Neste's Interim Report for January–September 2020
Neste Corporation, Interim Report, 22 October 2020 at 9 a.m. (EET)
Strong performance in Renewable Products – very challenging market in Oil Products continues
Third quarter in brief:
- Comparable operating profit totaled EUR 373 million (EUR 435 million)
- Operating profit totaled EUR 425 million (EUR 442 million)
- Renewable Products' comparable sales margin, including BTC, was USD 744/ton (USD 722/ton)
- Oil Products' total refining margin was USD 5.89/bbl (USD 12.07/bbl)
- Cash flow before financing activities was EUR 315 million (EUR 71 million)
Comparable operating profit totaled EUR 1,036 million (EUR 1,181 million)
- Operating profit totaled EUR 830 million (EUR 1,184 million)
- Cash flow before financing activities was EUR -51 million (EUR 211 million)
- Cash-out investments were EUR 751 million (EUR 346 million)
- Return on average capital employed (ROACE) was 23.1% over the last 12 months (2019: 26.6%)
- Leverage ratio was 4.5% at the end of September (31.12.2019: -3.3%)
- Comparable earnings per share: EUR 1.16 (EUR 1.12)
- Earnings per share: EUR 0.92 (EUR 1.11)
President and CEO Peter Vanacker:
“Neste's overall performance was solid during the third quarter despite the COVID-19 pandemic. Renewable Products business was very resilient and improved its sales margin and sales volume compared to the corresponding period last year. Oil Products continued to suffer from a very weak refining market caused by the global COVID-19 related demand destruction and over-supply, and the segment delivered a slightly negative comparable operating profit. Marketing & Services performed very well during the summer period also considering the earlier divestment of our Russian business. The Group posted a comparable operating profit of EUR 373 million, compared to EUR 435 million in the corresponding period last year. Neste reached a ROACE of 23.1% over the last 12 months, and had a leverage ratio of 4.5% at the end of September.
Renewable Products posted a very good comparable operating profit of EUR 352 million (EUR 305 million) in the third quarter. The renewable diesel demand remained good, and our sales volumes were relatively stable at 730,000 tons. The renewable feedstock markets remained tight. As a result of successful sales performance and a positive contribution from hedging, we were able to increase our sales margin to USD 744/ton. The sales margin was also supported by narrowing waste and residues price differentials to vegetable oils. The operational performance at our renewable diesel refineries was very good with a capacity utilization rate of 95%. As communicated earlier, the planned catalyst change at the Singapore refinery was completed in July, and another planned catalyst change at one of the Porvoo units in September. The share of waste and residues was 86% of the total renewable raw material inputs.
Oil Products posted a comparable operating profit of EUR -1 million (EUR 113 million) in the third quarter. The global demand is gradually recovering, but still depressed due to the COVID-19 pandemic, and the market remains over-supplied. The reference margin, which reflects the general market conditions, continued to be impacted by an exceptionally weak product market. The reference margin averaged USD -0.8/bbl compared to USD 7.3/bbl in the third quarter of 2019, which had a negative impact of EUR 170 million on the comparable operating profit year-on-year. Our additional margin was supported by good operational performance, currency hedging and contango inventory profits. Several short term cost reduction measures have been successfully implemented.
In order to ensure the long-term competitiveness of the Oil Products business we have initiated co-operation negotiations on a plan to restructure our refinery operations in Finland. We are exploring the shutdown of the refinery operations in Naantali and focusing the Naantali site on the terminal and harbor operations, as well as transforming the Porvoo refinery operations to co-processing renewable and circular raw materials. If implemented, the plans would mean up to 470 redundancies, including possible outsourcing. The decisions on the measures and impacts on the various functions, personnel groups and locations will be made after the negotiations have been concluded. The planned changes are expected to result in annual fixed cost savings of approximately EUR 50 million.
Marketing & Services posted a comparable operating profit of EUR 26 million (EUR 28 million) in the third quarter. Sales volumes were still negatively impacted by the COVID-19 pandemic, but we have been able to improve unit margins and have successfully lowered fixed costs.
The Others segment's comparable operating profit was EUR -5 million (EUR -13 million) in the third quarter. Nynas joint venture has been part of this segment. Neste AB sold its entire shareholding in Nynas AB to Bitumina Industries Ltd on 15 September 2020.
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 project is proceeding according to the updated completion schedule. Our future renewables capacity expansion project’s feasibility study phase is progressing. We have made several new contracts and partnerships in Renewable Aviation and Renewable Polymers & Chemicals businesses despite the COVID-19 situation. We are on track with our Neste Excellence program with a target to achieve at least EUR 225 million profit improvement by the end of 2022 compared to the year 2018 baseline. Unprecedented uncertainty on the further development of the COVID-19 pandemic and its impact on the global economy continues."
