Neste's Interim Report for January-September 2019

Neste Corporation, Interim Report, 23 October 2019 at 9 a.m. (EET)

Highest ever quarterly comparable operating profit

Third quarter in brief:

• Comparable operating profit totaled EUR 435 million (EUR 395 million) 
• Operating profit totaled EUR 444 million (EUR 250 million)
• Renewable Products' comparable sales margin was USD 635/ton (USD 645/ton)
• Oil Products' total refining margin was USD 12.07/bbl (USD 12.41/bbl)
• Marketing & Services' comparable operating profit was EUR 28 million (EUR 24 million)
• Cash flow before financing activities was EUR 71 million (EUR 108 million)

January-September in brief:

• Comparable operating profit totaled EUR 1,181 million (EUR 1,073 million)
• Operating profit totaled EUR 1,184 million (EUR 842 million)
• Cash flow before financing activities was EUR 211 million (EUR 481 million)
• Cash-out investments were EUR 346 million (EUR 285 million)
• Return on average capital employed (ROACE) was 21.0% over the last 12 months (2018: 21.1%)
• Leverage ratio was 6.6% at the end of September (31 Dec 2018: -1.5%)
• Comparable earnings per share: EUR 1.12 (EUR 1.12)
• Earnings per share: EUR 1.11 (EUR 0.85)

President and CEO Peter Vanacker:

“Neste had an excellent financial performance in the third quarter. We posted a comparable operating profit of EUR 435 million (EUR 395 million), which was the highest quarterly result ever. Renewable Products improved its sales margin compared to the previous quarter, and sales volumes were at a high level. Oil Products' comparable operating profit was solid despite the maintenance activities implemented in the third quarter. Marketing & Services had one of their best quarterly performances ever. Neste reached a ROACE of 21.0% over the last 12 months, and had a leverage ratio of 6.6% at the end of September.

Renewable Products posted a comparable operating profit of EUR 305 million (EUR 228 million) in the third quarter. The renewable diesel market continued to be favorable, but feedstock markets remained tight. Our sales optimization worked well and sales volumes were 716,000 tons, which was more than 30% higher than in the corresponding period last year. The comparable sales margin averaged at USD 635/ton, which was up 12% from the second quarter, and almost at the level of the corresponding period last year. During the third quarter, our renewable diesel production facilities operated at a high average utilization rate of 101%. The share of waste and residues was 81% of the total renewable raw material inputs.

Oil Products posted a comparable operating profit of EUR 113 million (EUR 146 million) in the third quarter. The reference margin, reflecting the general market conditions, improved towards the end of the quarter. The reference margin averaged at USD 7.3/bbl, slightly higher than in the corresponding period last year. The planned decoking maintenance at the Porvoo refinery Production Line 4 was brought forward and implemented in September. The maintenance activities had a negative impact on additional margin and sales volumes, which were lower than in the third quarter of 2018. A stronger US dollar rate improved the comparable operating profit year-on-year.

Marketing & Services posted a comparable operating profit of EUR 28 million (EUR 24 million) in the third quarter, which was one of the highest quarterly results ever.  The segment was again able to improve its unit margins from the corresponding period last year.

The Others segment's comparable operating profit was EUR -13 million (EUR -4 million), mainly due to the weak financial performance of Nynas. Nynas continued to struggle with crude oil supply problems caused by the US sanctions against Venezuela.

We continued to make good progress in our strategy execution. The Singapore renewables production capacity expansion is proceeding as planned. We opened an office in Shanghai and started renewable raw material sourcing operations in China. The first certified volumes of used cooking oil from China have been successfully procured. New sales agreements for renewable jet fuel have been signed with Lufthansa and other major airlines. Recruitment of key people proceeded, and Thorsten Lange was appointed as the new Executive Committee member responsible for Renewable Aviation business unit. We also continued to focus on our Operational Excellence program with expected operating profit impact on target."

The Group's third quarter 2019 results

Neste's revenue in the third quarter totaled EUR 3,961 million (3,884 million). The revenue increase mainly resulted from higher sales volumes. The Group’s comparable operating profit was EUR 435 million (395 million). Renewable Products' comparable operating profit was higher than in the third quarter of 2018, mainly as a result of higher sales volumes. Oil Products' result was lower than in the third quarter of 2018, mainly due to lower sales volumes and additional margin. Marketing & Services' higher unit margins drove improvement in the segment's comparable operating profit year-on-year. The Others segment's comparable operating profit was still 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’ third quarter comparable operating profit was EUR 305 million (228 million), Oil Products’ EUR 113 million (146 million), and Marketing & Services' EUR 28 million (24 million). The comparable operating profit of the Others segment totaled EUR -13 million (-4 million); Nynas' net profit accounted for EUR -8 million (-3 million) of this figure.

