Neste Oil’s Interim Report for January-September 2008
- Comparable operating profit increased and was EUR 199 million in the third quarter
The third quarter in brief:
– Strong comparable operating profit of EUR 199 million (Q3/07: 159 million)
– Operating profit of EUR 44 million (Q3/07: 180 million), depressed by an inventory loss of EUR 180 million due to rapidly falling oil prices
– Cash flow from operations of EUR -175 million (Q3/07: -32 million) due to temporarily high receivables at the end of the quarter
– Solid financial position; no major refinancing needs over the short or medium term, nor credit losses with counterparty banks
– Total refining margin reached a new record of USD 13.54 /bbl (Q3/07: 10.20)
– Maintenance work on the Porvoo diesel production line 4 was carried out as planned and the line has been operating normally since early October
Jarmo Honkamaa, Deputy CEO:
“We are satisfied with our strong results in what was a really exceptional environment in the third quarter. The oil market witnessed even higher-than-normal volatility, and crude oil prices dropped rapidly and significantly after rising for eight months. This was reflected in our IFRS operating profit for the quarter, which includes a large inventory loss.”
“Our comparable operating profit, which best reflects the company’s operational results, was among the highest in our history. This was largely thanks to our high total refining margin, supported by a strong diesel market, and another good quarterly result by Shipping.”
“Demand for middle distillates and diesel continues to be the main driver of refining margins. I am pleased to say that all our diesel production units are operating normally again after maintenance carried out at the Porvoo diesel line in August and September.”
Further information: Jarmo Honkamaa, Deputy CEO, tel. +358 10 458 4758 Risto Takkala, Interim CFO, tel. +358 10 458 4071 Investor Relations, tel. +358 10 458 5132
News conference and conference call
A press conference in Finnish on the third-quarter results for 2008 will be held today, 24 October 2008, at 11:30 am EET in the Mirror Room at Hotel Kaemp, Pohjoisesplanadi 29, Helsinki. www.nesteoil.com will feature English versions of the presentation materials.
An international conference call for investors and analysts will be held on the same day at 3:00 pm Finland / 1:00 pm London / 8:00 am New York. The call-in numbers are as follows: Europe: +44 (0)20 3023 4426, US: +1 866 966 5335. Use the password: Neste Oil. A webcast of the call can be found at http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=189806&eventID=1995604. An instant replay will be available for one week at +44 (0)20 8196 1998 for Europe and +1 866 583 1035 for the US, using access code 725434.
NESTE OIL FINANCIAL STATEMENTS, 1 JANUARY – 30 SEPTEMBER 2008
Unaudited
Figures in parentheses refer to the third quarter of 2007, unless otherwise stated.
KEY FIGURES
EUR million (unless otherwise noted) Last 12 7-9/08 7-9/07 1-9/08 1-9/07 2007 months Sales 4,521 2,978 12,238 8,642 12,103 15,699 Operating profit before depreciation 100 235 706 797 996 905 Depreciation, amortization and impairments 56 55 168 139 195 224 Operating profit 44 180 538 658 801 681 Comparable operating profit * 199 159 499 542 626 583 Profit before income tax 36 168 511 633 763 641 Earnings per share, EUR 0.13 0.52 1.51 1.86 2.25 1.91 Investments 131 59 323 236 334 421 Net cash from operating activities -175 -32 26 321 541 246 30 Sept 30 Sept 31 Dec Last 12 2008 2007 2007 months Total equity 2,503 2,331 2,427 – Interest-bearing net debt 1,295 879 755 – Capital employed 3,905 3,265 3,234 3,905 Return on capital employed pre-tax (ROCE), % 20.7 28.5 26.2 19.5 Return on average capital employed after tax (ROACE),% – – 15.5 13.1 Return on equity (ROE), % 21.1 28.7 25.6 20.4 Equity per share, EUR 9.75 9.10 9.47 – Cash flow per share, EUR 0.10 1.25 2.11 0.96 Equity-to-assets ratio, % 45.1 49.4 49.9 – Leverage ratio, % 34.1 27.4 23.7 – Gearing, % 51.7 37.7 31.1 – * Comparable operating profit is calculated by excluding inventory gains/losses, capital gains/losses, and unrealized changes in the fair value of oil and freight derivative contracts from the reported operating profit.
The Group’s third-quarter results
High oil prices boosted Neste Oil’s sales to EUR 4,521 million in the third quarter, representing a 52% increase compared to the third quarter of 2007.
The comparable operating profit stood at EUR 199 million (159 million), driven by high total refining margin and strong profitability in Shipping. Exceptional items burdened the comparable operating profit by EUR 19 million. The USD/EUR exchange rate also impacted negatively.
During the third quarter, the comparable operating profit of Oil Refining was EUR 149 million (125 million), Renewable Fuels EUR -3 million (-6 million), Specialty Products EUR 29 million (34 million), Oil Retail EUR 7 million (21 million), and Shipping EUR 23 million (-1 million).
The Group’s third-quarter operating profit was EUR 44 million (180 million), which includes an inventory loss of EUR 180 million due to a rapid fall in oil price.
The Group’s profit before taxes was EUR 36 million (168 million), and net profit for the period was EUR 34 million (132 million), resulting in earnings per share of EUR 0.13 (0.52).
The Group’s January-September results
Sales of the Neste Oil Group totaled EUR 12,238 million between January and September, compared to EUR 8,642 million in the same period in 2007.
The Group’s comparable operating profit for the period was EUR 499 million (542 million). This figure was supported by a high total refining margin, but its impact was muted by lower profitability at Specialty Products, the weak US dollar, and increased fixed costs.
The Group’s nine-month operating profit totaled EUR 538 million (658 million). Inventory gains decreased to EUR 14 million during the period (120 million).
Oil Refining’s nine-month comparable operating profit was EUR 379 million (399 million), Renewable Fuels’ EUR 12 million (-16 million), Specialty Products’ EUR 56 million (107 million), Oil Retail’s EUR 27 million (49 million), and Shipping’s EUR 52 million (32 million).
