Neste's Interim Report for January-June 2015

Neste Corporation
Interim Report
5 August 2015 at 9 am. (EET)

Neste's Interim Report for January-June 2015

Continuing strong refining market enabled good result despite the scheduled major turnaround at the Porvoo refinery

Second quarter in brief:

• Comparable operating profit totaled EUR 78 million (Q2/2014: EUR 86 million)
• Negative impact of the Porvoo refinery turnaround on comparable operating profit was EUR 130 million
• Total refining margin was USD 10.83/bbl (Q2/2014: USD 8.33/bbl)
• Renewable Products' comparable sales margin was USD 210/ton (Q2/2014: USD 200/ton)
• Net cash from operations totaled EUR 227 million (Q2/2014: EUR 219 million)

January-June in brief:

• Comparable operating profit totaled EUR 293 million (1-6/2014: EUR 136 million)
• Return on average capital employed (ROACE) was 12.5% over the last 12 months (2014: 10.1%)
• Leverage ratio was 40.3% as of the end of June (31.12.2014: 37.9%)
• Comparable earnings per share: EUR 0.80 (1-6/2014: EUR 0.30)

President & CEO Matti Lievonen:

"The second quarter was characterized by a strong refining margin environment, and the major turnaround at our Porvoo refinery. Neste recorded a comparable operating profit of EUR 78 million during the second quarter, compared to the EUR 86 million during the corresponding period last year. As announced on 16 June, the turnaround had a negative impact of approximately EUR 130 million on comparable operating profit.

Oil Products generated a comparable operating profit of EUR 14 million (EUR 33 million) during the second quarter. Neste's reference margin averaged USD 8.7/bbl, which was more than double that in the same period last year. Gasoline margins continued particularly high, supported by global demand growth and the summer driving season. The maintenance turnaround implemented during the second quarter was the largest in the history of the Porvoo refinery. It has now been successfully completed and will help ensure the refinery's performance and safety for the next five years.

Renewable Products recorded a comparable operating profit of EUR 54 million (EUR 32 million) during the second quarter. Renewable Products' additional margin and a stronger US Dollar had a positive effect on the result compared to the same period last year. Feedstock optimization continued, and the share of waste and residue feedstocks reached 67% of total inputs. The Porvoo turnaround reduced renewable diesel production by more than 10% of total production capacity during the second quarter.

Oil Retail's markets continued competitive, but we were able to increase profits by higher sales volumes particularly in the Baltic markets, and improving margins. The segment generated a comparable operating profit of EUR 22 million, higher than the EUR 20 million booked in the second quarter of 2014.

Global oil demand growth estimates for 2015 have been generally upgraded to 1.3-1.5 million bbl/day, and the forward refining margin outlook for the coming quarters is stronger than that seen in April. Current crude oil price level promotes oil product demand, and there seems to be limited upside potential in oil price.

Our result guidance remains unchanged: Neste estimates the Group's full-year 2015 comparable operating profit to remain robust and to be higher than that reached in 2014."

The Group's second-quarter 2015 results

Neste's revenue in the second quarter totaled EUR 2,605 million (EUR 4,104 million). The decrease mainly resulted from lower sales volumes due to the Porvoo refinery turnaround, which had an impact of EUR 1.1 billion, and lower sales prices caused by the oil price decline, which had a negative impact of EUR 0.7 billion. The change in USD/EUR exchange rate had a positive impact of EUR 0.3 billion on the revenue year-on-year. The Group's comparable operating profit came in at EUR 78 million (EUR 86 million). Oil Products' result was negatively impacted by the planned major turnaround at the Porvoo refinery, but positively impacted by reference refining margins, which were higher than in the second quarter of 2014. Renewable Products' result improved mainly due to higher additional margin and a favorable USD/EUR exchange rate. Oil Retail's result was positively impacted by higher sales volumes and margins year-on-year. The Others segment recorded a lower comparable operating profit compared to the second quarter of 2014.

Oil Products' second-quarter comparable operating profit was EUR 14 million (33 million), Renewable Products' EUR 54 million (32 million), and Oil Retail's EUR 22 million (20 million). The comparable operating profit of the Others segment totaled EUR -14 million (2 million).

The Group's IFRS operating profit was EUR 63 million (70 million), which was impacted by inventory gains totaling EUR 78 million (2 million), changes in the fair value of open oil derivatives totaling EUR -91 million (-18 million), mainly related to hedging of inventories, and non-recurring items totaling EUR -3 million (0 million). Pre-tax profit was EUR 52 million (48 million), profit for the period EUR 42 million (39 million), and earnings per share EUR 0.17 (0.15). The Group's effective tax rate was 20% (18%).

