Neste's Interim Report for January–September 2022

Neste Corporation, Interim Report, 27 October 2022 at 9 a.m. (EET)

Strong performance continued in exceptional markets

Third quarter in brief: 

• Comparable EBITDA totaled EUR 979 million (EUR 524 million)
• EBITDA totaled EUR 456 million (EUR 735 million)
• Renewable Products' comparable sales margin was USD 756/ton (USD 679/ton)
• Oil Products' total refining margin was USD 28.0/bbl (USD 9.4/bbl)
• Cash flow before financing activities was EUR -18 million (EUR 171 million)

January-September in brief: 

• Comparable EBITDA totaled EUR 2,643 million (EUR 1,329 million)
• EBITDA totaled EUR 2,299 million (EUR 1,919 million)
• Cash flow before financing activities was EUR -986 million (EUR -213 million)
• Cash-out investments were EUR 1,312 million (EUR 1,004 million)
• Return on average capital employed (ROACE)* was 27.6% over the last 12 months (2021: 18.3%)
• Leverage ratio was 16.3% at the end of September (31.12.2021: 0.6%)
• Comparable earnings per share: EUR 2.21 (EUR 1.04)
• Earnings per share: EUR 1.79 (EUR 1.71)

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

President and CEO Matti Lehmus:

“Neste’s strong performance continued in the third quarter. We posted a comparable EBITDA of EUR 979 million compared to EUR 524 million in the corresponding period last year. The war in Ukraine continued to have a significant impact on international energy markets, leading to high albeit volatile oil product and natural gas prices in Europe. Renewable Products performed well despite an adverse impact from margin hedging and some logistical delays in product deliveries. Oil Products improved its performance as a result of the exceptionally strong refining market. Also Marketing & Services performed very well during the summer period. Our ROACE over the last 12 months was 27.6%, and we had a leverage ratio of 16.3% at the end of September.

Renewable Products posted a comparable EBITDA of EUR 389 million (EUR 357 million) in the third quarter. Due to challenges in outbound logistics, part of the planned end-September product deliveries were postponed to October. Sales volumes were 698,000 tons, impacted by the logistical delays and the scheduled maintenance turnaround at the Singapore refinery. Comparable sales margin averaged USD 756/ton, which was a good achievement considering the volatile product and feedstock markets, the negative impact of our margin hedging, and the delayed sales. Sales margin was higher than in the corresponding period last year, but slightly below our third-quarter guidance range. Successful feedstock mix optimization continued and the share of waste and residue inputs was 96%. 

Oil Products posted a comparable EBITDA of EUR 537 million (EUR 125 million) in the third quarter. European oil product and natural gas prices remained exceptionally high. The refining margin was supported particularly by the strong diesel margins. The last shipment of Russian crude oil was received in July, and replacing natural gas with propane at the Porvoo refinery has been successfully executed and economically attractive. Our total refining margin was high at USD 28/bbl and almost at the record level of the second quarter of 2022. This boosted the segment’s comparable EBITDA significantly in the third quarter.

Marketing & Services posted a strong comparable EBITDA of EUR 38 million (EUR 32 million) in the third quarter. High price levels have had a negative impact on demand, but we have been able to gain market share and increase our unit margins.

During the third quarter we completed a strategy review, and continued to take important steps in executing our growth strategy. Our ongoing Singapore expansion project is approaching mechanical completion and it is proceeding according to schedule for targeted start-up at the end of the first quarter of 2023. The capital expenditure forecast of the project has been increased from EUR 1.5 billion to EUR 1.65 billion, reflecting recent changes in currency exchange rates and the cost impact of project execution during the pandemic. The Rotterdam expansion project is on track with the majority of the equipment purchases already done as a result of a successful front-end loading procurement.

I am pleased to note that we have also finalized the transaction to establish a 50/50 joint operation for production of renewable fuels with Marathon Petroleum in the United States following satisfaction of all closing conditions. The joint operation called Martinez Renewables is expected to commence production in Martinez, California, in early 2023. Pretreatment capabilities are expected to come online in the second half of 2023, and the facility is expected to be capable of producing 2.1 million tons per year by the end of 2023. In the initial phase, the main feedstock for Martinez Renewables is expected to be primarily sustainably sourced soybean oil, but the share of waste and residue raw materials is expected to increase after the pretreatment capabilities come online. In Neste’s global feedstock supply the share of waste and residue raw materials is expected to stay above 90% in the coming years, while in the longer term the growth in novel vegetable oils' availability may increase the share of sustainably produced vegetable oils.

