Neste's Half-Year Financial Report for January-June 2017

Neste Corporation
Half-Year Financial Report
3 August 2017 at 9 am (EET)

Neste's Half-Year Financial Report for January-June 2017

Solid performance continued - Record-high sales volumes in renewables

Second quarter in brief:

• Comparable operating profit totaled EUR 236 million (EUR 282 million)
• Operating profit totaled EUR 264 million (EUR 280 million)
• Oil Products' total refining margin was USD 10.67/bbl (USD 11.19/bbl)
• Renewable Products' comparable sales margin was USD 270/ton (USD 405/ton)
• Cash flow before financing activities was EUR 82 million (EUR 346 million)

January-June in brief:

• Comparable operating profit totaled EUR 439 million (EUR 457 million)
• Operating profit totaled EUR 536 million (EUR 534 million)
• Cash flow before financing activities was EUR 58 million (EUR 420 million)
• Return on average capital employed (ROACE) was 16.2% over the last 12 months (2016: 16.9%)
• Leverage ratio was 19.6% at the end of June (31.12.2016: 15.4%)
• Comparable earnings per share: EUR 1.24 (EUR 1.41)
• Earnings per share: EUR 1.56 (EUR 1.67)

President & CEO Matti Lievonen:

"Neste's solid performance continued in the second quarter. Oil Products delivered good results, Renewable Products was able to increase its sales volumes to a record-high level, and Marketing & Services' operating profit was back on track. Neste recorded a comparable operating profit of EUR 236 million during the second quarter, compared to EUR 282 million in the corresponding period of 2016, which had been also positively impacted by the US Blender's Tax Credit.

Oil Products posted a comparable operating profit of EUR 122 million, compared to EUR 149 million in the second quarter of 2016. Reference margin averaged USD 5.7/bbl, which was similar to the corresponding quarter last year. Our additional margin was USD 5.0/bbl, below the USD 5.6/bbl level achieved in the operationally excellent second quarter of 2016. We will be completing the ongoing strategic refinery investments during the third quarter, which will further support the additional margin going forward.

Renewable Products recorded a comparable operating profit of EUR 101 million, compared to EUR 119 million in the second quarter of 2016. The segment was able to keep its result at a good level with the support of higher sales volumes and more favorable market, despite the expiry of the US Blender's Tax Credit. The reference margin was 20% higher, but the additional margin was clearly lower compared to the corresponding period last year, mainly due to the lack of the Blender's Tax Credit. Renewable diesel sales volumes reached 674,000 tons, which is a new quarterly record. Second quarter sales allocation was quite typical: 68% of sales volumes were allocated to Europe and 32% to North America. Renewable diesel production facilities operated at a 96% utilization rate. Feedstock optimization continued and the share of waste and residue feedstock was high at 81% of total renewable inputs.

In Marketing & Services our sales volumes were maintained at the previous year's second quarter level. Unit margins recovered from the first quarter, but were still lower year-on-year. The segment generated a comparable operating profit of EUR 19 million (23 million).

Neste expects Oil Products' reference refining margin in 2017 to be on average similar to that in 2016. Our Porvoo refinery is expected to run at a high utilization rate, and to have only normal unit maintenance, including a four week scheduled decoking maintenance at the Production Line 4 starting in October. Start-up of the new Solvent Deasphalting (SDA) unit, which will improve the product yield and crude flexibility, has progressed at the Porvoo refinery during the second quarter and the unit is expected to reach high capacity utilization during the second half of the year. A major two-month turnaround at the Naantali unit is scheduled to start in August. Neste targets an average additional margin of at least USD 5.5/bbl after the ongoing strategic investments in Porvoo and Naantali are completed.

Renewable Products' reference margin in 2017 is expected to be higher than the average level of the year 2016. Neste continues to optimize sales margin by volume allocation between the core markets, and aims at higher additional margin. Sales volumes of the renewable diesel delivered as 100% to end-users are expected to grow from 15% in 2016 and be close to 25% of the total sales volumes in 2017. The vegetable oil market is expected to remain volatile, and we aim to expand the use of lower quality waste and residue feedstock further. Utilization rates of our renewable diesel facilities are expected to stay high.

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

Our strategy implementation is proceeding well, we continue to focus on our customers and growth initiatives, and will be completing the already announced strategic investments in 2017. Therefore, we are confident that the year 2017 will be another successful one for Neste."

The Group's second-quarter 2017 results

Neste's revenue in the second quarter totaled EUR 3,280 million (2,927 million). The increase mainly resulted from higher sales volumes in Renewable Products, which had a positive impact of over EUR 200 million on the revenue. The Group's comparable operating profit was EUR 236 million (282 million). Oil Products' result was lower than in the second quarter of 2016, mainly due to lower additional margin and higher fixed costs. Renewable Products' reference margin was stronger and sales volumes record-high, but additional margin was clearly lower than last year, mainly due to expiry of the US Blender's Tax Credit. Marketing & Services improved its performance from the first quarter, but had a lower comparable operating profit compared to the second quarter of 2016. The Others segment's comparable operating profit was slightly better than in the second quarter of 2016.

Oil Products' second-quarter comparable operating profit was EUR 122 million (149 million), Renewable Products' EUR 101 million (119 million), and Marketing & Services' EUR 19 million (23 million). The comparable operating profit of the Others segment totaled EUR -6 million (-8 million); Nynas accounted for EUR -1 million (5 million) of this figure.

