Neste's Interim Report for January-September 2016

Neste Corporation
Interim Report
25 October 2016 at 9.00 am. (EET)

Neste's Interim Report for January-September 2016

High operating profit and cash flow

Third quarter in brief:

• Comparable operating profit totaled EUR 264 million (EUR 281 million) 
• IFRS operating profit totaled EUR 319 million (EUR 158 million)
• Oil Products' total refining margin was USD 9.40/bbl (USD 13.19/bbl)
• Renewable Products' comparable sales margin was USD 375/ton (USD 239/ton)
• Cash flow before financing activities totaled EUR 147 million (EUR 249 million)

January-September in brief:

• Comparable operating profit totaled EUR 721 million (EUR 574 million)
• IFRS operating profit totaled EUR 853 million (EUR 454 million) 
• Cash flow before financing activities was EUR 567 million (EUR 180 million)
• Return on average capital employed (ROACE) was 18.6% over the last 12 months (2015: 16.3%)
• Leverage ratio was 21.4% at the end of September (31.12.2015: 29.4%)
• Comparable earnings per share: EUR 2.21 (EUR 1.69)
• Earnings per share: EUR 2.65 (EUR 1.37)

President & CEO Matti Lievonen:

"Neste's high financial performance continued, and our own successful actions were reflected in good additional margins. The reference margin in Oil Products was clearly below last year's exceptionally high level, but slightly higher than last year's level in Renewable Products. Neste recorded a comparable operating profit of EUR 264 million during the third quarter, compared to EUR 281 million in the same period last year.

Oil Products generated a comparable operating profit of EUR 120 million (EUR 178 million) during the third quarter. Reference margin averaged USD 3.9/bbl, which was USD 5.2/bbl lower than in the same period last year, and had EUR 128 million negative impact on the segment's comparable operating profit. High product inventories globally kept particularly gasoline margins low for the season. Diesel margins were stable, and started to improve towards the end of the quarter. Oil Products' additional margin was maintained at high USD 5.6/bbl level as a result of good operational performance and favorable sales structure.

Renewable Products recorded a comparable operating profit of EUR 124 million (EUR 75 million) during the third quarter. Renewable Products' reference margin was slightly higher than in the corresponding period last year. We continued to be able to achieve high additional margin by successful margin management and sales allocation. Feedstock optimization continued, and the share of waste and residue feedstocks was 79% of total inputs during the third quarter.

Oil Retail's markets were growing, and we were able to increase profits by higher sales volumes particularly in the Baltic markets. On the other hand, unit margins were lower under competitive pressure. The segment generated a comparable operating profit of EUR 25 million (EUR 27 million).

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 higher in the fourth quarter of 2016 than in the third quarter. However, ongoing maintenance work at production line 4 at the Porvoo refinery is expected to have a negative impact of approx. EUR 30 million on the segment's comparable operating profit mainly in the fourth quarter.

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

In Oil Retail sales volumes and unit margins are expected to follow 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 third-quarter 2016 results

Neste's revenue in the third quarter totaled EUR 3,034 million, in line with EUR 3,023 million reported in the corresponding period last year. The Group's comparable operating profit totaled EUR 264 million (EUR 281 million). Oil Products' result was negatively impacted by materially lower reference margin, but that was partly compensated by higher additional margin. Renewable Products' result improved mainly due to a significantly higher additional margin. Oil Retail had higher sales volumes, but lower unit margins year-on-year. The Others segment's comparable operating profit was lower compared to the third quarter of 2015, mainly due to Nynas' lower result.

Oil Products' third-quarter comparable operating profit was EUR 120 million (178 million), Renewable Products' EUR 124 million (75 million), and Oil Retail's EUR 25 million (27 million). The comparable operating profit of the Others segment totaled EUR -6 million (-1 million); Nynas accounted for EUR -3 million (3 million) of this figure.

The Group's IFRS operating profit was EUR 319 million (158 million), which was impacted by inventory gains totaling EUR 18 million (losses of 174 million), changes in the fair value of open commodity and currency derivatives totaling EUR 24 million (51 million), mainly related to hedging of inventories, and capital gains totaling EUR

12 million, mainly related to the sale of a minority share in Ekokem Corporation. Profit before income taxes was EUR 294 million (158 million), net profit EUR 253 million (129 million), and earnings per share EUR 0.99 (0.50).

The Group's January-September 2016 results

Neste's revenue during the first nine months totaled EUR 8,268 million (EUR 8,372 million). Sales volumes were higher, but the revenue decrease resulted from lower oil price year-on-year. The Group's comparable operating profit was EUR 721 million (EUR 574 million). Oil Products' result was negatively impacted by reference margin, which was materially lower than during the first nine months of 2015. However, additional margin increased, and the Porvoo refinery operated at high utilization, compared to the corresponding period last year impacted by scheduled major turnaround. Renewable Products operating profit improved as a result of successful margin management, sales allocation and feedstock optimization. Oil Retail's result was positively impacted by increased sales volumes. The Others segment recorded a lower comparable operating profit compared to the first nine months of 2015, mainly due to higher common corporate costs.

Oil Products' nine-month comparable operating profit was EUR 355 million (348 million), Renewable Products' EUR 323 million (171 million), and Oil Retail's EUR 70 million (67 million). The comparable operating profit of the Others segment totaled EUR -25 million (-12 million); Nynas accounted for EUR 2 million (7 million) of this figure.

The Group's IFRS operating profit was EUR 853 million (454 million), which was impacted by inventory gains totaling EUR 229 million (losses of 171 million), and changes in the fair value of open commodity and currency derivatives totaling EUR -107 million (-22 million), mainly related to hedging of inventories. IFRS operating profit was also impacted by capital gains totaling EUR 23 million (76 million), mainly related to the sale of Ekokem shares and the sale of Neste's power plant to Kilpilahti Power Plant Ltd. Profit before income taxes was EUR 778 million (415 million), net profit EUR 681 million (352 million), and earnings per share EUR 2.65 (1.37).

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. Global oil demand growth estimates for 2016 are around 1.2 million bbl/d, and both gasoline and diesel demand are expected to continue solid growth. However, product inventories are currently high. 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, and the capital expenditure is estimated to be approximately EUR 450 million.

Neste expects Oil Products' reference margin to be somewhat higher in the fourth quarter of 2016 than in the third quarter. Ongoing maintenance work at the production line 4 at the Porvoo refinery, replacing a planned maintenance in spring 2017, is expected to be completed in November. The maintenance is expected to have a negative impact of EUR 30 million on the segment's comparable operating profit mainly in the fourth quarter.

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 third-quarter 2016 results will be held today, 25 October 2016, 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 25 October 2016 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 3427 1903, US: +1 212 444 0896, using access code 9002176. The conference call can be followed at company's web site. A replay of the call will be available until 31 October 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 9002176.

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 lower 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 2015, Neste's net sales stood at EUR 11 billion, and we were on the Global 100 list of the 100 most sustainable companies in the world. Read more: neste.com