enabled us to retain high utilization rates at the Porvoo refinery. Oil Products’ second-quarter total refining margin was expected to more than double from the level seen in the first quarter, and that materialized as the total refining margin averaged USD 30.0/bbl. The increase in the total refining margin improved Oil Products’ second-quarter comparable EBITDA significantly compared to the first quarter.

Marketing & Services generated a comparable EBITDA of EUR 35 (25) million in the second quarter. Our unit margins were again supported by inventory gains driven by increased oil product prices.

Going forward, we continue to take meaningful steps in executing our growth strategy in renewable and circular solutions. Our strategy is based on global feedstock optimization as well as geographic, product and customer diversification. A new important step in the strategy implementation was the final investment decision announced in June to expand our renewables production capacity in Rotterdam. The Rotterdam refinery expansion investment of approximately EUR 1.9 billion will expand Neste’s overall renewables production capacity by 1.3 million tons per annum, bringing our total capacity in Rotterdam to 2.7 million tons annually, of which sustainable aviation fuel (SAF) production capability will be 1.2 million tons. Our target is to start up the new production unit during the first half of 2026. 

Our ongoing Singapore expansion project is proceeding according to schedule for start-up by the end of the first quarter of 2023. Significant progress has been made in positioning SAF in the market in preparation for the capacity coming up next year. In March we announced an agreement to establish a 50/50 production joint venture with Marathon Petroleum, which will produce renewable diesel following a conversion project of Marathon's refinery in Martinez, California. We expect the closing of the transaction to happen within the next months. Production of renewable diesel is targeted to come online at the end of 2022, and the facility is planned to reach its full annual nameplate capacity of 2.1 million tons by the end of 2023. The joint venture and the Singapore expansion project are expected to increase our total production capacity of renewable products to 5.5 million tons by the end of 2023, and we will be the only global provider of renewable products with a production footprint in North America, Asia and Europe. 

Neste’s transformation story continues. We remain highly committed to our sustainability targets and vision to become a global leader in renewable and circular solutions."

The Group's second-quarter 2022 results

Neste's revenue in the second quarter totaled EUR 7,039 million (3,022 million). The revenue growth resulted from higher market and sales prices, which had a positive impact of approx. EUR 1.4 billion, and higher sales volumes, which had a positive impact of approx. EUR 2.4 billion. In the corresponding period last year Oil Products’ sales volumes were negatively impacted by the Porvoo refinery major turnaround. Additionally, a stronger US dollar had a positive impact of approx. EUR 200 million on the revenue compared to the same period last year. 

The Group’s comparable EBITDA was EUR 1,085 million (377 million). Renewable Products' comparable EBITDA was EUR 538 million (341 million), mainly due to a higher sales margin and a stronger US dollar compared to the second quarter of 2021. Oil Products' comparable EBITDA was EUR 529 million (8 million), driven by the exceptionally strong refining market. Oil Products’ second quarter of 2021 was significantly impacted by the scheduled major turnaround at Porvoo. Marketing & Services comparable EBITDA was EUR 35 million (25 million). The Others segment's comparable EBITDA was EUR -10 million (4 million).

The Group’s EBITDA was EUR 927 million (599 million), which was impacted by inventory valuation gains of EUR 153 million (207 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -296 million (14 million), mainly related to margin hedging. Profit before income taxes was EUR 750 million (465 million), and net profit EUR 599 million (431 million). Comparable earnings per share were EUR 0.96 (0.31), and earnings per share EUR 0.78 (0.56).

The Group's January–June 2022 results

Neste's revenue in the first six months totaled EUR 12,562 million (6,155 million). The revenue growth resulted from higher market and sales prices, which had a positive impact of approx. EUR 3.5 billion, and higher sales volumes, which had a positive impact of approx. EUR 2.5 billion. A stronger US dollar had a positive impact of approx. EUR 400 million on the revenue.

The Group’s comparable EBITDA was EUR 1,663 million (806 million). Renewable Products' six-month comparable EBITDA was EUR 957 million (685 million), mainly due to the higher sales margin and a stronger US dollar than in the corresponding period of 2021. Oil Products' comparable EBITDA was EUR 667 million (60 million), mainly as a result of the improved refining market. Marketing & Services comparable EBITDA was EUR 67 million (49 million), as a result of higher unit margins compared to the first half of 2021. The Others segment's comparable EBITDA was EUR -11 million (14 million).