The Group's operating profit was EUR 264 million (280 million), which was impacted by inventory losses of EUR 70 million (gains of 163 million), and changes in the fair value of open commodity and currency derivatives of EUR 82 million (-155 million). Profit before income taxes was EUR 240 million (254 million), and net profit EUR 200 million (214 million). Comparable earnings per share were EUR 0.68 (0.84), and earnings per share EUR 0.78 (0.83).

The Group's January-June 2017 results

Neste's revenue during the first six months totaled EUR 6,351 million (5,234 million). The revenue increase mainly resulted from higher sales prices, which had a positive impact of approx. EUR 700 million. Higher sales volumes increased revenue by over EUR 200 million and stronger USD exchange rate by over EUR 100 million. The Group's comparable operating profit was EUR 439 million (457 million). Oil Products' result was positively impacted by higher sales volumes and a stronger US Dollar compared to the corresponding period last year. Renewable Products reference margin and sales volumes improved, but the additional margin was clearly below the previous year's level, mainly due to expiry of the US Blender's Tax Credit. Marketing & Services' result was negatively impacted by lower unit margins. Also the Others segment recorded a lower comparable operating profit compared to the first half of 2016.

Oil Products' six-month comparable operating profit was EUR 248 million (235 million), Renewable Products' EUR 181 million (199 million), and Marketing & Services' EUR 31 million (45 million). The comparable operating profit of the Others segment totaled EUR -23 million (-19 million); Nynas accounted for EUR -8 million (5 million) of this figure.

The Group's operating profit was EUR 536 million (534 million), which was impacted by inventory losses totaling EUR 28 million (gains of 211 million), and changes in the fair value of open commodity and currency derivatives totaling EUR 105 million (-131 million), mainly related to hedging of inventories. Profit before income taxes was EUR 477 million (484 million), and net profit EUR 402 million (428 million). Comparable earnings per share were EUR 1.24 (1.41), and earnings per share EUR 1.56 (1.67).

Outlook

Developments in the global economy have been reflected in the oil, renewable fuel, and renewable feedstock markets; and volatility in these markets is expected to continue.

Global crude oil inventories are expected to stay high for the foreseeable future in spite of the OPEC production cuts as the crude oil supply and demand are expected to be quite balanced. Global oil demand growth estimates for 2017 by recognized experts currently vary between 1.3 and 1.6 million bbl/d. In light of the expected refining capacity growth the global product supply and demand looks relatively balanced.

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 expected to continue, which will have an impact on the Renewable Products segment's profitability.

Neste expects Oil Products' reference refining margin in 2017 to be on average similar to that in 2016. Our Porvoo refinery is expected to run at a high utilization rate, and to have normal unit maintenance, including a four week scheduled decoking maintenance at the Production Line 4 starting in October. Start-up of the new Solvent Deasphalting (SDA) unit, which will improve the product yield and crude flexibility, has progressed during the second quarter and the unit is expected to reach high capacity utilization during the second half of the year. A major two-month turnaround at the Naantali unit is scheduled to start mid-August. Neste targets an average additional margin of at least USD 5.5/bbl after the ongoing strategic investments in Porvoo and Naantali are completed.

Renewable Products' reference margin in 2017 is expected to be higher than the average level of the year 2016. Neste continues to optimize sales margin by volume allocation between core markets, and aims at higher additional margin. Sales volumes of the 100% renewable diesel delivered to end-users are expected to grow from 15% in 2016 and be close to 25% of the total sales volumes in 2017. The vegetable oil market is expected to remain volatile, and Neste aims to expand the use of lower-quality waste and residue feedstock. Utilization rates of Neste's renewable diesel facilities are expected to be high. Positive news and more clarity in the US regulatory environment were received in July. The Environmental Protection Agency (EPA) confirmed the biomass-based diesel volume mandate for 2018 to 2.1 billion gallons, which represents a 5% increase year-on-year, and proposed a similar volume for 2019. California legislators also confirmed the extension of the state's cap and trade program and continuation of the Low Carbon Fuels Standard. Neste is currently evaluating the feasibility of options to invest in new renewables production capacity. The options under review include locations in the US and Singapore.

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

Our strategy implementation is proceeding well, we continue to focus on our customers and growth initiatives, and will be completing the already announced strategic investments in 2017. Therefore, we are confident that the year 2017 will be another successful one for Neste.

Conference call

A conference call in English for investors and analysts will be held today, 3 August 2017, 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 6937 9590, rest of Europe: +44 (0)20 7136 2051, US: +1 718 354 1359, using access code 2353832. The conference call can be followed at the company's web site. An instant replay of the call will be available until 10 August 2017 at +358 (0)9 2310 1650 for Finland, +44 (0)20 3427 0598 for Europe and +1 347 366 9565 for the US, using access code 2353832.

Further information:

Matti Lievonen, President & 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 choices for the needs of transport, businesses and consumers.  Our global range of products and services allows customers to reduce their carbon footprint by combining high-quality renewable products and oil products to tailor-made service solutions. We are the world's largest producer of renewable diesel refined from waste and residues, and we are also bringing renewable solutions to the aviation and plastics industries. We want to be a reliable partner, whose expertise, R&D and sustainable practices are widely respected. In 2016, Neste's net sales stood at EUR 11.7 billion, and we were on the Global 100 list of the 100 most sustainable companies in the world. Read more: neste.com