The Group’s profit before taxes was EUR 511 million (633 million), and net profit for the period was EUR 390 million (477 million). Earnings per share were EUR 1.51 (1.86).
Given the capital-intensive nature of its business, Neste Oil uses return on average capital employed after tax (ROACE) as its primary financial target. As of the end of September, the rolling twelve-month ROACE was 13.1% (financial period 2007: 15.5%). The target is at least 15% over the cycle.
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM COMPARABLE OPERATING PROFIT 199 159 499 542 626 583 – changes in the fair value of open oil derivative positions 22 -15 14 -9 -5 18 – inventory gains/losses -180 36 14 120 174 68 – gains from sales of fixed assets 3 0 11 5 6 12 OPERATING PROFIT 44 180 538 658 801 681
Capital expenditure and financing
Investments during the first nine months totaled EUR 323 million (236 million), of which Oil Refining accounted for EUR 98 million, Renewable Fuels EUR 141 million, Specialty Products EUR 19 million, Oil Retail EUR 41 million, and Shipping EUR 1 million. Capital investments in the Other segment totaled EUR 23 million. The largest single item in this figure was the acquisition of Rintekno.
Depreciation in January-September period was EUR 168 million (139 million).
Interest-bearing net debt totaled EUR 1,295 million at the end of September (31 Dec 2007: 755 million). This increase was mainly caused by a high level of working capital due to temporarily high receivables at the end of September. High working capital also resulted in lower net cash from operating activities between January and September of EUR 26 million (321 million).
Net financial expenses between January and September were EUR 27 million (25 million). The average interest rate of borrowings at the end of September was 4.9%, and average maturity 4.3 years. Liquidity is healthy, with cash and cash equivalents and committed, unutilized credit facilities amounting to EUR 1,217 million at the end of September (31 Dec 2007: 1,492 million). The company sees no major refinancing needs until 2012. Short-term financing needs are met by revolving credit and overdraft facilities. There are no financial covenants in existing loan agreements.
The equity-to-assets ratio was 45.1% (31 Dec 2007: 49.9%), the gearing ratio 51.7% (31 Dec 2007: 31.1%), and the leverage ratio 34.1% (31 Dec 2007: 23.7%).
In accordance with its hedging policy, Neste Oil has hedged the majority of its net foreign currency exposure for the next 12 months, mainly through the use of forward contracts and currency options. The most important hedged currency is the US dollar.
Market overview
After rising for eight months, crude oil prices fell significantly during the third quarter. Brent Dated reached a new record of USD 144/bbl at the beginning of July, but fell back to USD 90/bbl and averaged USD 115/bbl (75) during the quarter. Due to the worsening outlook of the world economy and a fall in demand forecasts, market sentiment shifted and money was pulled out of commodities. Simultaneously, the US dollar strengthened. Stronger fuel oil margins and supply problems with Middle Eastern grades boosted Russian crude, and the price differential between Urals and Brent Dated narrowed, averaging USD -2.61/bbl (-2.53).
Refining margins improved in the third quarter, mainly because of disruptions in oil production and at refineries in the US Gulf, caused by hurricanes Gustav and Ike. Declining crude oil price also supported product demand. The international reference refining margin in North-West Europe, IEA Brent Cracking, averaged USD 5.24 /bbl (4.39).
Margins for middle distillates remained high, although somewhat below the peaks seen in the second quarter. Diesel supplies increased, and additional demand resulting from power generation problems in Asia diminished. Distillate margins improved during September, both because of the hurricanes in the US and the European maintenance season.
US gasoline demand continued to fall due to the economic downturn and high prices. Margins peaked in September as hurricanes caused shutdowns at US Gulf refineries. In September and October, gasoline margins remained at a relatively good level compared to the second quarter.
Fuel oil margins were surprisingly strong. Marine fuel oil was in good demand in the East and South-East Asia and was shipped there from Europe. In addition, fuel oil for power production use was in demand in the Persian Gulf.
Reduced vegetable oil prices have resulted in lower prices for biofuels. Margins for high-quality renewable fuels have remained healthy.
Demand has been declining in Neste Oil’s retail markets in 2008, on the back of high prices and economic uncertainty, and this has been particularly evident in respect of gasoline.
Crude freight rates continued to be unseasonably high, with both North Sea and Baltic rates some 85% higher compared to the same period in 2007.
Key drivers
7-9/08 7-9/07 1-9/08 1-9/07 Oct 08 Oct 07 2007 IEA Brent cracking margin, USD/bbl 5.24 4.39 4.79 5.33 6.63 2.90 5.09 Total refining margin, USD/bbl 13.54 10.20 12.65 10.63 n.a n.a 10.46 Urals – Brent price differential, USD/bbl -2.61 -2.53 -3.32 -3.18 -1.61 -2.76 -3.10 Brent dated crude oil, USD/bbl 114.78 74.87 111.02 67.13 76.39 82.49 72.52 Crude freights, Aframax WS points 198 107 191 131 139 127 136 USD/EUR exchange rate 1.51 1.39 1.52 1.35 1.36 1.42 1.38
Sales and production
Sales from in-house production (in 1,000 tons and % of total)
7-9/08 % 7-9/07 % 1-9/08 % 1-9/07 % 2007 % Motor gasoline 1,089 29 1,125 31 3,205 29 3,342 31 4,384 31 Gasoline components 67 2 69 2 220 2 288 3 357 2 Diesel fuel 1,385 36 1,421 39 3,991 37 3,839 36 5,137 36 Jet fuel 198 5 189 5 504 5 532 5 729 5 Base oils 70 2 74 2 220 2 227 2 304 2 Heating oil 203 5 164 5 518 5 539 5 764 5 Heavy fuel oil 245 6 180 5 761 7 775 7 1,097 8 LPG 85 2 84 2 270 2 256 2 317 2 NExBTL renewable diesel 23 1 5 0 76 1 5 0 28 0 Other products 449 12 324 9 1,111 10 945 9 1,215 8 TOTAL 3,814 100 3,634 100 10,875 100 10,748 100 14,332 100
Sales from in-house production by market area (in 1,000 tons and % of total)
7-9/08 % 7-9/07 % 1-9/08 % 1-9/07 % 2007 % Finland 2,082 55 1,987 55 5,653 52 5,981 56 8,053 56 Other Nordic countries 521 14 635 17 1,449 13 1,575 15 2,059 14 Other Europe 800 21 633 18 2,293 21 1,756 16 2,399 17 USA & Canada 394 10 362 10 1,389 13 1,366 13 1,703 12 Other countries 16 0 17 0 91 1 70 0 118 1 TOTAL 3,814 100 3,634 100 10,875 100 10,748 100 14,332 100
Neste Oil refined 3.8 million tons (4.0 million) of crude oil and feedstocks at its refineries in the third quarter, of which 3.1 million tons (3.3 million) at Porvoo and 0.7 million tons (0.7 million) at Naantali. The Porvoo refinery operated at a crude distillation capacity utilization rate of 88% (99%) during the quarter, while Naantali reached 99% (100%) capacity utilization.
