Neste Oyj (NESTE) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, my name is Matti Kahkonen, and I am the Chair of the Board of Directors of Neste. It is my honor to open this Neste Annual General Meeting 2022 and warmly welcome you all on behalf of the Board. I'm opening this meeting in a global situation in which we are both appalled and concerned. The war in Ukraine is violating against international law, and principles of human rights. Like corporations, private citizens, Neste also condemns the Russian attack. We are monitoring the situation closely and have also taken appropriate measures. In addition to the war in Ukraine, COVID-19 continues to impact our operations. It is due to COVID that we are once again holding this Annual General Meeting with the exceptional arrangements. You can see the members of the executive board in this picture. Due to exceptional arrangements, I'm the only member of the Board present on site today. I have been the Chair of the Board of Directors of its Personnel and Remuneration Committee and also a member of the Shareholders' Nomination Board. All the Board members, as well as Virpi Halonen, authorized public accountant, our Chief Auditor of KPMG auditor are independent of Neste Corporation and its major shareholders. President and CEO, Peter Vanacker, is also physically present here today. And later, he will be giving his concise review of Neste's business operations. The key task of Neste's Board of Directors is to guide the group strategy in a way that creates conditions for meeting the financial goals of the group and for the creation of shareholder value over the long run, while taking account of the expectations of various stakeholders. In 2021, the Board of Directors focused on the company's long-term strategy such as the continued growth of the Renewable Product business and the expansion of sourcing and production of renewable raw materials. These include the ongoing expansion project in Singapore, the potential next refinery project for Renewable Products in Rotterdam and the joint venture for the production of renewable diesel with Marathon Petroleum in California, which we announced in March. The Naantali refinery was closed in March 2021. And the biggest large-scale turnaround ever at the Porvoo refinery was completed successfully and safely. The turnaround was a significant investment in the refinery's future safety, availability and competitiveness. In addition to these and the other schedule matters on the agenda, the Board of Directors also monitored the implementation of the company's strategy and assessed long-term changes in the operating environment and their impact on the company's business from the perspective of sustainability, among others. The Board has also addressed management issues, including the changes in our top management announced during 2021, and the development of competencies. The Board of Directors also kept a close eye on the development of safety, the company's operations, its financial results and risk management. Acquisitions and investment projects were also on the Board's agenda last year. During the year, the Board reviewed its own activities, focusing particularly on the diversity of the Board's skills and experience. The Board of Directors convened 13x in 2021 with a participation rate of 98.1%. Due to COVID, the meetings were held virtually apart from the meeting in September. The Board has worked in a very exceptional operating environment, which was marked by both the exceptional arrangements under the pandemic, as well as the uncertainty caused by the war in Ukraine and its impact on business and on life in general. Despite these exceptional circumstances, the Board of Directors has worked with expediency and diligence. I will come back to the company's remuneration principles later in this meeting. And now dear shareholders, ladies and gentlemen, I want to thank you for putting your confidence in Neste Corporation and buying stock in the company. I would also like to thank you for attending this meeting online and for having voted in advance on the important decisions to be taken by this Annual General Meeting. I declare the Annual General Meeting open. And in the absence of other proposals, Jukka Laitasalo, attorney-at-law, is elected to chair the meeting. I will now give the floor to him.

