Neste's Interim Report for January-September 2015

Neste Corporation
Interim Report
23 October 2015 at 9 am. (EET)

Neste's Interim Report for January-September 2015

All-time high quarterly comparable operating profit as a result of strong refining market and good operational performance

Third quarter in brief:

• Comparable operating profit totaled EUR 281 million (Q3/2014: EUR 191 million) 
• Total refining margin was USD 13.19/bbl (Q3/2014: USD 10.77/bbl)
• Renewable Products' comparable operating profit was EUR 75 million (Q3/2014: EUR 53 million)
•  Net cash from operations totaled EUR 322 million (Q3/2014: EUR -144 million)

January-September in brief:

• Comparable operating profit totaled EUR 574 million (1-9/2014: EUR 327 million) 
• Return on average capital employed (ROACE) was 14.5% over the last 12 months (2014: 10.1%)
• Leverage ratio was 35.7% as of the end of September (31.12.2014: 37.9%)
• Comparable earnings per share: EUR 1.69 (1-9/2014: EUR 0.79)

President & CEO Matti Lievonen:

"The refining margin environment continued strong during the third quarter, and our production facilities were back to normal operation after the scheduled Porvoo turnaround. Neste posted a record-high comparable operating profit of EUR 281 million, compared to the EUR 191 million during the corresponding period last year. Additionally, favorable USD/EUR exchange rate contributed positively to our profitability. We also generated strong cash flow from our operations as a result of reduced working capital and high EBITDA.

Oil Products posted a comparable operating profit of EUR 178 million (EUR 111 million) during the third quarter. Neste's reference margin averaged USD 9.1/bbl, which was almost 60% higher than that in the same period last year. Gasoline margins continued particularly high, supported by global demand growth and the summer driving season. Our Porvoo refinery was running at 96% average utilization rate reflecting its successful return to normal operation.

Renewable Products recorded a comparable operating profit of EUR 75 million (EUR 53 million) during the third quarter. Renewable Products' higher sales volumes 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 75% of total inputs, an all-time high quarterly level.

In Oil Retail 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 27 million, slightly higher than in the third quarter of 2014.

The comparable operating profit posted during the first nine months was almost at full-year 2014 level, despite the scheduled major turnaround at Porvoo, showing strong performance of our businesses. While the refining market is expected to follow normal seasonality, market conditions seem to remain reasonably favorable. Therefore, the outlook for the full-year 2015 result remains robust."

The Group's third-quarter 2015 results

Neste's revenue in the third quarter totaled EUR 3,023 million (EUR 3,846 million). The decrease mainly resulted from lower sales prices caused by the oil price decline, which had a negative impact of EUR 1.6 billion on the revenue year-on-year. Change in USD/EUR exchange rate had a positive impact of EUR 0.6 billion, and higher sales volumes had a positive impact of EUR 0.2 billion year-on-year. The Group's comparable operating profit came in at EUR 281 million (EUR 191 million). Oil Products' result was positively impacted by higher reference margins and a favorable USD/EUR exchange rate. Renewable Products' result was also positively impacted by the stronger US dollar and higher sales volumes. Oil Retail had higher sales volumes and margins year-on-year. Others segment recorded a lower comparable operating profit compared to the third quarter of 2014.

Oil Products' third-quarter comparable operating profit was EUR 178 million (111 million), Renewable Products' EUR 75 million (53 million), and Oil Retail's EUR 27 million (26 million). The comparable operating profit of the Others segment totaled EUR -1 million (5 million).

The Group's IFRS operating profit was EUR 158 million (54 million), which was impacted by inventory losses totaling EUR 174 million (169 million), and changes in the fair value of open oil derivatives totaling EUR 51 million (38 million), mainly related to hedging of inventories. Pre-tax profit was EUR 158 million (27 million), profit for the period EUR 129 million (15 million), and earnings per share EUR 0.50 (0.06). The Group's effective tax rate was 18% (44%).

The Group's January-September 2015 results

Neste's revenue during the first nine months totaled EUR 8,372 million (EUR 11,459 million). The decrease resulted from lower overall sales prices caused by the oil price decline, which had an impact of EUR 3.5 billion, and lower sales volumes mainly due to the scheduled Porvoo refinery turnaround, which had a negative impact of EUR 0.9 billion. The change in USD/EUR exchange rate had a positive impact of EUR 1.3 billion on the revenue year-on-year. The Group's comparable operating profit came in at EUR 574 million (EUR 327 million). Oil Products' result was positively impacted by reference refining margins, which were clearly higher than during the first nine months of 2014. Renewable Products improved mainly as a result of higher additional margin 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 nine months of 2014.

Oil Products' nine-month comparable operating profit was EUR 348 million (176 million), Renewable Products' EUR 171 million (97 million), and Oil Retail's EUR 67 million (60 million). The comparable operating profit of the Others segment totaled EUR -12 million (-5 million).

The Group's IFRS operating profit was EUR 454 million (175 million), which was impacted by inventory losses totaling EUR 171 million (170 million), changes in the fair value of open oil derivatives totaling EUR -22 million (25 million), mainly related to hedging of inventories, and non-recurring items totaling EUR 74 million (-7 million), mainly related to the capital gain from the disposal of the Porvoo electricity grid. Pre-tax profit was EUR 415 million (108 million), profit for the period EUR 352 million (80 million), and earnings per share EUR 1.37 (0.31). The Group's effective tax rate was 15% (26%) 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 further increased and are generally 1.5-1.8 million bbl/d, as especially gasoline demand has been growing. The forward reference refining margin outlook for the coming quarters is expected to follow normal seasonality. The refining capacity growth in Asia and the Middle East and ending of the refinery maintenance season are expected to increase product supply, but the transatlantic supply demand balance is also dependent on demand growth and possible refinery shutdowns. Average utilization rates of European refineries have been clearly higher year-on-year. 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.

The Rotterdam NEXBTL renewable diesel refinery is scheduled for a major turnaround lasting approx. seven weeks during the second quarter of 2016.

Neste's capital expenditure is expected to total approx. EUR 500 million in 2015.

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 further positive impact on Neste's comparable operating profit.

The comparable operating profit posted during the first nine months was almost at full-year 2014 level despite the scheduled major turnaround at the Porvoo refinery, showing strong performance of our businesses. While the refining market is expected to follow normal seasonality, market conditions seem to remain reasonably favorable. Therefore, the outlook for the full-year 2015 result remains robust.

Starting in 2016 Neste will discontinue giving numerical result guidance to be consistent with industry practice. Taking into account this announced principle, the company's result guidance for 2015 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 third-quarter 2015 results will be held today, 23 October 2015, 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 23 October 2015 at 3 pm. Finland / 1 pm. London / 8 a.m. New York. The call-in numbers are as follows: Finland: +358 (0)9 2310 1620, rest of Europe: +44 (0)20 3427 0503, US: +1 646 254 3366, using access code 4615018. The conference call can be followed at company's web site. An instant replay of the call will be available until 30 October 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 4615018.

Neste in brief

Neste is a forerunner in oil refining and renewable solutions. We offer our customers cleaner traffic solutions and industrial products based on cutting-edge research. Our sustainable practices have received recognition in the Dow Jones Sustainability World Index and the Global 100 list of the world's most sustainable companies. In 2014, our revenue amounted to EUR 15 billion. Neste shares are listed on Nasdaq Helsinki. Cleaner traffic, energy and life are moved forward by 5,000 professionals. Learn more at neste.com