Neste Corporation, Interim Report, 29 April 2022 at 9 a.m. (EET)
Strong financial performance amid markets impacted by the Ukraine war
First quarter in brief:
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Comparable EBITDA totaled EUR 578 million (EUR 429 million)
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EBITDA totaled EUR 916 million (EUR 585 million)
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Renewable Products' comparable sales margin was USD 806/ton (USD 699/ton)
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Oil Products' total refining margin was USD 10.3/bbl (USD 6.7/bbl)
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Cash flow before financing activities was EUR -960 million (EUR -645 million)
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Return on average capital employed (ROACE)* was 19.1% over the last 12 months (2021: 18.3%)
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Leverage ratio was 12.0% at the end of March (31.12.2021: 0.6%)
* Calculation formula has been adjusted; and the figure for 2021 restated.
President and CEO Peter Vanacker:
"We at Neste are appalled by and concerned about the war in Ukraine and we strongly condemn the invasion by Russia. We have already mostly replaced Russian crude oil with other crudes, and the remaining supply contracts for Russian crude oil will end in July. We have not bought Russian crude oil on the spot market since the start of the war, nor are we making any new supply agreements for Russian crude oil or fossil feedstocks. Our employees have done an excellent job in replacing Russian crude oil with other grades in a safe way.
Despite the market turmoil, Neste's financial performance was strong in the first quarter. We posted a comparable EBITDA of EUR 578 million, compared to EUR 429 million in the corresponding period last year. Renewable Products' sales margin was exceptionally strong and the sales volumes were high. Oil Products improved its performance year-on-year as a result of a stronger refining market. Marketing & Services also performed well supported by significant inventory gains driven by the oil price surge. Our cash flow before financing activities was negatively impacted by a major inventory build-up to secure business continuity and by the market price increases for feedstock, energy and finished products.
Renewable Products posted a strong comparable EBITDA of EUR 419 million (EUR 344 million) in the first quarter. The renewable diesel demand was robust, but the feedstock markets remained very tight. The Ukraine war has strongly impacted the vegetable oil and oil product markets, whereas the impact on waste and residue markets is taking place with some time delay. In this market situation we reached a record-high comparable sales margin of USD 806/ton. This outstanding achievement was supported by our strong sales performance, margin hedging and the flexibility provided by our global optimization model. Our sales volumes were 747,000 tons, slightly higher than in the corresponding period last year. During the first quarter our renewables production facilities operated at an average 104% utilization rate, and reached a new quarterly production record of 858,000 tons. This production record will help us to manage through the scheduled maintenance shut-down period later this year. Feedstock mix optimization continued, and the share of waste and residue inputs increased to 95%.
Oil Products posted a comparable EBITDA of EUR 137 million (EUR 52 million) in the first quarter. We have replaced most Russian crude oil and feedstock with other crude oils, and have tested ways to replace natural gas at our Porvoo refinery. Due to the changes in our crude oil supply and the prevailing market volatility, we have discontinued splitting our total refining margin into reference margin and additional margin. Our total refining margin was supported by exceptionally high oil product margins, but burdened by high utility costs driven by very expensive natural gas and electricity. The sales volumes were at par with the corresponding period last year.
Marketing & Services generated a comparable EBITDA of EUR 32 million (EUR 23 million) in the first quarter. Our unit margins were supported by significant inventory gains driven by the surge in oil prices.
We continue to implement our growth strategy, and an important step forward was the announcement to establish a 50/50 production joint venture with US-based Marathon Petroleum. The joint venture will produce renewable diesel following a conversion project of Marathon's refinery in Martinez, California. The closing of the joint venture is subject to customary closing conditions and regulatory approvals, including obtaining the necessary permits, which depend upon certification of a final Environmental Impact Report. Neste's total investment will amount to approximately EUR 0.9 billion and the project is expected to increase our renewable products capacity by slightly over 1 million tons per annum. Production of renewable diesel is expected to come online in the second half of 2022, and the facility is planned to reach its full annual nameplate capacity of 2.1 million tons by the end of 2023. We are committed to helping our customers decrease their greenhouse gas emissions by at least 20 million tons of CO2eq annually by 2030. This joint venture will help us exceed our commitment as it will bring a substantial amount of renewable diesel to our customers in the US. Our ongoing Singapore expansion project and this joint venture will increase our total production capacity of renewable products to 5.5 million tons by the end of 2023 and we will be the only global provider of renewable products with a production footprint in North America, Asia and Europe. The project for a possible next worldscale renewables refinery in Rotterdam is in the engineering phase, and we are approaching technical readiness for a final investment decision during the next months. However, the timeline for the decision-making will take into account the current geopolitical situation.