[Interpreted] I thank for your confidence. I also would like to welcome those who follow this AGM online. We will start by calling the meeting to order. Traditionally, we need a Secretary, and I call Christian Stahlberg, General Counsel of the company, this year too to act as Secretary. So Christian, you are the Secretary. And some general remarks on the meeting. As Matti Kahkonen, Chairman of the Board, said in his opening speech, this year too, this AGM, Annual General Meeting, is held under exceptional arrangements without the presence of shareholders or their proxy representatives. And this is based on the so-called temporary act with the aim of taking into account health and safety and also that the company can take important decisions. But on the other hand, this temporary act and its exceptional arrangements want to give the rights to the shareholders as far as possible under these exceptional circumstances. The shareholders and their proxy representatives have been entitled to participate in the AGM and exercise their shareholder rights only by voting in advance, by making counterproposals in advance, and asking questions in advance, following the instructions in the notice and in the company's other instructions. And this meeting is possible -- it is possible to follow this meeting on the company's website. Shareholders following this online are not considered to be participating in the AGM. We will later tell about the entitlement of participation. As you've seen in the notice, shareholders holding 100, at least, of all shares of the company within the meaning of the Temporary Act, have the right to make counter proposals to the proposed resolutions, but there were no counterproposals submitted by the shareholders by deadline. Shareholders have also had the possibility to e-mail questions in line with Chapter 5, Article 25 of the Finnish Companies Act concerning items on the agenda. But there were no questions either to put to the company in advance. The advanced voting procedure, under the Temporary Act, it has been possible to give a vote on all the points on the agenda. And it has been possible to give a vote in favor, against or abstain or otherwise not participate in that vote. So normal Limited Liabilities Act, actually today, it is better to find out the votes of the shareholders. Because normally, there are no votes taken in sort of ordinary annual meetings, but now this vote is taken on each point on the agenda where the decision is needed. A summary of votes cast in advance, which is submitted by Euroclear Finland Oy and the number of votes for each point will be annexed to the minutes under point 2, and you should be seeing that summary now on your screens. And the numbers and percentages will be entered in the minutes under each point as the law requires, as we can say that the required majority of shares represented in the meeting for the AGM are in favor, with a clear majority, of all the proposals to be found in the notice. Either Neste or Euroclear Finland are not aware of any technical or other kind of problem or ambiguity concerning advanced voting or the meeting procedure in general. The right of participation of shareholders and the accuracy of the accounting votes has been accounted for in ways comparable to those used in sort of normal AGMs. This meeting as a main rule will be held in Finnish. However, Peter Vanacker, the President and CEO, will present his review in English. And there are -- there is interpretation from the Finnish into English, which you can use online. The proposals made to the AGM are to be found in the notice. And I will say that the deadlines for making the documents available have been met. So at this point, we are ready to move on about the election of the examiners, of the minutes and supervisors for counting a vote. The Temporary Act stipulates that in the notice of the meeting, it shall be indicated how meeting officials are to be elected. At this time, the Board of Directors has made a proposal, which you can find in the notice, that the examiner of the minutes and the supervisor of the counting of votes is General Counsel of the company, Christian Stahlberg. Next point on the agenda is establishing the legality of the meeting. And here, we verify that general meeting, the convocation to that meets requirements. According to Section 10 of the Articles of Association, the note is convening a general meeting of shareholders is issued by the Board, and the notice shall be published on the company's website no earlier than 2 months and no later than 3 weeks prior to that meeting, but at least 9 days prior to the record date of the meeting. And in addition, where the Board so decides, the company may publish the date and location of the meeting and the link to the company's website on one of our newspapers. The notice has been published following the decision of the Board on the company's website and as a stock exchange release on February 10, 2022. So these deadlines in the Articles of Association have been respected. There were no newspaper notices published this year. And the notice is also available here at the chair's desk. And just to add that the notice will be annexed to the minutes, and I still want to say that according to the Article of Association, the meetings can be convened in Espoo, Helsinki or Vantaa, and today, we are meeting in Espoo at the headquarters. So as a Chairman, I can say that the requirements of the Limited Companies Act and Articles of Association have been complied with. So the meeting has been convened in line with them, and it is correct. Let's move on to point 5 before going to the business proper for which decisions are taken under point 5, we record the attendance the meeting and the voting list, which will be annexed to the minutes. So in order to be able to use your voting right is that the participant has been registered in the shareholders' register of the company, maintained by Euroclear Finland Oy on 18th of March, which is the record date. And this deadline is both to nominee [ registry ] and the directly registered shareholders. And the last one is in a way that the nominee registered shareholders have to be registered in that list by the record date and that they also have given notice that they have been included temporarily on the shareholders' register for the meeting and for votes. As established in the notice, the shareholder is considered to have the entitlement to participate or the right to having shares on the record date, also registration by the deadline mentioned in the notice. And in addition, the shareholder has participated in advance voting, which gave him the right to participate in the annual general meeting. And Euroclear Finland Oy shows the advanced vote 300,547 (sic) [ 3,547 ] shareholders took part in the advanced voting, representing 599,587,341 shares and votes. This is 77.95% of all shares and votes of the company. The voting list will be annexed to the minutes of the meeting under point 5. So that was the organization of the meeting. Now we are ready to go to the issues that are to be decided by the Annual General Meeting. We start with the presentation of the financial statements for 2021, including the consolidated financial statements reviewed by the Board and the auditor's report. It will be recorded that documents regarding the financial statements have been made available to shareholders since 4th of March on the company's website and at the headquarters of the company so that 3-week deadline was respected. The financial statements include also the consolidated financial statements and the original version of those documents are available at the headquarters. I will next give the floor to President and CEO, Peter Vanacker, who will present his review of the year 2021. The floor is yours.