The proportion of Russian Export Blend in Neste Oil’s total refinery input was 52% (62%) during the third quarter.
The company has decided to reorganize its sales and trading activities as of 1 January 2009. The office in London will be closed and operations moved to Geneva, Switzerland.
SEGMENT RESULTS
Neste Oil’s businesses are grouped into six segments: Oil Refining, Renewable Fuels, Specialty Products, Oil Retail, Shipping, and Other.
Oil Refining
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM Sales, MEUR 3,763 2,310 9,933 6,608 9,348 12,673 Operating profit, MEUR -2 148 415 501 640 554 Comparable operating profit, MEUR 149 125 379 399 484 464 Capital expenditure, MEUR 30 31 98 147 193 144 Total refining margin USD/bbl 13.54 10.20 12.65 10.63 10.46 11.91
Oil Refining posted a comparable operating profit of EUR 149 million (125 million) and an operating profit of EUR -2 million (148 million).
The increase in comparable operating profit resulted from a high total refining margin of USD 13.54/bbl (10.20). The benchmark IEA Brent cracking margin was USD 5.24/bbl (4.39). The weak US dollar compared to the same period in 2007 continued to have a negative impact.
The stronger total refining margin was due to strong diesel margins and profitable gasoline exports to the North American market. As a result of the maintenance shutdown of the new diesel line, however, Neste Oil’s ability to use heavier Russian crude was limited. Higher energy costs also had a negative effect on the total refining margin.
Oil Refining’s rolling 12-month comparable return on net assets at the end of September was 19.3%.
Renewable Fuels
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM Sales, MEUR 27 7 96 13 40 123 Operating profit, MEUR -2 -7 11 -14 -12 13 Comparable operating profit, MEUR -3 -6 12 -16 -13 15 Capital expenditure, MEUR 64 13 141 47 69 163
Renewable Fuels posted a comparable operating profit of EUR -3 million (-6 million) and an operating profit of EUR -2 million (-7 million) in the third quarter.
Although operations at the first NExBTL renewable diesel production plant at Porvoo were profitable, sales volumes were lower compared to the second quarter. The NExBTL margins have remained healthy. Project and development costs had a negative impact on the segment’s results.
Renewable Fuels’ rolling 12-month comparable return on net assets at the end of September was 8.3%.
Specialty Products
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM Sales, MEUR 149 164 479 511 649 617 Operating profit, MEUR 23 34 56 112 122 66 Comparable operating profit, MEUR 29 34 56 107 109 58 Capital expenditure, MEUR 16 1 19 3 5 21
Specialty Products posted a comparable operating profit of EUR 29 million (34 million) and an operating profit of EUR 23 million (34 million) in the third quarter.
Base oil margins recovered compared to previous quarters as a result of declining feedstock prices. Gasoline components suffered from a weak gasoline market. Nynas showed good profitability, supported by normal seasonality.
Specialty Products’ rolling 12-month comparable return on net assets at the end of September was 15.8%.
Oil Retail
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM Sales, MEUR 1,132 853 3,158 2,470 3,435 4,123 Operating profit, MEUR 9 22 31 51 60 40 Comparable operating profit, MEUR 7 21 27 49 59 37 Capital expenditure, MEUR 18 9 41 27 51 65 Total sales volume*, 1,000 m3 1,104 1,087 3,211 3,329 4,519 4,402 – gasoline station sales, 1,000 m3 388 392 1,103 1,087 1,457 1,473 – diesel station sales, 1,000 m3 359 338 1,051 981 1,334 1,399 – heating oil, 1,000 m3 180 172 539 546 763 756 – heavy fuel oil, 1,000 m3 76 103 251 367 473 357 *includes both station and terminal sales
Oil Retail recorded a comparable operating profit of EUR 7 million (21 million) and an operating profit of EUR 9 million (22 million) in the third quarter. The segment’s profitability was negatively impacted by an additional EUR 11 million write-down on business partner-related receivables. A write-down of EUR 4 million on the same case was reported in the second quarter. Revamping of the Finnish station network has increased fixed costs.
Neste Oil has been able to retain its market share of the Finnish gasoline market, despite a decline in gasoline demand throughout 2008. Lower demand has also put pressure on gasoline retail margins. Diesel volumes have continued to increase. The ongoing project aimed at strengthening Oil Retail’s profitability and position in Finland has proceeded according to plan.
The downturn of the Baltic economies has been reflected in lower volumes, but retail margins have not been affected significantly. Volumes and margins in North-West Russia were softer compared to the same quarter in 2007.
At the end of the quarter, Neste Oil had 891 (896) outlets in Finland and 279 (257) around the Baltic Rim.
Oil Retail’s rolling 12-month comparable return on net assets at the end of September was 10.0%.