Effective 1 January 2022, comparable EBITDA has replaced comparable operating profit as Neste's main profitability indicator, since we consider comparable EBITDA to better reflect our underlying business performance during a heavy investment period.
As I will shortly be leaving Neste, I feel grateful for having had the opportunity to lead such an amazing company for close to four years. I wish the best of success to Matti Lehmus as the new President and CEO, his leadership team and the whole Neste organization. The company is in great hands with this outstanding team and our strategy remains valid with full Board support. Neste's transformation story continues."
The Group's first quarter 2022 results
Neste's revenue in the first quarter totaled EUR 5,523 million (3,132 million). The revenue growth resulted from higher market and sales prices, which had a positive impact of approx. EUR 2.0 billion, and a stronger US dollar, which had a positive impact of approx. EUR 200 million on the revenue compared to the corresponding period last year.
The Group's comparable EBITDA was EUR 578 million (429 million). Renewable Products' comparable EBITDA was EUR 419 million (344 million), mainly as a result of higher sales margin and stronger US dollar than in the first quarter of 2021. Oil Products' comparable EBITDA totaled EUR 137 million (52 million), following the improved refining market. Marketing & Services comparable EBITDA was EUR 32 million (23 million), mainly as a result of higher unit margins compared to the first quarter of 2021. The Others segment's comparable EBITDA was EUR 1 million (10 million).
The Group's EBITDA was EUR 916 million (585 million), which was impacted by inventory valuation gains of EUR 115 million (175 million), and changes in the fair value of open commodity and currency derivatives totaling EUR 219 million (-20 million), mainly related to utility price hedging. Profit before income taxes was EUR 736 million (415 million), and net profit EUR 640 million (374 million). Comparable earnings per share were EUR 0.45 (0.31), and earnings per share EUR 0.83 (0.49).
Outlook
Visibility in the global economy is very low due to the war in Ukraine and the continuing COVID-19 pandemic. We expect volatility in the oil products and renewable feedstock markets to remain very high.
Renewable Products' second-quarter sales volumes are expected to be slightly higher than in the previous quarter. Waste and residue markets are anticipated to remain tight as their demand continues to be robust. Following the oil product and renewable feedstock market price increases in the latter part of the first quarter, our second-quarter sales margin is expected to be within the range USD 675-750/ton.
Utilization rates of our renewables production facilities are forecasted to remain high. As announced in February, we have scheduled a six-week turnaround at the Singapore refinery in the third quarter, and a seven-week turnaround at the Rotterdam refinery in the fourth quarter of 2022. The Singapore turnaround is currently estimated to have a negative impact of approximately EUR 90 million, and the Rotterdam turnaround a negative impact of approximately EUR 100 million on the segment's comparable EBITDA.
Oil Products' market is very volatile and impacted by the war in Ukraine and possible further trade sanctions. Our second-quarter total refining margin is currently expected to be at a roughly similar level as in the first quarter of 2022. The high natural gas market price will impact Neste's production costs with one month delay. Replacing natural gas with other alternatives has been tested. If the replacement proves successful in normal operations, it will enable a significant reduction of natural gas usage at the refinery. The second-quarter sales volumes are forecasted to increase slightly from the level seen in the previous quarter. The sale of our base oils business was completed in early April, and thus it will not contribute to the Oil Products segment's financials as of the second quarter 2022. The impact of the related long-term offtake for Neste's base oils production at the Porvoo refinery will be included in the total refining margin going forward.
In Marketing & Services the sales volumes and unit margins are expected to follow the previous years' seasonality pattern in the second quarter. The COVID-19 pandemic is anticipated to have some negative impact on the demand and sales volumes.
Based on our current estimates and a hedging rate of approximately 80%, Neste's effective EUR/US dollar rate is expected to be within a range of 1.14-1.16 in the second quarter of 2022.
Neste estimates the Group's full-year 2022 cash-out capital expenditure to be approximately EUR 1.9 billion, including approximately EUR 0.8 billion for the announced joint venture with Marathon, which is still subject to closing. Other possible M&A is excluded from the figure.
Conference call
A conference call in English for investors and analysts will be held today, 29 April 2022, 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 2311 3291, rest of Europe: +44 (0) 2071 928338, US: +1 646 7413167, using access code 7073525. The conference call can be followed at the company's website. An instant replay of the call will be available until 6 May 2022 at +44 (0) 333 300 9785 for Europe and +1 866 331 1332 for the US, using access code 7073525.
Further information:
Peter Vanacker, President and CEO, tel. +358 10 458 11
Jyrki Mäki-Kala, CFO, tel. +358 10 458 4098
Investor Relations, tel. +358 10 458 5292
Neste Corporation