Hi, and welcome to this virtual Annual General Meeting. Welcome also on my behalf to our Annual General Meeting, which once again is being held under very different circumstances. I'm not only referring to the COVID-19 pandemic, which forces us to hold this meeting virtually, but also the war in Ukraine, which is a clear violation of international law and principles of human rights. We, along with so many businesses and individuals, condemn the invasion by Russia. And last month, we decided to mostly replace Russian crude oil with crudes from other regions and not make any new supply agreements of Russian-origin oil products for the moment. Neste does not buy renewable raw materials from Russia, and will not make any new agreements to buy renewable raw materials from Russia in the current situation. Neste continues to closely monitor the situation and the development of sanctions and potential counter sanctions. And we are preparing for various options in procurement, production and logistics. Our primary target is to secure the uninterrupted supply of products and the safe continuation of operations in any situation. These are harrowing, upsetting times for tens of millions of people in Ukraine and elsewhere, and my heart goes out to all those who are suffering. Dear shareholders, despite these difficult times, we have not lost sight of our purpose to create a healthier planet for our children. As you can see from our performance in 2021, Neste is a company like no other. If I could choose 3 words to summarize the year, they would be resolve, resilience and results. Our employees, they showed great resolve in putting together to successfully execute our strategy of becoming a leader in renewable and circular solutions. They showed incredible resilience during another year of the pandemic, which [ rolls ] the global economy and touched all of us personally, either directly or indirectly. And most importantly, they drove Neste to fantastic results, both in terms of safety as well as financially, which I will expand upon shortly. And thanks to these 3 Rs, Neste took big steps forward as a company in 2021. We agreed numerous partnerships and acquisitions to grow our Renewable Aviation, Renewable Road Transportation and Renewable Polymers and Chemicals business units. We expanded our global access to waste and residues, and announced a broadened sustainability vision that sets aspirational targets for biodiversity, human rights, our supply chain and raw materials. We delivered an excellent safety performance and that despite the risk posed by COVID and the major 3-month turnaround that we had in our Porvoo refinery. And I'm pleased to say we have kept the momentum going on in 2022. Earlier this month, we agreed on a significant renewable fuels joint venture with Marathon Petroleum. And that will make Neste the only global provider of renewable fuel products with our production footprint on 3 continents: North America, Asia and Europe. And my warm thanks go to our employees, our partners and our stakeholders for such a successful 2021. I will cover our achievements in more detail after walking you through our key numbers, the financial targets and dividend policy. These targets ensure that Neste remains a healthy and profitable company that is capable of investing into the future while providing solid shareholder value. One of our key long-term targets is to keep our return on average capital employed after tax above 15%. And in 2021, we reached 15.5% on a rolling 12-month basis, exceeding the target despite the pandemic. Secondly, our leverage ratio should stay below 40%. In 2021, the number was 0.6%, which is remarkable considering the turmoil caused by the pandemic. This healthy figure gives us the flexibility to make large decisions that will help us advance our strategy like the investment in Singapore and the just announced USD 1 billion investment in the United States. We're also starting to highlight comparable earnings before interest, tax, depreciation and amortization or EBITDA, a metric that removes the impact of acquisitions and investments on earnings and better shows the underlying business performance. In 2021, our comparable EBITDA was EUR 1.92 billion, roughly flat versus 2020 and an excellent achievement in the pandemic conditions. And finally, our policy is to distribute at least 50% of our comparable net profits as dividends. Our Chair will shortly speak about our dividend proposal. Before moving to our achievements in sustainability, I would like to take this moment to give my thanks to our Chief Financial Officer, Jyrki Maki-Kala, who will retire during the spring after serving Neste for 9 years. Thank you, Jyrki. Jyrki will be succeeded by Martti Ala-Härkönen who will join us on April 1 and formally take over from Jyrki on May 1. Now I will turn to sustainability, which as you know is at the core of our business. And I'm pleased to say that in 2021, we raised our already high ambitions even higher. The year was one of significant activity, focused on tackling the climate crisis, including the unveiling of the Europeans' Fit for 55 emissions reduction plan and the COP26 Climate Change Conference in Glasgow. This shows the growing urgency to reduce the climate change impact, something