Shipping
7-9/08 7-9/07 1-9/08 1-9/07 2007 LTM Sales, MEUR 114 82 337 307 394 424 Operating profit, MEUR 22 -4 52 35 30 47 Comparable operating profit, MEUR 23 -1 52 32 28 48 Capital expenditure, MEUR 0 1 1 2 2 1 Fleet utilization rate, % 96 95 96 95 94 96
Shipping recorded a comparable operating profit of EUR 23 million (-1 million) and an operating profit of EUR 22 million (-4 million).
This stronger profitability was driven by unseasonably high freight rates compared to the same quarter in 2007 and an excellent fleet utilization rate.
Shipping’s rolling 12-month comparable return on net assets at the end of September was 16.4%.
Shares, share trading, and ownership
A total of 85,821,084 Neste Oil shares were traded in the third quarter, totaling EUR 1.3 billion. The share price reached EUR 17.89 at its highest and EUR 14.25 at its lowest, and closed the quarter at EUR 14.57, giving the company a market capitalization of EUR 3.7 billion as of 30 September 2008. An average of 1.3 million shares were traded daily, equivalent to 0.5% of the shares outstanding.
Neste Oil’s share capital registered with the Company Register as of 30 September 2008 totaled EUR 40 million, and the total number of shares outstanding is 256,403,686. The company does not hold any of its own shares, and the Board of Directors has no authorization to buy back company shares or to issue convertible bonds, share options, or new shares.
At the end of September, the Finnish state owned 50.1% of outstanding shares, foreign institutions 23.0%, Finnish institutions 18.2%, and Finnish households 8.6%.
Legal proceedings
Neste Oil has clarified its claims against YIT Industrial and Network Services to total some EUR 107 million in a contract dispute that was put before the Court of Arbitration in April this year. Neste Oil’s claims against YIT consist of damages based on contract delays, now specified at approximately EUR 38.5 million, and damages valued at some EUR 68.5 million resulting from subsequent lost production. The dispute between Neste Oil and YIT relates to disagreements related to the final financial settlement of mechanical installation work on diesel production line 4, which was completed and came on stream at Neste Oil’s Porvoo oil refinery in the summer of 2007. YIT has lodged counter-claims against Neste Oil totaling some EUR 25 million, primarily based on work carried out under the contract and the additional costs incurred due to the prolongation of the project. Both parties contest each other’s claims.
Changes in Group management
President & CEO Risto Rinne retired as of 1 October 2008 after more than 30 years of service in the company. Mr. Matti Lievonen has been appointed the new President & CEO and will join the company on 1 December. Deputy CEO Jarmo Honkamaa will handle the duties of President & CEO until Matti Lievonen takes over.
The Chief Financial Officer, Petri Pentti, left Neste Oil at the end of September to work in another company. His successor is yet to be nominated. Corporate Controller Risto Takkala will serve as Interim CFO until the new CFO joins the company.
Personnel
Neste Oil had an average of 5,162 (4,806) employees in the third quarter. At the end of September, Neste Oil had 5,182 employees (30 September 2007: 4,834).
Health, safety, and the environment
The main indicator for safety performance used by Neste Oil – total recordable injury frequency (TRIF, number of cases per million hours worked) for all work done for the company, combining the company’s own personnel and contractors – stood at 5.8 (5.7) at the end of September 2008. The target for 2008 is below 5.
The cumulative number of lost workday injuries was 41 at the end of September, with the frequency (LWIF) of 3.4. The target is below 3.
Strategy implementation
Neste Oil has continued to implement its clean fuel strategy. As part of this the company’s current investment projects consist of new plants to increase the production of renewable diesel and high-quality base oils. The company is also investing in an isomerization unit to improve gasoline quality. All ongoing investment projects in Porvoo, Singapore, Rotterdam and Bahrain are progressing according to plan.
The basic engineering for a new hydrocracker unit at the Naantali refinery has been completed. Due to uncertainty in the global economic situation and high investment costs, the company has decided not to proceed with the project for the time being.
Potential short-term and long-term risks
The oil market continues to be very volatile. Oil refiners are exposed to a variety of political and economic trends and events, as well as natural phenomena, that affect the short- and long-term supply of and demand for the products that they produce and sell.
The largest uncertainty in the foreseeable future is the slowdown of the world economy, which is likely to reduce the demand for petroleum products and gasoline in particular. The problems in the international financial market have increased uncertainties. As a consequence, managing customer receivables risks has become even more important. Sudden and unplanned outages at Neste Oil’s production units or facilities continue to represent a short-term risk.
Rapid and large changes in feedstock and product prices may lead to significant inventory gains or losses, or change in working capital. These may have a material impact on the company’s IFRS operating profit and net cash from operations.
Over the longer term, access to funding and rising capital costs, as well as challenges in procuring and developing new competitive and reasonably priced raw materials, may impact the company’s growth plans.
The development and content of the bio fuel legislation in the EU and other key market areas may influence the speed at which the demand for these fuels develops.
The key market drivers for Neste Oil’s financial performance are international refining margins, the price differential between Russian Export Blend (REB) and Brent crude, and the USD/EUR exchange rate.
For more detailed information on Neste Oil’s risks and risk management, please refer to the company’s Annual Report and Financial Statements for 2007.
Outlook
Uncertainty in the global economy looks set to continue and this has already resulted in unprecedented volatility in oil prices. Neste Oil expects to report additional inventory losses in the fourth quarter of 2008.
Forecasts for global oil demand have been revised down throughout the year, and reduced demand has been most evident in gasoline and the US in particular.
Demand for diesel and middle distillates is believed to remain strong relative to gasoline, primarily driven by Asian demand. This is likely to support the competitiveness of complex refining companies that are geared towards diesel production, such as Neste Oil.
Volumes of NExBTL renewable diesel will be low during the fourth quarter, due to a one-and-a-half month planned maintenance outage at the Porvoo plant.
Base oil margins are expected to stay healthy for the remainder of 2008. Demand for iso-octane gasoline component demand is estimated to suffer from the weak gasoline market.
The continuation of the economic slowdown is likely to affect the oil retail market in Finland and around the Baltic Rim.
Oil freight rates have normalized after unseasonably high rates during the past two quarters.
