Neste's Interim Report for January-June 2016

Neste Corporation
Interim Report
28 July 2016 at 9 am. (EET)

Neste's Interim Report for January-June 2016

Strong performance continued - high operating profit and cash flow

Second quarter in brief:

• Comparable operating profit totaled EUR 282 million (Q2/2015: EUR 78 million) 
• IFRS operating profit totaled EUR 280 million (Q2/2015: 63 million)
• Oil Products' total refining margin was USD 11.19/bbl (Q2/2015: USD 10.83/bbl)
• Renewable Products' comparable sales margin was USD 405/ton (Q2/2015: USD 210/ton)
• Cash flow before financing activities was EUR 346 million (Q2/2015: EUR 14 million)

January-June in brief:

• Comparable operating profit totaled EUR 457 million (1-6/2015: EUR 293 million) 
• IFRS operating profit totaled EUR 534 million (1-6/2015: EUR 296 million)
• Cash flow before financing activities was EUR 420 million (1-6/2015: EUR -69 million)
• Return on average capital employed (ROACE) was 19.1% over the last 12 months (2015: 16.3%)
• Leverage ratio was 25.2% at the end of June (31.12.2015: 29.4%)
• Comparable earnings per share: EUR 1.41 (1-6/2015: EUR 0.80)
• Earnings per share: EUR 1.67 (1-6/2015: EUR 0.87)

President & CEO Matti Lievonen:

"Neste's strong performance continued as we were able to improve our result by successful own actions, which were reflected in high additional margins. The reference margin in Oil Products was below last year's level, but almost at par in Renewable Products. Neste recorded a comparable operating profit of EUR 282 million during the second quarter, compared to EUR 78 million last year, which was impacted by a scheduled major turnaround at the Porvoo refinery.

Oil Products generated a comparable operating profit of EUR 149 million (EUR 14 million) during the second quarter. Reference margin averaged USD 5.6/bbl, which was USD 3.1/bbl lower than in the same period last year. Although gasoline margins softened during the quarter, gasoline continued as the strongest part of the barrel. Diesel margins recovered during the quarter as refiners shifted to maximize gasoline production. Good operational performance and favorable sales structure enabled maintaining high additional margin at USD 5.6/bbl.

Renewable Products recorded a comparable operating profit of EUR 119 million (EUR 54 million) during the second quarter. Renewable Products' reference margin remained almost at the same level as in the corresponding period last year. We continued to be able to increase our additional margin significantly by successful margin management, sales allocation, and by capturing a high share of the US Blender's Tax Credit. Feedstock optimization continued, and the share of waste and residue feedstocks reached 93% of total inputs during the second quarter. The major turnaround at the Rotterdam refinery has now been successfully completed and will help ensure the refinery's performance and safety during the coming years. The turnaround had a EUR 35 million negative impact on the operating profit.

Oil Retail's markets continued supportive, and we were able to increase profits by higher sales volumes particularly in the Baltic markets. The segment generated a comparable operating profit of EUR 23 million, higher than the EUR 22 million recorded in the second quarter of 2015.

Crude oil and renewable feedstock price changes, as well as demand balances, will be reflected in the oil and renewable fuel markets. Relatively low crude oil prices are expected to continue supporting product demand. Neste expects Oil Products' reference margin to be somewhat lower in the second half of 2016 than in the first half of the year, as global product inventories are currently on a high level. The Porvoo refinery is expected to run at high utilization rate with no major maintenance shutdowns scheduled.

Renewable Products' reference margin is expected to remain at approximately the average level of the year 2015, and the additional margin is expected to remain strong. Utilization rates of our renewable diesel production facilities are expected to be high.

In Oil Retail the sales volumes and unit margins are expected to follow the previous years' seasonality pattern.

The year has continued well, and we are confident that the year 2016 will be another successful one for Neste."

The Group's second-quarter 2016 results

Neste's revenue in the second quarter totaled EUR 2,927 million (EUR 2,605 million). The increase mainly resulted from higher sales volumes compared to the second quarter of 2015, which was impacted by the major turnaround at the Porvoo refinery. The revenue growth was negatively impacted by lower overall sales prices caused by the oil price decline year-on-year. The Group's comparable operating profit totaled EUR 282 million (EUR 78 million). Oil Products' result was negatively impacted by lower reference margin, but that was compensated by higher additional margin and higher sales volumes in an operationally sound quarter. Renewable Products' result improved mainly due to a significantly higher additional margin despite the major turnaround implemented at the Rotterdam refinery. Oil Retail's result was positively impacted by higher sales volumes year-on-year. The Others segment's comparable operating profit was higher compared to the second quarter of 2015, mainly due to Nynas' better result.