The Group’s operating profit was EUR 444 million (250 million), which was impacted by inventory valuation losses of EUR 13 million (8 million), and changes in the fair value of open commodity and currency derivatives totaling EUR 54 million (-49 million), mainly related to margin hedging. As a result of normal impairment testing, we booked an asset writedown of EUR 34 million regarding our shareholding in Nynas AB. Our Nynas shareholding is now fully written off. Profit before income taxes was EUR 343 million (229 million), and net profit EUR 269 million (168 million). Comparable earnings per share were EUR 0.35 (0.40), and earnings per share EUR 0.35 (0.22).

The Group's January-September 2019 results

Neste's revenue in the first nine months totaled EUR 11,787 million (11,258 million). The increase resulted from higher sales volumes, and a stronger USD exchange rate. The Group’s comparable operating profit was EUR 1,181 million (1,073 million), which was a great achievement. 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 EUR 140 million positive impact of the retroactive US Blender’s Tax Credit decision. Oil Products' comparable operating profit was lower than in the first nine months of 2018, mainly due to weaker refining margins. Marketing & Services was able to increase its unit margins, which lead to a materially higher comparable operating profit compared to the first nine 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’ nine-month comparable operating profit was EUR 928 million (702 million), Oil Products’ EUR 269 million (337 million), and Marketing & Services' EUR 66 million (58 million). The comparable operating profit of the Others segment totaled EUR -84 million (-24 million); Nynas accounted for EUR -52 million (-13 million) of this figure.

The Group’s operating profit was EUR 1,184 million (842 million), which was impacted by inventory valuation gains of EUR 94 million (losses of 38 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -64 million (-99 million), mainly related to margin hedging. As a result of normal impairment testing, we booked an asset writedown of EUR 34 million regarding our shareholding in Nynas AB in the third quarter. Profit before income taxes was EUR 1,037 million (780 million), and net profit EUR 856 million (649 million). Comparable earnings per share were EUR 1.12 (1.12), and earnings per share EUR 1.11 (0.85).

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 is expected to grow 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 1.12-1.15 in the fourth quarter of 2019.

Demand for renewable diesel is expected to remain strong in the fourth quarter in anticipation of the growing mandates in 2020. Feedstock markets are expected to continue on a strengthening trend. Utilization rates of the renewables production facilities are expected to remain high, except for the scheduled four-week catalyst change at the Rotterdam refinery in the fourth quarter of 2019. The catalyst change was previously estimated to have a negative impact of approximately EUR 50 million on the segment's comparable operating profit. The estimated result impact in the fourth quarter has been approximately halved through product inventory buildup during the previous quarter and other mitigation actions. We have scheduled the next catalyst change at the Singapore refinery in the second quarter of 2020 and at the Rotterdam refinery in the fourth quarter of 2020. Neste will implement a scheduled approximately eleven-week major turnaround at the Porvoo refinery in the second quarter of 2020. The Porvoo turnaround is currently estimated to have a negative impact of approximately EUR 40 million on the Renewable Products segment's comparable operating profit, mainly in the second quarter.

Oil Products’ fourth-quarter reference margin is expected to be slightly lower than that in the third quarter. Utilization rates of our production facilities are anticipated to remain high in the fourth quarter, except for normal unit maintenances. We will implement a scheduled approximately eleven-week major turnaround at the Porvoo refinery in the second quarter of 2020. The Porvoo turnaround is currently estimated to have a negative impact of approximately EUR 180 million on the segment's comparable operating profit, mainly in the second quarter.

In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern in the fourth quarter. The divestment of the Russian operation is expected to be completed in the fourth quarter.

Conference call

A conference call in English for investors and analysts will be held today, 23 October 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 confirmation code 1598536. The conference call can be followed at the company's website. An instant replay of the call will be available until 30 October 2019 at +44 (0) 333 300 9785 for Europe and +1 917 677 7532 for the US, using access code 1598536.

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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