The Group’s capital expenditure estimate for 2008 has been revised down to approximately EUR 550 million from EUR 600 million previously.
Reporting date for full-year and fourth-quarter 2008 results
Neste Oil will publish its full-year and fourth-quarter results for 2008 on 5 February 2009 at approximately 9:00 a.m. EET.
Espoo, 23 October 2008
Neste Oil Corporation Board of Directors
The preceding information contains, or may be deemed to contain, “forward-looking statements”. These statements relate to future events or our future financial performance, including, but not limited to, strategic plans, potential growth, planned operational changes, expected capital expenditures, future cash sources and requirements, liquidity and cost savings that involve known and unknown risks, uncertainties, and other factors that may cause Neste Oil Corporation’s or its businesses’ actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, such forward-looking statements can be identified by terminology such as “may,”"will,”"could,”"would,”"should,”"expect,”"plan,”"anticipate,”"intend,”"believe,”"estimate,”"predict,”"potential,” or “continue,” or the negative of those terms or other comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Future results may vary from the results expressed in, or implied by, the forward-looking statements, possibly to a material degree. All forward-looking statements made in this report are based on information presently available to management and Neste Oil Corporation assumes no obligation to update any forward-looking statements. Nothing in this report constitutes investment advice and this report shall not constitute an offer to sell or the solicitation of an offer to buy any securities or otherwise to engage in any investment activity.
NESTE OIL GROUP JANUARY-SEPTEMBER 2008 Unaudited CONSOLIDATED INCOME STATEMENT MEUR Last Note 12 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Sales 3 4 521 2 978 12 238 8 642 12 103 15 699 Other income 12 4 37 21 27 43 Share of profit (loss) of associates and joint ventures 3 28 17 39 31 39 47 Materials and -13 services -4 228 -2 546 -10 868 -7 237 -10 279 910 Employee benefit costs -77 -60 -231 -187 -256 -300 Depreciation, amortization and impairments 3 -56 -55 -168 -139 -195 -224 Other expenses -156 -158 -509 -473 -638 -674 Operating profit 44 180 538 658 801 681 Financial income and expenses Financial income 2 2 6 6 8 8 Financial expenses -18 -13 -42 -26 -40 -56 Exchange rate and fair value gains and losses 8 -1 9 -5 -6 8 Total financial income and expenses -8 -12 -27 -25 -38 -40 Profit before income taxes 36 168 511 633 763 641 Income tax expense -2 -36 -121 -156 -183 -148 Profit for the period 34 132 390 477 580 493 Attributable to: Equity holders of the company 33 132 387 475 577 489 Minority interest 1 0 3 2 3 4 34 132 390 477 580 493 Earnings per share from profit attributable to the equity holders of the Company basic and diluted (in euro per share) 0,13 0,52 1,51 1,86 2,25 1,91 CONSOLIDATED BALANCE SHEET 30 Sep 30 Sep 31 Dec MEUR Note 2008 2007 2007 ASSETS Non-current assets Intangible assets 5 52 40 41 Property, plant and equipment 5 2 578 2 396 2 436 Investments in associates and joint ventures 190 173 178 Non-current receivables 10 2 3 Pension assets 86 83 81 Deferred tax assets 12 5 7 Derivative financial instruments 6 30 22 22 Available-for-sale financial assets 2 3 2 Total non-current assets 2 960 2 724 2 770 Current assets Inventories 1 070 935 968 Trade and other receivables 1 303 905 955 Derivative financial instruments 6 130 104 126 Cash and cash equivalents 107 55 52 Total current assets 2 610 1 999 2 101 Total assets 5 570 4 723 4 871 EQUITY Capital and reserves attributable to the equity holders of the company Share capital 40 40 40 Other equity 2 2 456 2 288 2 383 Total 2 496 2 328 2 423 Minority interest 7 3 4 Total equity 2 503 2 331 2 427 LIABILITIES Non-current liabilities Interest-bearing liabilities 1 165 601 662 Deferred tax liabilities 283 278 289 Provisions 22 6 8 Pension liabilities 11 11 11 Derivative financial instruments 6 35 18 22 Other non-current liabilities 3 7 5 Total non-current liabilities 1 519 921 997 Current liabilities Interest-bearing liabilities 237 333 145 Current tax liabilities 26 24 14 Derivative financial instruments 6 183 62 77 Trade and other payables 1 102 1 052 1 211 Total current liabilities 1 548 1 471 1 447 Total liabilities 3 067 2 392 2 444 Total equity and liabilities 5 570 4 723 4 871 CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY Attributable to equity holders of the Company Share Reserve Fair Translation Re- Mi- Total ca- fund value diffe- tained nority equity pital and rences ear- inte- other nings rest MEUR Note reserves Total equity at 1 January 2007 40 9 26 3 2011 8 2 097 Dividend paid -231 -231 Treasury shares 2 -12 -12 Income and expenses recognized directly in equity Translation differences and other changes 1 -2 -1 -2 Cash flow hedges recorded in equity, net of tax 36 36 transferred to income statement, net of tax -27 -27 Net investment hedges, net of tax -2 -2 Share-based compensation 2 2 Change in minority -7 -7 Items recognized directly in equity 1 11 -4 -1 -7 0 Profit for the period 475 2 477 Total recognized income and expenses 1 11 -4 474 -5 477 Total equity at 30 September 2007 40 10 37 -1 2 242 3 2 331 Share Reserve Fair Translation Re- Mi- Total ca- fund value diffe- tained nority equity pital and rences ear- inte- other nings rest MEUR Note reserves Total equity at 1 January 2008 40 10 42 -11 2 342 4 2 427 Dividend paid -256 -256 Income and expenses recognized directly in equity Translation differences and other changes 1 -10 -1 -10 Cash flow hedges recorded in equity, net of tax -1 -1 transferred to income statement, net of tax -46 -46 Net investment hedges, net of tax 0 0 Share-based compensation 0 0 Hedging reserves in associates and joint ventures -1 -1 Change in minority 0 0 Items recognized directly in equity 1 -48 -10 -1 0 -58 Profit for the period 387 3 390 Total recognized income and expenses 1 -48 -10 386 3 332 Total equity at 30 September 2008 40 11 -6 -21 2 472 7 2 503 CONDENSED CONSOLIDATED CASH FLOW STATEMENT 7-9 7-9 1-9 1-9 1-12 MEUR Note /2008 /2007 /2008 /2007 /2007 Cash flow from operating activities Profit before taxes 36 168 511 633 763 Adjustments, total 21 60 156 121 184 Change in working capital -268 -195 -588 -254 -189 Cash generated from operations -211 33 79 500 758 Finance cost, net 70 -17 38 -24 -40 Income taxes paid -34 -48 -91 -155 -177 Net cash generated from operating activities -175 -32 26 321 541 Capital expenditure -131 -59 -313 -236 -334 Acquisition of subsidiary 4 0 0 -10 0 0 Proceeds from sales of fixed assets 1 2 4 14 14 Proceeds from sales of shares 3 0 10 -5 -5 Change in other investments 30 -17 4 -30 -22 Cash flow before financing activities -272 -106 -279 64 194 Net change in loans and other financing activities 304 90 590 152 20 Dividends paid to the equity holders of the company 0 0 -256 -231 -231 Net increase (+)/decrease (-) in cash 32 -16 55 -15 -17 and cash equivalents KEY FINANCIAL INDICATORS 30 Sep 30 Sep 31 Dec Last 12 2008 2007 2007 months Capital employed, MEUR 3905 3265 3234 3905 Interest-bearing net debt, MEUR 1295 879 755 – Capital expenditure and acquisition of subsidiary, MEUR 323 236 334 421 Return on average capital employed, after tax, ROACE % – – 15,5 13,1 Return on capital employed, pre-tax, ROCE % 20,7 28,5 26,2 19,5 Return on equity, % 21,1 28,7 25,6 20,4 Equity per share, EUR 9,75 9,10 9,47 – Cash flow per share, EUR 0,10 1,25 2,11 0,96 Equity-to-assets ratio, % 45,1 49,4 49,9 – Gearing, % 51,7 37,7 31,1 – Leverage ratio, % 34,1 27,4 23,7 – Average number of shares 255903686 255994173 255971365 255903686 Number of shares at the end of the period 255903686 255903686 255903686 255903686 Average number of personnel 5162 4806 4810 –
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES
The interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by EU. The interim report should be read in conjunction with the annual financial statements for the period ended 31 December 2007. The accounting policies adopted are consistent with those of the Group’s annual financial statements for the year ended 31 December 2007 with the exception that the Group applies IFRS 8 Operating Segments as of 1 January 2008.
The following interpretations are mandatory for the financial year ending 31 December 2008, but not relevant for the Group:
– IFRIC 11 IFRS 2 Group and Treasury Shares
– IFRIC 12 Service Concession
Arrangements
2. TREASURY SHARES
In 2007 Neste Oil entered into an agreement with a third party service provider concerning the administration of the new share-based management share performance arrangement for key management personnel. As part of the agreement, the service provider purchased a total of 500,000 Neste Oil shares in February 2007 in order to hedge part of Neste Oil’s cash flow risk in relation to the future payment of the rewards, which will take place partly in Neste Oil shares and partly in cash during 2010 and 2013. Despite the legal form of the hedging arrangement, it has been accounted for as if the share purchases had been conducted directly by Neste Oil, as required by IFRS 2, Share based payments and SIC-12, Consolidation – Special purpose entities. The consolidated balance sheet and the consolidated changes in total equity reflect the substance of the arrangement with a deduction amounting to EUR 12 million in equity. This amount represents the consideration paid for the shares by the third party service provider.
3. SEGMENT INFORMATION
Neste Oil’s businesses are grouped into six segments: Oil Refining, Renewable Fuels, Specialty Products, Oil Retail, Shipping and Other. Group administration, shared service functions as well as Research and Technology and Neste Jacobs are included in the Other segment.