Neste has already been doing for years. We have set ourselves a number of targets in this area. And on the slide, you can see our key sustainability targets and achievements, which we track closely. They cover our climate promises, our carbon footprint and handprint commitments, as well as circular economy and environmental targets. They also cover safety performance, which once again was strong in 2021, considering the Porvoo turnaround and the unstable COVID environment. To highlight one of these targets, we are committed to helping customers reduce their greenhouse gas emissions with our renewable and circular solutions by at least 20 million tons of CO2 equivalent annually by 2030. In 2021, we made strong progress with a reduction of 10.9 million tons. And that is the equivalent of removing 4.2 million passenger cars from the roads for a full year. I'm pleased to say that our joint venture with Marathon Petroleum, once closed, will help us exceed this commitment. But as I said, in 2021, we raised our sustainability ambitions even higher and setting aspirational targets for biodiversity, human rights, over supply chain and raw materials, as you can see in this slide. On climate, we're taking the lead to transform towards a carbon-neutral value chain by now including Scope 3 emissions in our targets, aiming to reduce the use phase emission intensity of sold products by 50% by 2040, and that is compared to 2020. We will reach our climate targets through increasing the share of renewable and circular solutions, transforming our Porvoo refinery to make it the most sustainable one in Europe, and working with suppliers and partners to cut emissions across the value chain. And for example, in December, we announced that we met our goal of 100% renewable electricity use in Finland ahead of schedule after signing a renewable hydropower agreement. Our ambitions will require further transformation from Neste, its suppliers and partners with new ways of working innovation and cooperation. But the cost of this effort pales in comparison when you consider what is at stake for the planet. In 2021, our hard work was once again recognized by a number of leading external parties like the Corporate Knights and the Dow Jones Sustainability Indices. You can find more details on this and other topics in our very comprehensive annual sustainability report, which is available on our website. Neste's strategy is built on renewable and circular solutions. In other words, developing different alternatives to ensure that carbon is used again and again. We refine waste residues and innovative raw materials into renewable fuels and sustainable feedstock for plastics and other materials. Last year, we showed clear progress on multiple fronts. We expanded a number of customers for our leading sustainable aviation fuel business, or SAF, to include leading airlines such as Lufthansa, KLM, Delta Airlines and DHL. With our ongoing Singapore refinery expansion and the additional investments into our Rotterdam refinery, we will have the capacity to produce around 1.5 million tons of SAF annually and that by the end of 2023. The project for a possible next world renewables refinery in Rotterdam is in the engineering phase. And its scope is relatively similar to Singapore. We are approaching readiness for a final investment decision during the next months. We grew our Neste MY Renewable Diesel fueling network in target markets, including the United States, Sweden. And we also launched Neste MY Renewable Diesel in Belgium. It was also a strong year for our Renewable Polymers & Chemicals business, which track a number of strategic agreements with companies like Unilever, LyondellBasell, Mitsui Chemicals and Toyota Tshusho Corporation. Neste aims to become a significant solution provider for advanced recycling and has set a target to process over 1 million tons of waste plastic annually and from 2030 onwards. In 2021, we successfully conducted trial runs of our advanced recycling capabilities for liquefied waste plastic in Porvoo, laying out the foundations for replacing crude oil-based raw materials with liquefied waste plastic. And in addition to these successes, we made excellent progress in our efforts to build future growth platforms in renewable and circular solutions. As we know, innovation at Neste drives transformation and growth. Remember that around 25% of our Neste employees are working in our innovation and technology divisions. And the number continues to grow with the establishment of our R&D center in Singapore. We are, for example, developing linear cellulosic fuels and materials, scalable feedstocks for aviation fuels such as algae and municipal solid waste, as well as Power-to-X solutions. Some of these raw materials could be commercialized within the next 3 to 5 years, while others will take significantly longer to scale up. The clear highlight in this area in 2021 was an EUR 88 million grant decision from the European Innovation Fund to our develop our green hydrogen and carbon capture and storage project in Porvoo, part of our efforts to decarbonize production at the refinery. Now this decision was clear as a recognition of our role as a key contributor to the European energy transition. We continue to prioritize