In Finland we launched a strategic study on transitioning our Porvoo refinery to a renewable and circular site and ending crude oil refining in the mid-2030s. Through co-processing and possible retrofitting of units, and benefiting from available refining assets, experience and know-how, we would have the potential to significantly grow our renewables and circular production in Porvoo in the long term. 

Our growth strategy and 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 third quarter 2022 results

Neste's revenue in the third quarter totaled EUR 6,583 million (4,026 million). The revenue growth resulted from higher market and sales prices, which had a positive impact of approx. EUR 2.4 billion, and lower sales volumes, which had a negative impact of approx. EUR 200 million. Additionally, a stronger US dollar had a positive impact of approx. EUR 400 million.

The Group’s comparable EBITDA was EUR 979 million (524 million). Renewable Products' comparable EBITDA was EUR 389 million (357 million), mainly due to a higher sales margin and stronger US dollar compared to the third quarter of 2021. Oil Products' comparable EBITDA was EUR 537 million (125 million), as a result of the exceptionally strong refining market. Marketing & Services’ comparable EBITDA was EUR 38 million (32 million). The Others segment's comparable EBITDA was EUR 3 million (10 million).

The Group’s EBITDA was EUR 456 million (735 million), which was impacted by inventory valuation losses of EUR 420 million (gains of 63 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -101 million (145 million), mainly related to margin hedging. Profit before income taxes was EUR 231 million (582 million), and net profit EUR 139 million (512 million). Comparable earnings per share were EUR 0.79 (0.42), and earnings per share EUR 0.18 (0.66).

The Group's January–September 2022 results

Neste's revenue in the first nine months totaled EUR 19,145 million (10,181 million). The revenue growth resulted from higher market and sales prices, which had a positive impact of approx. EUR 5.8 billion, and higher sales volumes, which had a positive impact of approx. EUR 2.4 billion. A stronger US dollar had a positive impact of approximately EUR 800 million on the revenue.

The Group’s comparable EBITDA was EUR 2,643 million (1,329 million). Renewable Products' nine-month comparable EBITDA was EUR 1,347 million (1,042 million), mainly due to the higher sales margin and a stronger US dollar than in the corresponding period of 2021. Oil Products' nine-month comparable EBITDA was EUR 1,204 million (185 million), mainly as a result of the improved refining market. Also the Porvoo refinery major turnaround had a negative impact on the corresponding period last year. Marketing & Services’ comparable EBITDA was EUR 105 million (80 million), as a result of higher unit margins compared to the first nine months of 2021. The Others segment's comparable EBITDA was EUR -8 million (24 million), due to increased common costs related to growth strategy execution.

The Group’s EBITDA was EUR 2,299 million (1,919 million), which was impacted by inventory valuation losses of EUR 152 million (gains of 445 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -179 million (139 million), mainly related to margin and utility price hedging. Profit before income taxes was EUR 1,716 million (1,462 million), and net profit EUR 1,377 million (1,318 million). Comparable earnings per share were EUR 2.21 (1.04), and earnings per share EUR 1.79 (1.71).

Outlook

Visibility in the global economy is low due to high inflation, reduced economic growth expectations and continued 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’ fourth-quarter sales volumes are expected to be higher than in the previous quarter. Waste and residue markets are anticipated to remain tight and volatile as demand continues to be robust. Our fourth-quarter sales margin is currently expected to be within the range USD 700-800/ton. However, forecasting of the quarterly margin remains challenging due to high market volatility. The segment’s fourth-quarter fixed costs are expected to be approximately EUR 55 million higher than in the previous quarter, reflecting the costs related to Martinez Renewables joint operation and the build-up of capabilities in anticipation of the Singapore expansion start-up.

The utilization rates of our renewables production facilities are forecasted to remain high, except for the scheduled seven-week turnaround at the Rotterdam refinery in the fourth quarter. The Rotterdam turnaround is currently estimated to have a negative impact of approximately EUR 100 million 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. Based on the current forward market, our fourth-quarter total refining margin is expected to remain solid, but lower compared to the high level in the third quarter of 2022. The fourth-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 fourth 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 1.06–1.075 in the fourth 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 Martinez Renewables. Possible further M&A is excluded from the figure.

According to our understanding, the EU solidarity contribution for the fossil fuel industry approved as part of the Regulation on an Emergency Intervention to Address High Energy Prices on 6 October 2022, would not be applicable to Neste.

Conference call

A conference call in English for investors and analysts will be held today, 27 October 2022, at 3 p.m. Finland / 1 p.m. London / 8 a.m. New York. In order to receive the participant dial in numbers and a unique personal PIN, participants are requested to register using the following link:

https://register.vevent.com/register/BI1729417f55c544c29304af4b5a8ed55a. The conference call can also be followed as a webcast at the company's web site. 

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