President & CEO Matti Lievonen, "Neste had another successful year in 2016, as we posted a comparable operating profit of €983 million compared to €925 million in 2015. For the first time, renewable products had the largest full-year profit contribution, which reflects the continuing strategic transformation of the company. I am very pleased to note that all business areas improved their result from the previous year. We also generated strong cash flow and further strengthened our balance sheet. All key financial indicators showed improvement, and the return on average capital employed after tax reached 16.9%, which was over the long term target level of 15%."
Neste's revenue in the 4Q16 totalled €3421 million, approx. 24% over the €2759 million reported in the corresponding period last year. The revenue increase resulted from higher oil price and higher sales volumes. The group's comparable operating profit totalled €262 million (€352 million). Oil products' result was negatively impacted by a lower reference margin and higher maintenance costs, but positively impacted by higher additional margin and sales volumes. Renewable products' result was strong, but lower compared to the corresponding period last year, when the full-year US Blender's Tax Credit for 2015 was recorded in the quarter's comparable operating profit. Oil retail's result was positively impacted by higher sales volume and unit margin. The others segment's comparable operating profit was lower compared to the 4Q15, mainly due to Nynas' lower result.
Oil products' 4Q16 comparable operating profit was €98 million (91 million), Renewable products' €146 million (231 million), and oil retail's €19 million (17 million). The comparable operating profit of the others segment totalled €2 million (15 million); Nynas accounted for €9 million (22 million) of this figure. The group's IFRS operating profit was €302 million (245 million), which was impacted by inventory gains totalling €51 million (losses of 91 million), changes in the fair value of open commodity and currency derivatives totalling €-11 million (7 million), mainly related to hedging of inventories. Profit before income taxes was €297 million (219 million), net profit €262 million (209 million), and earnings per share €1.02 (0.81).
The group's full-year results for 2016
Neste's revenue in 2016 totalled €11 689 million (€11 131 million). Sales volumes increased, but the revenue was negatively impacted by a lower average oil price year-on-year. The group's comparable operating profit was €983 million (€925 million). Oil products' result was negatively impacted by reference margin, which was materially lower than in 2015. However, the additional margin increased, and the sales volume was higher compared to last year, which was impacted by the scheduled turnaround at the Porvoo refinery. Renewable products operating profit improved as a result of higher reference margin and additional margin. Oil retail's result was positively impacted by increased sales volumes and unit margins. The others segment recorded a lower comparable operating profit compared to 2015, mainly due to Nynas' lower result and higher common corporate costs.
Oil products' full-year comparable operating profit was €453 million (439 million), renewable products' €469 million (402 million), and oil retail's €90 million (84 million). The comparable operating profit of the Others segment totalled €-23 million (2 million); Nynas accounted for €11 million (29 million) of this figure.
The group's IFRS operating profit was €1 155 million (699 million), which was impacted by inventory gains totalling €280 million (losses of 263 million), and changes in the fair value of open commodity and currency derivatives totalling €-118 million (-15 million), mainly related to hedging of inventories. IFRS operating profit was also impacted by capital gains totalling €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 €1 075 million (634 million), net profit €943 million (560 million). Comparable earnings per share were €3.10 (2.84), and earnings per share €3.67 (2.18). The group's effective tax rate was 12% (12%), which is lower than the Finnish statutory tax rate 20% mainly due to lower taxation in Latvia, Lithuania, Singapore and Switzerland, where Neste has business operations. Neste's manufacturing investment in Renewable Products during 2008 – 2010 in Singapore is subject to tax exemption for 2010 – 2023 under the applicable Singapore legislation.
Outlook for 2017
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. Crude oil supply and demand are expected to become more balanced, leading to a stronger crude market. Global oil demand growth estimates for 2017 by recognised experts currently vary between 1.2 and 1.6 million bpd. In light of the expected refining capacity growth the global product supply and demand look relatively balanced.
Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks. Market volatility in feedstock prices is expected to continue, which will have an impact on the renewable products segment's profitability.
Neste expects oil products' reference refining margin to be quite similar to that in 2016 on average. The Porvoo refinery is expected to run at a high utilisation rate and to have normal planned unit maintenance. A major two month turnaround at the Naantali unit is scheduled for the third quarter. The company is targeting at least US$5.5/bbl additional margin after mid-2017 as the ongoing strategic investments in the Porvoo Solvent Deasphalting (SDA) unit and the Naantali configuration change are completed.
Renewable products' reference margin is expected to be at approximately the average level of the year 2016. Neste continues to optimise sales allocation based on the total margin, and there are attractive markets in Europe. For example, Norway has set a biofuel target in traffic growing from 7.5% in 2017 to 20% in 2020. California continues to be an important market for Neste. Sales volumes of the renewable diesel delivered as 100% to end-users are expected to continue growing and be close to 25% of the total sales volumes in 2017. The vegetable oil market is expected to remain volatile, and the company aims to expand the use of lower quality waste and residue feedstock further. The completed acquisition of the new feedstock pretreatment and storage facility in the Netherlands will support this goal. A new nameplate capacity of 2.6 million t is effective 1 January 2017, and utilisation rates of renewable diesel facilities are expected to be high. Production costs have been reduced and variable production cost guidance has been lowered from US$130 to US$110/t.
In oil retail, the sales volumes and unit margins are expected to follow the previous years' seasonality pattern. Neste will continue to implement its global renewables growth strategy. The global demand for renewable products is expected to continue growing globally. Neste's renewables capacity increase programme will include both debottlenecking of the existing production capacity to 3 million t by 2020, and building of new capacity. The company is currently evaluating the feasibility of options to invest in new production capacity. The options under review include locations in the US and Singapore.
Company strategy implementation is proceeding well, with continued focus on customers and growth initiatives, and the approaching completion of the already announced strategic investments in 2017. Therefore, Neste is confident that the year 2017 will be another successful one.
Read the article online at: https://www.hydrocarbonengineering.com/clean-fuels/08022017/nestes-financial-results/