The Group's January-June 2015 results

Neste's revenue during the first six months totaled EUR 5,348 million (EUR 7,613 million). The decrease mainly resulted from lower overall sales prices caused by the oil price decline, which had an impact of EUR 1.9 billion, and lower sales volumes due to the Porvoo refinery maintenance during the second quarter, which had a negative impact of EUR 1.1 billion. The change in USD/EUR exchange rate had a positive impact of EUR 0.7 billion on the revenue year-on-year. The Group's comparable operating profit came in at EUR 293 million (EUR 136 million). Oil Products' result was positively impacted by reference refining margins, which were clearly higher than during the first half of 2014. However, the scheduled major turnaround at the Porvoo refinery negatively impacted the segment's result during the second quarter. Renewable Products improved as a result of successful margin management, feedstock optimization and a favorable USD/EUR exchange rate. Oil Retail's result was positively impacted by increased sales volumes and margins. The Others segment recorded a lower comparable operating profit compared to the first half of 2014.

Oil Products' six-month comparable operating profit was EUR 170 million (65 million), Renewable Products' EUR 96 million (44 million), and Oil Retail's EUR 39 million (34 million). The comparable operating profit of the Others segment totaled EUR -11 million (-9 million).

The Group's IFRS operating profit was EUR 296 million (120 million), which was impacted by inventory gains totaling EUR 2 million (losses of 1 million), changes in the fair value of open oil derivatives totaling EUR -73 million (-13 million), mainly related to hedging of inventories, and non-recurring items totaling EUR 74 million (-2 million), mainly related to the capital gain from the disposal of the Porvoo electricity grid. Pre-tax profit was EUR 257 million (81 million), profit for the period EUR 223 million (66 million), and earnings per share EUR 0.87 (0.25). The Group's effective tax rate was 13% (20%) mainly due to the tax-exempt items, such as the sale proceeds of the shares of Kilpilahden Sähkönsiirto Oy, electricity grid company.

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 oil demand growth estimates for 2015 have been increased and are generally at 1.3-1.5 million bbl/d, as especially gasoline demand growth has been healthy. The forward reference refining margin outlook for the coming quarters is stronger than that seen in April. While the refining capacity growth in Asia and the Middle East and ending of the refinery maintenance season are expected to increase product supply, the transatlantic supply demand balance is also dependent on demand growth and possible refinery shutdowns. Lifting of the economic sanctions against Iran could increase the supply of medium heavy crude oil in the European market in the future.

Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks, but no fundamental changes in the drivers influencing long-term average feedstock price differentials are expected. Feedstock prices have been on a downward trend, but vegetable oil price differentials have remained narrower than the historical average. Market volatility in feedstock and oil prices is expected to continue, which will have an impact on the Renewable Products segment's profitability.

Crude oil price changes, supply and demand balances, together with uncertainties related to political decision-making on biofuel mandates, the US Blender's Tax Credit (BTC) and other incentives will be reflected in the oil and renewable fuel markets. Reintroduction of the BTC would have a positive impact on Neste's comparable operating profit, and it is not included in the company's current result guidance.

Neste's guidance remains unchanged: Neste estimates the Group's full-year 2015 comparable operating profit to remain robust and to be higher than that reached in 2014.

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

News conference and conference call

A press conference in Finnish on second-quarter 2015 results will be held today, 5 August 2015, at 11:30 a.m. EET at the company's headquarters at Keilaranta 21, Espoo. www.neste.com will feature English versions of the presentation materials. A conference call in English for investors and analysts will be held on 5 August 2015 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 9543, rest of Europe: +44 (0)20 3427 1906, US: +1646 254 3362, using access code 6785568. The conference call can be followed at the company's web site. An instant replay of the call will be available until 12 August 2015 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 6785568.

Neste in brief

Neste is a pioneer in oil refining and renewable solutions. We provide our customers with premium-quality products for cleaner traffic and industrial products based on world-class research. Our sustainable operations have received recognition in the Dow Jones Sustainability World Index and the Global 100 list of the world's most sustainable companies, among others. Our net sales for 2014 amounted to approximately EUR 15 billion, and our shares are listed on Nasdaq Helsinki. Cleaner traffic, energy and life are moved forward by about 5,000 professionals. More information: neste.com/en