The Group's third quarter 2020 results
Neste's revenue in the third quarter totaled EUR 2,881 million (3,961 million). The revenue decline resulted from the lower crude oil price, which had a negative impact of approx. EUR 700 million, and lower sales volumes of conventional oil products, which had a negative impact of approx. EUR 400 million on the revenue. The Group’s comparable operating profit was EUR 373 million (435 million). Renewable Products' comparable operating profit was EUR 352 million (305 million), showing the segment’s continued resilience in the turbulent market. Oil Products' comparable operating profit was EUR -1 million (113 million), due to the exceptionally weak refining market. Marketing & Services comparable operating profit was EUR 26 million (28 million), reflecting its very good performance. The Others segment's comparable operating profit of EUR -5 million (-13 million).
The Group’s operating profit was EUR 425 million (442 million), which was positively impacted by inventory valuation gains of EUR 68 million (losses of 15 million), and changes in the fair value of open commodity and currency derivatives totaling EUR 27 million (54 million), mainly related to inventory hedging. As the shares of Nynas AB were sold, a loss on the sale and related release of cumulative currency translation differences totaling EUR 42 million was booked. Profit before income taxes was EUR 407 million (341 million), and net profit EUR 347 million (267 million). Comparable earnings per share were EUR 0.40 (0.35), and earnings per share EUR 0.45 (0.35).
The Group's January–September 2020 results
Neste's revenue in the first nine months totaled EUR 8,723 million (11,787 million). The revenue decline resulted from the lower crude oil price, which had a negative impact of approx. EUR 2.2 billion, and lower sales volumes of conventional oil products, which had a negative impact of approx. EUR 800 million on the revenue. The Group’s comparable operating profit was EUR 1,036 million (1,181 million). Renewable Products' nine-month comparable operating profit was EUR 996 million (928 million), supported by higher sales volumes than in the corresponding period of 2019. Oil Products' nine-month comparable operating profit was only EUR 13 million (269 million), due the exceptionally weak refining market. Marketing & Services comparable operating profit was EUR 53 million (66 million), mainly due to lower sales volumes compared to the first nine months of 2019 and divestment of the Russian business. The Others segment's cumulative comparable operating profit of EUR -30 million (-84 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 830 million (1,184 million), which was impacted by inventory valuation losses of EUR 98 million (gains of 93 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -64 million (-64 million), mainly related to margin hedging. The divestment of Nynas resulted in a capital loss of EUR 42 million in the third quarter. Profit before income taxes was EUR 807 million (1,037 million), and net profit EUR 709 million (855 million). Comparable earnings per share were EUR 1.16 (1.12), and earnings per share EUR 0.92 (1.11).
Visibility in the global economic development still remains 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 80%, Neste's effective EUR/US dollar rate is expected to be within a range 1.14-1.18 in the fourth quarter of 2020.
Sales volumes of renewable diesel in the fourth quarter are expected to be slightly lower or similar to the previous quarter. Waste and residue markets are anticipated to remain tight. While global availability of waste and residues has been gradually recovering, their demand continues solid. Utilization rates of our renewables production facilities are forecasted to remain high, except for the scheduled catalyst change at the Rotterdam refinery in the fourth quarter. This catalyst change is estimated to have a negative impact of approximately EUR 50 million on the segment’s comparable operating profit, mainly during the fourth quarter.
Oil Products’ fourth-quarter market demand is seen to continue slowly recovering, but still to be impacted by the COVID-19 pandemic. The reference margin is expected to remain very low and very volatile. The contango inventory profits are expected to positively impact also the fourth quarter result.
In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern in the fourth quarter. The COVID-19 pandemic is anticipated to have some negative impact on the demand and sales volumes in the fourth quarter.
Based upon our business continuity plans, we continue to focus on short-term cost reduction activities. The ongoing co-operation negotiations regarding the restructuring of Oil Products’ refining operations in Finland are expected to be completed in the fourth quarter.
Neste estimates the Group’s full-year 2020 capital expenditure to be approximately EUR 800 million, excluding M&A. Previously the full-year capital expenditure was estimated to be approx. EUR 850 million.
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
A conference call in English for investors and analysts will be held today, 22 October 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 2311 3291, rest of Europe: +44 (0) 2071 928338, US: +1 646 741 3167, using access code 2165150. The conference call can be followed at the company's website. An instant replay of the call will be available until 29 October 2020 at +44 (0) 333 300 9785 for Europe and +1 866 331 1332 for the US, using access code 2165150.
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 renewable diesel and sustainable aviation fuel, developing chemical recycling to combat the plastic waste challenge. We aim at helping customers to reduce greenhouse gas emissions with our renewable and circular solutions by at least 20 million tons annually by 2030. As a technologically advanced refiner of high-quality oil products with a commitment to reach carbon-neutral production by 2035, we are also introducing renewable and recycled raw materials such as waste plastic as refinery raw materials. We have consistently been included in the Dow Jones Sustainability Indices and the Global 100 list of the world’s most sustainable companies. In 2019, Neste's revenue stood at EUR 15.8 billion, with 82% of the company’s comparable operating profit coming from renewable products. Read more: neste.com