operational excellence and process improvements and are making great progress on this front. In 2021, we raised our improvement targets for the Neste Excellence program from EUR 225 million to EUR 350 million by the end of 2022 and from EUR 300 million to EUR 500 million by 2030. And these improvements are measured versus the year 2018. We're also continuously reviewing our portfolio to ensure the optimal execution of our strategy. In 2021, we acquired Agri-Trading, one of the largest renewable waste and residue fat and oil traders in the United States. And we agreed to sell our existing base oils business to Chevron and struck a deal to exit our base oil joint venture with Bahrain Petroleum Company and Nogaholding. These transactions support our renewable and circular solutions strategy, and they show just how much Neste has transformed as a company. And I will give you 2 examples to support this point. First, 955 new professionals joined Neste during 2021, and 700 internal career movements took place as we developed the company through external talent acquisition and internal career moves. And second, 3 years ago, around 30% of our employees worked on our change strategy. And the figure is now about 70%. The same is valid for our CapEx investments. Now more than 70% of our investments are in the area of renewable and circular solutions, and this number continues to grow. This is a remarkable change indeed. And we continue to invest significantly also in Finland, in particular, in Porvoo driven by the commitment to reach carbon-neutral production by 2035. Finland is and continues to be our research development and innovation hub. Dear shareholders, as Neste prepares for its next wave of transformation, I have decided to join one of the leaders in the polymers and chemicals industry, so it can accelerate its own move towards renewables and circularity. This decision was extremely difficult to take given how attached I have become to Neste, its people and its mission, and also to Finland and its people who welcomed me so warmly and treated me and my family so kindly during my time here. I am prepared to leave with full faith in Neste's management and employees to successfully navigate through these challenging times, a feeling that was reinforced last week with the selection of Matti Lehmus to be my successor. Matti is exactly the right person to lead Neste on its next steps as a company. Achievements are always about the work of many pulling together, driven by shared purpose and values rather than the contributions of any one single person. This is a growing company of some 5,000 passionate, innovative people. And Neste also has a top-notch leadership team. The call for a more sustainable world is getting louder and our renewable and circular solutions with our people at the core are answering the call, and we are only getting started. Thank you, dear shareholders, for our excellent work together and for continually driving me and the management team to deliver higher performance with the highest standards. I depart knowing that Neste is not only on the road towards creating a healthier planet for our children, it is leading the way. Thank you.

[Interpreted] Thank you, President and CEO, Peter Vanacker, for this review. And I wish you all the best of success in your new challenges in the future. As far as the financial statements are concerned, we will take a look at the auditor's report, which is available on Pages 247 through 250 of the English annual report published on the company's website. And it has been signed by Virpi Halonen, authorized public accountant who has been the auditor with principal responsibility. And they have given the following opinion. The consolidated financial statements give a true and fair view of the group's financial position, financial performance and cash flows in accordance with international financial reporting standards, IFRS, as adopted by the EU. And the financial statements give a true and fair view of the parent company's financial performance and financial position in accordance with the laws and regulations governing the preparation of financial statements in Finland and that they comply with statutory requirements. In this agenda item, we will say that the financial statements, consolidated financial statements and the other relevant documents have been presented to the meeting. Moving now to Item 7, which is the adoption of the financial statements, including the adoption of the consolidated financial statements, the auditor has supported the financial statements, the consolidated financial statements should be adopted, and the voting results is shown here. In this agenda item, 99.92% of the votes cast have been in favor of the proposal. The number has been 599,102,033 in favor. And the votes against were 345,422. And there were 138,836 abstaining votes. So based on the voting result of the Annual General Meeting has adopted the financial statements and the consolidated financial statements for 2021. The next item requiring resolution is #8, use of the profit shown in the balance sheet and the resolution of the payment of dividend. And the Chairman of the Board of Neste Corporation, Matti Kahkonen, will now present the dividend proposal. The floor is yours.

