Neste’s Interim Report for January-March 2020

Good results amid increasing market uncertainty

First quarter in brief:

• Comparable operating profit totaled EUR 408 million (EUR 378 million)
• Operating profit totaled EUR 197 million (EUR 383 million)
• Renewable Products’ comparable sales margin, including BTC, was USD 685/ton (USD 756/ton)
• Oil Products’ total refining margin was USD 11.03/bbl (USD 9.47/bbl)
• Cash flow before financing activities was EUR -120 million (EUR 8 million)
• Return on average capital employed (ROACE) was 26.7% over the last 12 months (2019: 26.6%)
• Leverage ratio was -1.1% at the end of March (31.12.2019: -3.3%)
• Board of Directors dividend proposal revised

President and CEO Peter Vanacker:

“Neste had a solid start to the year considering the negative market impacts caused by the global coronavirus (COVID-19) pandemic in the latter part of the first quarter. We posted a comparable operating profit of EUR 408 million in the first quarter, compared to EUR 378 million in the corresponding period last year. Renewable Products’ sales volumes were high, and our renewables facilities reached a new quarterly production record. Oil Products’ comparable operating profit was at the same level as in the first quarter of 2019, mainly as a result of high additional margin. Marketing & Services’ financial performance mainly reflected the volume reduction caused by warm weather and the COVID-19 impacts. Oil price declined significantly during the quarter, which resulted in material inventory valuation losses in the Group’s operating profit. Neste reached a ROACE of 26.7% over the last 12 months and a leverage ratio of -1.1%.

Renewable Products posted a comparable operating profit of EUR 329 million (EUR 337 million) in the first quarter. The renewable diesel demand was good in early 2020, but, as expected, the feedstock markets remained tight. Combined with the significant impact of the COVID-19 situation on commodity pricing, the tight feedstock market created some pressure on the sales margin. The lower sales margin had a negative impact of EUR 45 million on the comparable operating profit compared to the corresponding period last year. The US Blender’s Tax Credit (BTC) contribution was EUR 52 million (EUR 40 million) in the first quarter. Our sales volumes were 731,000 tons, which was approximately 6% higher than in the corresponding period last year. During the first quarter our renewable diesel production facilities operated at an average 101% utilization rate, and reached a new quarterly production record of 795,000 tons. Feedstock mix optimization continued, and the proportion of waste and residue inputs was 82%.

Oil Products posted a comparable operating profit of EUR 74 million (EUR 73 million) in the first quarter. The reference margin, reflecting the general market conditions, was very volatile during the quarter. It averaged slightly lower than in the corresponding period last year. Oil Products’ additional margin was strong at USD 6.7/bbl, supported by good operational and supply performance. Sales volumes were lower than in the first quarter of 2019 due to warm weather and COVID-19 impacting demand in the latter part of the quarter.

Marketing & Services generated a comparable operating profit of EUR 8 million (EUR 13 million) in the first quarter. The lower financial performance year-on-year was mainly due to the lower sales caused by warm weather and COVID-19 impacts. The divestment of the Russian business, completed in October 2019, had a negative impact totaling EUR 3 million on the comparable operating profit compared to the first quarter of 2019.

The Others segment’s comparable operating profit was EUR 34 million higher than in the corresponding period of 2019. This was mainly due to the Nynas minority shareholding not having an impact on the Others segment’s financial performance any more as it was fully written-off in the third quarter of 2019.

On 12 March 2020, we held a Capital Markets Day, where we gave an update on our strategy and market outlook. Neste’s ambition to become a global leader in renewable and circular solutions is unchanged, and the company continues to focus on its strategy implementation in the current very volatile market environment. The Singapore renewables capacity expansion project is on track, and it is scheduled to be up and running in mid-2022, depending on restrictions set by the local government due to COVID-19.

Neste takes the risks relating to COVID-19 very seriously. In this exceptional situation, the company’s primary objective is to ensure the health and safety of its employees, customers, contractors and other external partners as well as to ensure the continuity of its refinery operations and secure supply of products to its customers. Therefore, and to comply with the emergency rules set by the Finnish government, we decided to postpone the Annual General Meeting scheduled for 7 April 2020, to a later date. We were also forced to delay and execute the Porvoo refinery major turnaround scheduled for the second quarter of 2020 in phases.