Oil Products' second-quarter comparable operating profit was EUR 149 million (14 million), Renewable Products' EUR 119 million (54 million), and Oil Retail's EUR 23 million (22 million). The comparable operating profit of the Others segment totaled EUR -8 million (-14 million); Nynas accounted for EUR 5 million (-6 million) of this figure.

The Group's IFRS operating profit was EUR 280 million (63 million), which was impacted by inventory gains totaling EUR 163 million (78 million), changes in the fair value of open commodity and currency derivatives totaling EUR -155 million (-91 million), mainly related to hedging of inventories. Profit before income taxes was EUR 254 million (52 million), net profit EUR 214 million (42 million), and earnings per share EUR 0.83 (0.17).

The Group's January-June 2016 results

Neste's revenue during the first six months totaled EUR 5,234 million (EUR 5,348 million). Sales volumes were higher, but the revenue decrease resulted from lower overall sales prices caused by the oil price decline year-on-year. The Group's comparable operating profit was EUR 457 million (EUR 293 million). Oil Products' result was negatively impacted by reference margin, which was clearly lower than during the first half of 2015. However, additional margin increased, and the Porvoo refinery was in full operation with high utilization in the second quarter, compared to the scheduled major turnaround implemented in the corresponding period last year. Renewable Products improved as a result of successful margin management, sales allocation and feedstock optimization. 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 2015.

Oil Products' six-month comparable operating profit was EUR 235 million (170 million), Renewable Products' EUR 199 million (96 million), and Oil Retail's EUR 45 million (39 million). The comparable operating profit of the Others segment totaled EUR -19 million (-11 million); Nynas accounted for EUR 5 million (4 million) of this figure.

The Group's IFRS operating profit was EUR 534 million (296 million), which was impacted by inventory gains totaling EUR 211 million (2 million), changes in the fair value of open commodity and currency derivatives totaling EUR -131 million (-73 million), mainly related to hedging of inventories, and capital gains totaling EUR 11 million (77 million), mainly related to the sale of Neste's existing power plant to Kilpilahti Power Plant Ltd. Profit before income taxes was EUR 484 million (257 million), net profit EUR 428 million (223 million), and earnings per share EUR 1.67 (0.87).

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.

Relatively low crude oil prices are expected to continue supporting product demand. Crude oil supply is expected to increase as the economic sanctions against Iran are lifted and more medium heavy crude oil will be brought to the European market in 2016. Global oil demand growth estimates for 2016 have increased typically to 1.4 million bbl/d level, and both gasoline and diesel demand are expected to continue solid growth. In light of the expected refining capacity growth, the global product supply and demand look reasonably balanced mid-term.

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. Market volatility in feedstock prices is expected to continue, which will have an impact on the Renewable Products segment's profitability.

In 2016, Neste's effective EUR/USD exchange rate is expected to stay close to the current market rate, the Capital expenditure is estimated to be approximately EUR 400 million.

Neste expects Oil Products' reference margin to be somewhat lower in the second half of 2016 than in the first half of the year, as global product inventories are currently on a high level. The Porvoo refinery is expected to run at high utilization rate with no major maintenance shutdowns scheduled.

Renewable Products' reference margin is expected to remain at approximately the average level of the year 2015, and the additional margin is expected to remain strong. Utilization rates of our renewable diesel production facilities are expected to be high.

In Oil Retail the sales volumes and unit margins are expected to follow the previous years' seasonality pattern.

The year has continued well, and we are confident that the year 2016 will be another successful one for Neste.

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 2016 results will be held today, 28 July 2016, at 11:30 am. 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 28 July 2016 at 3 pm. Finland / 1 pm. London / 8 am. New York. The call-in numbers are as follows: Finland: +358 (0)9 2310 1618, rest of Europe: +44 (0)20 3427 0502, US: +1 646 254 3369, using access code 4563376. The conference call can be followed at the company's web site. An instant replay of the call will be available until 4 August 2016 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 4563376.

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. We are the world's leading producer of renewable diesel, and our annual production capacity is more than 2 million tons. We also are the world's largest company providing renewable fuel from waste and residues. 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 2015 amounted to approximately EUR 11 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