Last SALES 12 MEUR 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Oil Refining 3763 2310 9933 6608 9348 12673 Renewable Fuels 27 7 96 13 40 123 Specialty Products 149 164 479 511 649 617 Oil Retail 1132 853 3158 2470 3435 4123 Shipping 114 82 337 307 394 424 Other 36 20 100 67 93 126 Eliminations -700 -458 -1865 -1334 -1856 -2387 Total 4521 2978 12238 8642 12103 15699 OPERATING Last PROFIT 12 MEUR 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Oil Refining -2 148 415 501 640 554 Renewable Fuels -2 -7 11 -14 -12 13 Specialty Products 23 34 56 112 122 66 Oil Retail 9 22 31 51 60 40 Shipping 22 -4 52 35 30 47 Other -7 -16 -30 -28 -37 -39 Eliminations 1 3 3 1 -2 0 Total 44 180 538 658 801 681 COMPARABLE OPERATING Last PROFIT 12 MEUR 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Oil Refining 149 125 379 399 484 464 Renewable Fuels -3 -6 12 -16 -13 15 Specialty Products 29 34 56 107 109 58 Oil Retail 7 21 27 49 59 37 Shipping 23 -1 52 32 28 48 Other -7 -17 -30 -30 -39 -39 Eliminations 1 3 3 1 -2 0 Total 199 159 499 542 626 583 DEPRECIATION, AMORTIZATION AND Last IMPAIRMENTS 12 MEUR 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Oil Refining 35 36 107 89 126 144 Renewable Fuels 2 2 5 3 5 7 Specialty Products 4 3 12 10 13 15 Oil Retail 9 7 25 20 27 32 Shipping 3 4 11 11 15 15 Other 3 3 8 6 9 11 Total 56 55 168 139 195 224 SHARE OF PROFIT OF ASSOCIATES AND JOINT Last VENTURES 12 MEUR 7-9/2008 7-9/2007 1-9/2008 1-9/2007 1-12/2007 months Oil Refining 0 0 0 0 0 0 Renewable Fuels 0 0 0 0 0 0 Specialty Products 28 17 39 31 39 47 Oil Retail 0 0 0 0 0 0 Shipping 0 0 0 0 0 0 Other 0 0 0 0 0 0 Total 28 17 39 31 39 47 NET ASSETS 30 Sep 30 Sep 31 Dec MEUR 2008 2007 2007 Oil Refining 2761 2189 2165 Renewable Fuels 259 122 142 Specialty Products 403 359 324 Oil Retail 351 368 381 Shipping 287 298 297 Other 64 51 59 Eliminations 2 3 2 Total 4127 3390 3370 RETURN ON NET ASSETS, Last % 30 Sep 30 Sep 31 Dec 12 2008 2007 2007 months Oil Refining 22,6 31,5 30,1 23,1 Renewable Fuels 7,5 -19,3 -11,4 7,2 Specialty Products 20,2 44,7 36,8 18,0 Oil Retail 11,2 20,3 17,4 10,8 Shipping 23,9 15,4 9,9 16,1 COMPARABLE RETURN ON NET Last ASSETS, % 30 Sep 30 Sep 31 Dec 12 2008 2007 2007 months Oil Refining 20,6 25,1 22,7 19,3 Renewable Fuels 8,2 -22,1 -12,3 8,3 Specialty Products 20,2 42,7 32,9 15,8 Oil Retail 9,7 19,5 17,1 10,0 Shipping 23,9 14,0 9,3 16,4 QUARTERLY SEGMENT INFORMATION QUARTERLY SALES MEUR 7-9 4-6 1-3 10-12 7-9 4-6 1-3 /2008 /2008 /2008 /2007 /2007 /2007 /2007 Oil Refining 3763 3624 2546 2740 2310 2516 1782 Renewable Fuels 27 46 23 27 7 4 2 Specialty Products 149 164 166 138 164 181 166 Oil Retail 1132 1078 948 965 853 843 774 Shipping 114 123 100 87 82 115 110 Other 36 33 31 26 20 24 23 Eliminations -700 -648 -517 -522 -458 -476 -400 Total 4521 4420 3297 3461 2978 3207 2457 QUARTERLY OPERATING PROFIT MEUR 7-9 4-6 1-3 10-12 7-9 4-6 1-3 /2008 /2008 /2008 /2007 /2007 /2007 /2007 Oil Refining -2 231 186 139 148 246 107 Renewable Fuels -2 12 1 2 -7 -4 -3 Specialty Products 23 28 5 10 34 47 31 Oil Retail 9 11 11 9 22 18 11 Shipping 22 23 7 -5 -4 16 23 Other -7 -14 -9 -9 -16 -6 -6 Eliminations 1 -1 3 -3 3 -3 1 Total 44 290 204 143 180 314 164 QUARTERLY COMPARABLE OPERATING PROFIT MEUR 7-9 4-6 1-3 10-12 7-9 4-6 1-3 /2008 /2008 /2008 /2007 /2007 /2007 /2007 Oil Refining 149 133 97 85 125 168 106 Renewable Fuels -3 13 2 3 -6 -5 -5 Specialty Products 29 19 8 2 34 41 32 Oil Retail 7 11 9 10 21 17 11 Shipping 23 20 9 -4 -1 12 21 Other -7 -14 -9 -9 -17 -5 -8 Eliminations 1 -1 3 -3 3 -3 1 Total 199 181 119 84 159 225 158 QUARTERLY DEPRECIATION, AMORTIZATION AND IMPAIRMENTS MEUR 7-9 4-6 1-3 10-12 7-9 4-6 1-3 /2008 /2008 /2008 /2007 /2007 /2007 /2007 Oil Refining 35 34 38 37 36 29 24 Renewable Fuels 2 1 2 2 2 1 0 Specialty Products 4 4 4 3 3 4 3 Oil Retail 9 8 8 7 7 7 6 Shipping 3 4 4 4 4 3 4 Other 3 2 3 3 3 1 2 Total 56 53 59 56 55 45 39 QUARTERLY SHARE OF PROFIT OF ASSOCIATES AND JOINT VENTURES MEUR 7-9 4-6 1-3 10-12 7-9 4-6 1-3 /2008 /2008 /2008 /2007 /2007 /2007 /2007 Oil Refining 0 0 0 0 0 0 0 Renewable Fuels 0 0 0 0 0 0 0 Specialty Products 28 10 1 8 17 13 1 Oil Retail 0 0 0 0 0 0 0 Shipping 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 Total 28 10 1 8 17 13 1
4. ACQUISITIONS
Neste Jacobs, subsidiary of Neste Oil Group, acquired 90% of the shares of an engineering company Rintekno, which employs 230 people. The acquisition was closed on 29 February 2008. Prior to this Neste Jacobs already owned 10% of the company. Rintekno is an engineering company specialized in engineering services for oil refining, chemicals and biopharma industries. Neste Jacobs and Rintekno have worked together for a number of years in connection with engineering of Neste Oil’s investment projects.
On consolidation, intangible assets related to order backlog, customer relationships and trade name have been recognized at fair value in the balance sheet. Total amount recognized is EUR 1 million and the assets are depreciated during their expected life time, in 1-5 years. Goodwill recognized in the consolidated balance sheet is attributable to the experienced and capable personnel employed by Rintekno Group and to synergies achieved in engineering projects due to Rintekno’s previous experience as a subcontractor in Neste Oil’s major investment projects.
The profit of Rintekno Group included in the Neste Oil consolidated income statement 1 January – 30 September 2008 is immaterial. Also, management estimates that Rintekno Group’s effect on Neste Oil’s consolidated sales or profit for the period would have been immaterial as at 30 September 2008, had the acquisition taken place on 1 January 2008.