[Interpreted] Thank you, Chairman and the distinguished participants of the Neste Annual General Meeting. Neste's dividend policy is to pay out last half of the comparable operating profit as dividend and the distributable funds at the parent company at the end of last year were EUR 2,800 million. And the Board proposes that a total of EUR 0.82 per share would be paid as dividend for 2021 in 2 tranches. And this is in line with the company's dividend policy. The first installment would be paid -- which would be EUR 0.41 per share would be paid to shareholders who are registering the company's shareholders register, maintained by Euroclear Finland Limited on the record date for the first dividend installments, which will be Friday, the 1st of April 2022. And the Board proposes that the first dividend installment will be paid on Friday, the 8th of April 2022. The second installment also EUR 0.41 per share would be paid to shareholders who are registered in the company's shareholders' register maintained by Euroclear Finland Limited on the record date for the second dividend installment, which will be Friday, the 30th of September 2022. The Board proposes to the Annual General Meeting that the second dividend installment would be paid on Friday, the 7th of October 2022. We also propose that the Board of Directors is authorized to set a new dividend record date and payment date for the second installment of the dividend in case the rules and regulations on the Finnish book and/or system are changed or otherwise required. That was our proposal.

Thank you, Chairman of the Board, for presenting the proposal. In this agenda item, the percentage are as follows: 99.86% of the votes cast have been in favor of the proposal. And the number of those votes in favor was 598,718,509, and there were 851,765 votes against, corresponding to approximately 0.14% of the votes cast. And there were 17,056 abstaining votes or representing 17,056 shares. And based on this voting results, the Annual General Meeting has resolved to adopt the Board's proposal regarding the use of the profit shown in the balance sheet. One more item related to the financial statements, which is the discharge of the members of the Board of Directors and the President and CEO from liability. The auditors has again supported the Members of Board of Directors and the Managing Director of the parent company should be discharged from liability for the financial period of 2021. And this decision will concern the following persons: Matti Kahkonen Chairman of the Board; Marco Wiren, Vice Chair of the Board; and members who have been members for the entire financial period or part of it. John Abbott, Sonat Burman-Olsson, Nick Elmslie, Martina Flöel, Jean-Baptiste Renard, Jari Rosendal, and Johanna Söderström. The President and CEO for the entire financial period has been Peter Vanacker. And let it be recorded that persons who have functioned as Board members or the President and CEO are disqualified from a decision-making on this agenda item. And in this agenda writing, the voting results is the following: 98.01% of shares and votes have been in favor of this decision, 587,629,008 votes. And the number of opposing votes was 10,163,969, representing 1.70%, and they were 1,768,893 abstaining votes. And based on this voting result, the annual general meeting as a result, discharge the Board members and the President and CEO from liability. When we go to Item 10 on the agenda, which is the remuneration report. Just a few words, first of all, to explain the subject matter. Under the Securities Markets Act, listed companies since 2021 shall publish a remuneration report containing information about the remuneration of Board members, as well as the President and CEO and any Deputy CEO during the past financial year, in line with the company's remuneration policy. In accordance with Limited Liability Companies Act, the Annual General Meeting of listed companies shall decide upon the adoption of the remuneration report, and this decision is of an advisory nature. And the remuneration report was published on the 4th of March 2022, and this meets the requirement of the law that publication shall take place no later than 3 weeks before the Annual General Meeting, and it was published as part of the annual report as a stock exchange release and as well as on the company's website. I'll now go forward to the Chairman of the Board, Matti Kahkonen who will explain the main points of the remuneration report.