The Group’s EBITDA was EUR 1,843 million (1,184 million), which was impacted by inventory valuation gains of EUR 268 million (382 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -77 million (-6 million), mainly related to utility price and margin hedging. Profit before income taxes was EUR 1,485 million (880 million), and net profit EUR 1,238 million (806 million). Comparable earnings per share were EUR 1.41 (0.62), and earnings per share EUR 1.61 (1.05).

Outlook

Visibility in the global economy is low due to high inflation, reduced economic growth expectations and increased geopolitical uncertainty. The war in Ukraine has had significant impacts on global energy markets, and energy prices have risen to high levels. We expect volatility in the oil products and renewable feedstock markets to remain high.

Renewable Products’ third-quarter sales volumes are expected to be slightly lower than in the previous quarter. Waste and residue markets are anticipated to remain tight as their demand continues to be robust. Our third-quarter sales margin is currently expected to be within the range USD 775-850/ton. However, forecasting of the quarterly margin remains challenging due to the high market volatility.

The utilization rates of our renewables production facilities are forecasted to remain high, except for the scheduled six-week turnaround at the Singapore refinery in the third quarter, and a seven-week turnaround at the Rotterdam refinery in the fourth quarter of 2022. The Singapore and Rotterdam turnarounds are currently estimated to have a negative impacts of approximately EUR 90 million and EUR 100 million respectively on the segment’s comparable EBITDA. Thanks to our mitigation actions via inventories, the sales volume and EBITDA impacts are spread over a period of several quarters. 

The market in Oil Products is volatile and impacted by the war in Ukraine, trade sanctions and their possible counter-measures. Based on the current forward market, oil product margins are expected to come down from the levels seen in the second quarter. Our third-quarter total refining margin is expected to remain solid, but lower compared to the exceptional level in the second quarter of 2022. The third-quarter sales volumes are forecasted to be at about the same level as seen in the previous quarter.

In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern in the third quarter. The high price levels are expected to have some negative impact on demand particularly in the consumer segment.

Based on our current estimates and a hedging rate of approximately 85%, Neste's effective EUR/US dollar rate is expected to be within a range of 1.09–1.12 in the third quarter of 2022.

Neste estimates the Group’s full-year 2022 cash-out capital expenditure to be approximately EUR 1.9 billion, including approximately EUR 0.8 billion for the announced joint venture with Marathon, which is still subject to closing. Other possible M&A is excluded from the figure.

Conference call

A conference call in English for investors and analysts will be held today, 28 July 2022, at 3 p.m. Finland / 1 p.m. London / 8 a.m. New York. The call-in numbers are as follows: Finland: +358 9 3158 2770, UK: +44 1 212 818 004, US: +1 718 705 8796. No access code is needed. The conference call can be followed at the company's web site. A replay of the call will be available until 4 August 2022 at +39 02 802 0987, then pressing 700718# and 718#.

Further information:

Matti Lehmus, President and CEO, tel. +358 10 458 11
Martti Ala-Härkönen, CFO, tel. +358 40 737 6633
Investor Relations, tel. +358 10 458 5292

Neste in brief

Neste (NESTE, Nasdaq Helsinki) creates solutions for combating climate change and accelerating a shift to a circular economy. We refine waste, residues and innovative raw materials into renewable fuels and sustainable feedstock for plastics and other materials. We are the world’s leading producer of sustainable aviation fuel and renewable diesel and developing chemical recycling to combat the plastic waste challenge. We aim at helping customers to reduce their greenhouse gas emissions with our renewable and circular solutions by at least 20 million tons annually by 2030. Our ambition is to make the Porvoo oil refinery in Finland the most sustainable refinery in Europe by 2030. We are introducing renewable and recycled raw materials such as liquefied waste plastic as refinery raw materials. We have committed to reaching carbon-neutral production by 2035, and we will reduce the carbon emission intensity of sold products by 50% by 2040. We also have set high standards for biodiversity, human rights and supply chain. We have consistently been included in the Dow Jones Sustainability Indices and the Global 100 list of the world’s most sustainable companies. In 2021, Neste's revenue stood at EUR 15.1 billion. Read more: neste.com