Neste's Interim Report for January-September 2018

Neste Corporation Interim Report 26 October 2018 at 9 am. (EET)

Excellent quarter - outstanding performance in Renewable Products

Third quarter in brief:

•  Comparable operating profit totaled EUR 395 million (EUR 350 million)
•  Operating profit totaled EUR 250 million (EUR 339 million)
•  Renewable Products' comparable sales margin was USD 645/ton (USD 435/ton)
•  Oil Products' total refining margin was USD 12.41/bbl (USD 11.96/bbl)
•  Cash flow before financing activities was EUR 108 million (EUR 283 million)

January-September in brief:

•  Comparable operating profit totaled EUR 1,073 million (EUR 790 million)
•  Operating profit totaled EUR 842 million (EUR 875 million)
•  Cash flow before financing activities was EUR 481 million (EUR 340 million)
•  Return on average capital employed (ROACE) was 20.8% over the last 12 months (2017: 17.5%)
•  Leverage ratio was 3.4% at the end of September (31.12.2017: 8.7%)
•  Comparable earnings per share: EUR 3.35 (EUR 2.32)
•  Earnings per share: EUR 2.54 (EUR 2.60)

President and CEO Matti Lievonen:

“Neste had an excellent third quarter and our financial performance continued to be strong. We posted a comparable operating profit of EUR 395 million, compared to EUR 350 million in the corresponding period last year. Renewable Products exceeded the previous year's performance as a result of a favorable market and successful margin optimization. Oil Products performed well even though the market conditions were slightly less supportive than in the third quarter of 2017. Marketing & Services had a seasonally good quarter. Neste maintained a strong ROACE of 20.8% over the last 12 months and reached a leverage ratio of 3.4%.

Renewable Products posted a comparable operating profit of EUR 228 million (EUR 171 million). The renewable diesel market continued to be favorable, and our margin optimization was successful. A higher comparable sales margin had a positive impact of EUR 115 million on the operating profit compared to the corresponding period last year. During the third quarter our renewable diesel production facilities operated at an average 93% utilization rate. Our sales volumes were 547,000 tons, about 14% lower than in the corresponding period last year. Sales volumes were impacted by the scheduled maintenance activities at the Rotterdam refinery in the second quarter, and by the preparations for the Singapore turnaround in the fourth quarter. During the third quarter 71% of volumes were sold to the European markets and 29% to North America. The share of 100% renewable diesel delivered to end-users was 29% of total volumes. Feedstock mix optimization towards lower-quality raw materials continued, and the proportion of waste and residue inputs was 84%.

Oil Products posted a comparable operating profit of EUR 146 million (EUR 158 million) in the third quarter. The overall refining market improved particularly in August, but started to soften thereafter as the summer driving season ended. During the third quarter the reference margin averaged USD 6.0/bbl, which was at a good level, but lower than the exceptionally high USD 7.2/bbl in the corresponding period last year. Oil Products' additional margin was again strong at USD 6.4/bbl, supported by good operational performance and the new strategic investments being in full utilization. Our refineries operated at a high average utilization rate of 97%. The refined product sales volumes were at the same level as in the third quarter of 2017. In July we announced that we are exploring ways to introduce liquefied waste plastic as a future raw material for fossil refining. That is one concrete step in our efforts towards low carbon refining.

In Marketing & Services our sales volumes and unit margins were maintained at approximately third quarter 2017 level. The markets continued to be competitive. Marketing & Services generated a comparable operating profit of EUR 24 million (EUR 27 million).

Renewable Products' additional margin is expected to be at a strong level in the fourth quarter. 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 approximately EUR 100 million on the comparable operating profit, mostly in the fourth quarter. The estimated result impact of the turnaround has increased mainly due to higher margins.

Global oil product supply and demand are anticipated to be balanced in 2018. Solid distillate demand outlook continues and is reflected in margins. Oil Products' reference margin is expected to be seasonally weak in the fourth quarter as gasoline margins have decreased following the end of the driving season and refinery maintenance season is approaching its end. We anticipate high reliability to continue in our refinery operations, noting that scheduled unit maintenances will be implemented during the fourth quarter. The scheduled unit maintenances are currently estimated to have a negative impact of approximately EUR 50 million on the comparable operating profit in the fourth quarter.

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

We maintain our view that we expect 2018 to be a very strong year for Neste.

As I will be stepping down as the President and CEO of Neste at the end of October, I would like to sincerely thank our personnel, customers, shareholders, the Board of Directors, and other key stakeholders for the excellent cooperation and support during my past ten years with the company. We have had an exciting journey together. Neste's future looks bright, and I am confident that the company will prosper under the leadership of Peter Vanacker. Peter has already been onboarding since 1 September, and will start as the President and CEO on 1 November."