Due to the COVID-19 pandemic, there is significant, unprecedented uncertainty related to economic development, and the demand and prices of oil products. A lot will depend on the pace, timing and geographical distribution of a possible market recovery. According to the IEA, the global oil demand in 2020 is expected to contract for the first time since the global recession of 2009. Different market consultants currently estimate that oil demand will decline between 4 and 9 million barrels per day year-on-year. This is expected to have a negative impact on the market demand, sales and profitability of Oil Products and Marketing & Services businesses. Biofuel regulations and mandates are expected to continue supporting renewable diesel demand. Possible decline in the overall fuel demand could, however, negatively impact the sales and profitability of Renewable Products business. Neste has a strong balance sheet and liquidity position to navigate through these uncertain and difficult times. Business continuity and contingency plans are in place, and corrective actions have already been started. I have full faith in our management and employees to navigate successfully through these challenging times.

So far Neste’s business has been quite resilient against the various consequences of the pandemic. Still, there is an unprecedented uncertainty on the further development of the pandemic and its impact on the global economy. In this context, the Board has decided to propose a change in the dividend proposal to the Annual General Meeting.”

The Group’s first quarter 2020 results

Neste’s revenue in the first quarter totaled EUR 3,270 million (3,769 million). The revenue decline mainly resulted from the lower oil price, which had a negative impact of approx. EUR 400 million, and lower sales volumes, which had a negative impact of approx. EUR 100 million on the revenue. The Group’s comparable operating profit was EUR 408 million (378 million). Renewable Products’ comparable operating profit was EUR 329 million (337 million), mainly due to a lower sales margin than in the first quarter of 2019. Oil Products’ comparable operating profit was EUR 74 million (73 million). Marketing & Services comparable operating profit was EUR 8 million (13 million), mainly due to lower sales volumes compared to the first quarter of 2019 and divestment of the Russian business. The Others segment’s comparable operating profit of EUR -9 million (-43 million) was significantly better than in the corresponding period of 2019, mainly as a result of the minority shareholding in Nynas having been fully written-off in 2019.

The Group’s operating profit was EUR 197 million (383 million), which was impacted by inventory valuation losses of EUR 293 million (gains of 72 million), and changes in the fair value of open commodity and currency derivatives totaling EUR 82 million (-88 million), mainly related to inventory hedging.  Profit before income taxes was EUR 203 million (348 million), and net profit EUR 201 million (295 million). Comparable earnings per share were EUR 0.50 (0.38), and earnings per share EUR 0.26 (0.38).

Outlook

Visibility in the global economic development is extremely low due to the COVID-19 pandemic. As a consequence, we expect volatility in the oil products, renewable feedstock and renewable fuels markets to remain very high. Based on our current estimates and a hedging rate of 90%, Neste’s effective EUR/US dollar rate is expected to be within a range 1.11-1.13 in the second quarter of 2020.

Sales volumes of renewable diesel are expected to remain relatively stable in the second quarter despite the market impacts of the COVID-19 pandemic. We expect the waste and residue feedstock markets to remain very tight, also driven by lower availability of Used Cooking Oil due to restaurants not operating. Utilization rates of our renewables production facilities are expected to remain good, except for a scheduled four-week catalyst change at the Singapore refinery in the second quarter, and at the Rotterdam refinery in the fourth quarter of 2020. The exact timing of the catalyst change in Singapore will be subject to the lock-down restrictions by the local authorities. A catalyst change maintenance is currently estimated to have a negative impact of EUR 50 million on the segment’s comparable operating profit. Additionally, one renewable diesel unit at the Porvoo refinery is expected to have a 3-week maintenance break in the third quarter. The Porvoo unit maintenance is estimated to have a negative impact of EUR 10 million on the comparable operating profit.Oil Products’ second-quarter market demand is expected to be severely reduced by the COVID-19 pandemic. The reference margin is also expected to be lower than in the first quarter of 2020, and very high volatility is expected to continue. As announced on 23 March 2020, the scheduled major turnaround at the Porvoo refinery has been postponed to 2021, and only business critical unit maintenance will be performed during the second quarter of 2020. The maintenance of the critical units is currently estimated to have a negative impact of approximately EUR 85 million on the segment’s comparable operating profit, mainly in the second quarter.

In Marketing & Services the COVID-19 pandemic is expected to have a significant negative impact on the demand and sales volumes in the second quarter.

Neste continues to implement the Singapore capacity expansion project, the modified Porvoo turnaround, and other strategic projects according to plan. The company expects the Group’s full-year 2020 capital expenditure to be reduced from the previously estimated EUR 1.2 billion to approximately EUR 950 million, excluding possible M&A.

Source

Neste Corp., press release, 2020-04-24.

Supplier

Neste Corporation

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