Assets and liabilities of Rintekno Group Acquired Acquired fair book MEUR value value Intangible assets 1 0 Property, plant and equipment 1 1 Trade and other receivables 5 5 Cash and cash equivalents 6 6 Total assets 13 12 Trade and other payables 5 5 Pension liabilities 1 1 Total liabilities 6 6 Acquired net assets 7 6 Purchase consideration 16 Direct costs related to the acquisition 0 Goodwill 9 Purchase consideration settled in cash 16 Direct costs related to the acquisition 0 Cash and cash equivalents in Rintekno Group -6 Cash outflow on acquisition 10
5. CHANGES IN INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT AND CAPITAL COMMITMENTS
CHANGES IN INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT 30 Sep 30 Sep 31 Dec MEUR 2008 2007 2007 Opening balance 2477 2348 2348 Depreciation, amortization and impairments -168 -139 -195 Capital expenditure 313 236 334 Disposals -3 -12 -12 Translation differences 0 3 2 Acquired group companies 11 – – Closing balance 2630 2436 2477 CAPITAL COMMITMENTS 30 Sep 30 Sep 31 Dec MEUR 2008 2007 2007 Commitments to purchase property, plant and equipment 611 76 88 Commitments to purchase intangible assets 0 1 0 Total 611 77 88 6. DERIVATIVE FINANCIAL INSTRUMENTS 30 Sep 30 Sep 31 Dec 2008 2007 2007 Interest rate and currency derivative contracts and share forward contracts Nominal Net Nominal Net Nominal Net fair fair fair MEUR value value value value value value Interest rate swaps 375 -1 297 2 345 0 Forward foreign exchange contracts 2025 -53 1155 35 1189 35 Currency options Purchased 501 -8 334 7 353 11 Written 349 -7 199 2 188 1 Share forward contracts 14 -5 17 3 17 2 Oil and freight Net Net Net derivative fair fair fair contracts Volume value Volume value Volume value million million million bbl Meur bbl Meur bbl Meur Sales contracts 35 52 73 -38 68 -66 Purchase contracts 43 -37 87 34 74 65 Purchased options 2 -2 3 0 1 0 Written options 2 2 1 0 0 0 The fair values of derivative financial instruments subject to public trading are based on market prices as of the balance sheet date. The fair values of other derivative financial instruments are based on the present value of cash flows resulting from the contracts, and, in respect of options, on evaluation models. The amounts also include unsettled closed positions. Derivative financial instruments are mainly used to manage the group’s currency, interest rate and price risk. 7. CONTINGENT LIABILITIES 30 Sep 30 Sep 31 Dec MEUR 2008 2007 2007 Contingent liabilities On own behalf For debt Pledges 6 9 4 Real estate mortgages 26 26 26 For other commitments Real estate mortgages 0 0 0 Other contingent liabilities 37 28 42 Total 69 63 72 On behalf of associates and joint ventures Guarantees 9 3 2 Other contingent liabilities 1 1 1 Total 10 4 3 On behalf of others Guarantees 12 5 12 Other contingent liabilities 0 0 0 Total 12 5 12 Total 91 72 87 30 Sep 30 Sep 31 Dec MEUR 2008 2007 2007 Operating lease liabilities Due within one year 116 116 108 Due between one and five years 202 178 183 Due later than five years 191 125 119 Total 509 419 410 Other contingent liabilities Neste Oil Corporation has a collective contingent liability with Fortum Heat and Gas Oy of the demerged Fortum Oil and Gas Oy’s liabilities based on the Finnish Companies Act’s Chapter 17 Paragraph 16.6.
CALCULATION OF KEY FIGURES
CALCULATION OF KEY FINANCIAL INDICATORS
Operating profit = Operating profit includes the revenue from the sale of goods and services, other income such as gain from sale of shares or non-financial assets, share of profits (loss) of associates and joint ventures, less losses from sale of shares or non-financial assets, as well as expenses related to production, marketing and selling activities, administration, depreciation, amortization, and impairment charges. Realized and unrealized gains or losses on oil and freight derivative contracts together with realized gains and losses from foreign currency and oil derivative contracts hedging cash flows of commercial sales and purchases that have been recycled in the income statement, are also included in operating profit.
Comparable operating profit = Operating profit -/+ inventory gains/losses -/+ gains/losses from sale of shares and non-financial assets – unrealized change in fair value of oil and freight derivative contracts
Return on equity, (ROE) % = 100 x (Profit before taxes – taxes) / Total equity average
Return on capital employed, pre-tax (ROCE) % = 100 x (Profit before taxes + interest and other financial expenses) / Capital employed average
Return on average capital employed, after-tax (ROACE) % = 100 x (Profit for the period (adjusted for inventory gains/losses, gains/losses from sale of shares and non-financial assets and unrealized gains/losses on oil and freight derivative contracts, net of tax) + minority interest + interest expenses and other financial expenses related to interest-bearing liabilities (net of taxes)) / Capital employed average
Capital employed = Total assets – interest-free liabilities – deferred tax liabilities -provisions
Interest-bearing net debt = Interest- bearing liabilities – cash and cash equivalents
Leverage ratio, % = 100 x Interest- bearing net debt / (Interest- bearing net debt + Total equity)
Gearing, % = 100 x (Interest bearing net debt / Total equity)
Equity-to assets ratio, % = 100 x Total equity / (Total assets – advances received)
Return on net assets, % = 100 x Segment operating profit / Average segment net assets
Comparable return on net assets, % = 100 x Segment comparable operating profit / Average segment net assets
Segment net assets = Property, plant and equipment, intangible assets, investment in associates and joint ventures, pension assets, inventories and interest-free receivables and liabilities allocated to the business segment, provisions and pension liabilities
CALCULATION OF KEY SHARE RATIOS
Earnings per share (EPS) = Profit for the period attributable to the equity holders of the company / Adjusted average number of shares during the period
Equity per share = Shareholder’s equity attributable to the equity holders of the company/ Adjusted average number of shares at the end of the period
Cash flow per share = Net cash generated from operating activities / Adjusted average number of shares during the period
This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.
Interim Report Q3 2008: http://hugin.info/133386/R/1262954/277130.pdf
Copyright Copyright Hugin AS 2008. All rights reserved.
SOURCE: Neste Oil Oyj