The Group's third quarter 2018 results

Neste's revenue in the third quarter totaled EUR 3,884 million (3,229 million). The revenue increase mainly resulted from higher sales prices. The Group’s comparable operating profit was EUR 395 million (350 million). Renewable Products' comparable operating profit was higher than in the third quarter of 2017, mainly as a result of higher sales margin. Oil Products' result was lower than in the third quarter of 2017, mainly due to a lower reference margin. Marketing & Services was able to maintain its sales volumes and margins, but had higher fixed costs, which lead to a lower comparable operating profit compared to the third quarter of 2017. The Others segment's comparable operating profit was slightly weaker than in the corresponding period of 2017.

Renewable Products’ third quarter comparable operating profit was EUR 228 million (171 million), Oil Products’ EUR 146 million (158 million), and Marketing & Services' EUR 24 million (27 million). The comparable operating profit of the Others segment totaled EUR -4 million (-2 million); Nynas accounted for EUR -3 million (3 million) of this figure.

The Group’s operating profit was EUR 250 million (339 million), which was impacted by inventory losses of EUR 8 million (gains of 61 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -49 million (-68 million), mainly related to margin hedging. As a result of normal impairment testing we booked an asset writedown of EUR 86 million regarding our minority shareholding in Nynas AB. Background for this are the current US sanctions and unstable situation in Venezuela impacting Nynas' business. Profit before income taxes was EUR 229 million (331 million), and net profit EUR 168 million (268 million). Comparable earnings per share were EUR 1.19 (1.08), and earnings per share EUR 0.66 (1.04).

The Group's January-September 2018 results

Neste's revenue in the first nine months totaled EUR 11,258 million (9,580 million). The revenue increase resulted from higher sales prices, which had a positive impact of approx. EUR 1,900 million, and higher sales volumes, 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 1,073 million (790 million). Renewable Products' additional margin was significantly higher compared to the corresponding period of 2017, and the retroactive US Blender's Tax Credit decision for 2017 supported the first quarter result. Oil Products' result was lower than in the first nine 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 79 million on the comparable operating profit compared to the first nine months of 2017. Marketing & Services was able to increase its sales volumes and other income, which lead to a slightly higher comparable operating profit than in the first nine months of 2017. The Others segment's comparable operating profit was at the same level as in the corresponding period of 2017.

Renewable Products’ nine-month comparable operating profit was EUR 702 million (352 million), Oil Products’ EUR 337 million (406 million), and Marketing & Services' EUR 58 million (57 million). The comparable operating profit of the Others segment totaled EUR -24 million (-24 million); Nynas accounted for EUR -13 million (-5 million) of this figure.

The Group’s operating profit was EUR 842 million (875 million), which was impacted by inventory losses of

EUR 38 million (gains of 33 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -99 million (37 million), mainly related to margin hedging. In addition there was an asset writedown of EUR 86 million regarding our minority shareholding in Nynas AB. Profit before income taxes was EUR 780 million (807 million), and net profit EUR 649 million (669 million). Comparable earnings per share were EUR 3.35 (2.32), and earnings per share EUR 2.54 (2.60).

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 the fourth quarter. 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 100 million on the comparable operating profit, mostly in the fourth quarter. The estimated result impact of the turnaround has increased mainly due to higher margins.

Global oil product demand is expected to remain strong, and recent demand growth estimates for 2018 vary between 1.4 and 1.7 million bbl/d. Global oil product supply and demand are anticipated to be balanced in 2018. Solid distillate demand outlook continues and is reflected in product margins. Oil Products' reference margin is expected to be seasonally weak in the fourth quarter as gasoline margins have decreased following the end of the driving season and refinery maintenance season is approaching its end. We anticipate high reliability to continue in our refinery operations, noting that scheduled unit maintenances will be implemented during the fourth quarter. The scheduled unit maintenances are currently estimated to have a negative impact of approx. EUR 50 million on the comparable operating profit in the fourth quarter.

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

We maintain our view that we expect 2018 to be a very strong year for Neste.

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

Conference call

A conference call in English for investors and analysts will be held today, 26 October 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 9128, US: +1 929 477 0448, using access code 6554753. The conference call can be followed at the company's website. An instant replay of the call will be available until 2 November 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 6554753.

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 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 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.

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 2017, Neste's revenue stood at EUR 13.2 billion. In 2018, Neste placed 2nd on the Global 100 list of the most sustainable companies in the world. Read more: neste.com

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