Sasol Ltd Q2 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Sasol’s Financial Year 2020 Interim Results Conference Call. Today’s call will be hosted by Fleetwood Grobler, President and Chief Executive Officer; and Paul Victor, Chief Financial Officer. Following the presentation, an interactive Q&A session will take place. I would now like to hand the conference over to Mr. Fleetwood Grobler. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. This is Fleetwood Grobler speaking. Thank you for joining us for this call during which Paul Victor and I will discuss Sasol’s financial results for the six months ending December 2019. Other members of our management team will support us during the Q&A session. We have published a slide presentation of our results, which you can download from the Investor Centre on the Sasol website. In the interest of time, we will not focus on and discuss all slides as we would like to make more time available for your questions. Before we begin, I would like to refer you to the safe harbor note on the forward-looking statements contained on slide 2 of the presentation. At the time of my appointment, I said we needed to prioritize some practical short-term objectives. In short, we need to be realistic around the challenges we face, focus on the issues within our control, and start to deliver on the expectations of all our stakeholders. It has been almost four months since I took the reins, and so I want to share the work we have been doing. As you know, the industry has faced intensifying macro headwinds over the last few months. Sasol has not escaped these, and the challenges we have faced are reflected in the results we are announcing. But this macro volatility has served only to intensify our focus on improving the factors within our control, and there is much to deliver on. So let me start with a recap of some of my key focus areas in these first few months. I was clear at the outset that we need to focus on delivery in order to rebuild confidence. We delivered a satisfactory operating performance and performed well in areas such as working capital management and cost containment. Admittedly, there are many areas in which we can do better. Frankly, a satisfactory performance is not good enough. We need to focus on areas such as delivering efficiencies through continuous improvement, making more changes to optimize the cost base and working capital. Thirdly, we need to focus on the transformation of Sasol’s culture. I have introduced changes to deliver the key behavior shifts to progress our improved culture, and I am personally committed to setting the right tone from the top. Finally, sustainability remains a critical focus to position Sasol for the future. Our vision for sustainability also needs to consider the significant stakeholder ramifications. And our intention is to give a full update at our Capital Markets Day later this year. With that context, let me move on to the business performance over the last six months. The safety of our people and contractors that service our business remains a key priority, and the tragic loss of two of our mining colleagues has been most difficult, and efforts to erase safety risks are continuing. Moving to our operations, a solid performance has been delivered across the business. Slide 7 highlights the regional performance of our operations across the globe. We have pockets that are challenging, such as mining, and the productivity turnaround plan is underway to address this. In North America, LCCP units in operations are ramping up, and the cracker is performing well after the catalyst change in the acetylene reactor section. Our Eurasian production has been lower in response to the lower market demand during recent months, with volumes from the new alkoxylation unit in China. This unit’s operation has been impacted following the coronavirus outbreak, and the seriousness and duration of the impact is yet unknown. As a final point, let me stress that although we are in the peak gearing phase, we are taking care not to cut corners that could compromise asset integrity. Now turning to the LCCP, there is no escaping that the past year has presented considerable challenges, including more recently with the incident at the LDPE unit. The delays in the LDPE’s unit start-up were a significant disappointment, but those issues are isolated. The root cause of the incident established that a piping support structure within the LDPE emergency vent system failed during commissioning, causing a pipe to dislodge. Remediation work is underway; however, some of the high-pressure piping material components needing replacement have long lead times, and beneficial operation for the LDPE unit is expected in the second half of this calendar year. The cost of the restoration project will mostly be recovered under our insurance policy, and the overall project cost guidance of $12.6 billion to $12.9 billion remains intact. We are well on track for completion of the project and are rapidly nearing the end of the capital spend, and about 80% of the project’s total installed output is already online. It is noteworthy that in the second half, we expect to reach an all-important turning point as we see a positive EBITDA contribution from the LCCP. Management remains focused on near-term actions and controllable factors. Our financial performance has been impacted by the downturn in the macros, which has resulted in soft pricing across the portfolio, and EBITDA has decreased by 27% to R19.6 billion. Our normalized cash fixed costs increased below our targeted 6% inflation level, and our capital spend has declined as we near the end of the LCCP’s construction. With our debt levels consistently within our guided range and decisive measures taken to protect and strengthen the balance sheet, we have made the tough decision to pass the interim dividend. Regarding our balance sheet, we are working hard to protect our investment-grade rating, preserve asset integrity, and restore dividends as soon as we can to allow shareholders to benefit from the anticipated positive earnings. Meanwhile, we are making changes to improve our culture. Culture change inevitably takes time, and we have some way to go. As part of this journey, we are ensuring an advancing change readiness at leadership levels and across the organization. While it is critical that we optimize the efficient running of the business in the short term, we have to position Sasol for a sustainable future. In parallel, work is underway to create the framework which will guide us in building a robust Sasol. Part of this framework entails improving our competitiveness, embedding our culture change, and responding to our sustainability challenges. To this end, we are committed to delivering a sustainability roadmap and an update to our broader business strategy at our Capital Markets Day at the end of this year. Let me hand over to Paul to report on our financial performance. We will then open up the session for questions. Thank you.

Thank you, Fleetwood. Good afternoon, ladies and gentlemen. It’s my pleasure to take you through our financial results for the interim reporting period. Firstly, our results were negatively impacted by the difficult macroeconomic environment. In short, we faced a 9% decrease in the rand per barrel crude oil price, softer global chemical prices, and lower refining margins. Against this backdrop, I’m pleased to report that our volumes, cost containment, and working capital levels were mostly tracking our internal targets. Our mining business, on the other hand, experienced a very difficult second quarter which negatively impacted our results. Mining is a key driver for the integrated coal to liquids value chain. As per our guidance, we managed our balance sheet’s debt levels to below our newly approved bank covenant levels, with gearing at the upper end of the guided range provided for in December 2019. We have achieved peak gearing and will now commence with the transitory phase of deleveraging the balance sheet as the LCCP’s construction is coming to an end. The commensurate cash flows from the LCCP will now start to positively impact EBITDA and flow through to the balance sheet. Very important to note that this will, however, be a gradual process, and it’s particularly important that we continue to protect and strengthen the balance sheet by focusing on the controllable factors at our disposal. We have been able to effectively manage most of these levers in the past and are committed to doing so in the future, especially in the current volatile macroeconomic environment. We are also advancing our portfolio activities as we are progressing currently towards achieving above 25% level of the $2 billion target previously communicated to the market. In this process, we will continue to safeguard long-term shareholder value, while still aligning our portfolio to the Company’s long-term strategy. On Slide 13, we have strategic group profitability. Adjusted EBITDA decreased by 27% or R19.6 billion, largely due to the macroeconomic environment, the LCCP start-up losses incurred, and the lower than expected performance from our mining business. The decrease in cash generated by operating activities was limited to 21% or R19.6 billion as a result of proactive cost and working capital management activities. Earnings were also negatively impacted by the increase in LCCP depreciation and the interest charges now charged to the income statement, as a result of almost 80% of the LCCP units being operational, which is very much in line with what we communicated to the market before. Previously we would have capitalized interest to the balance sheet, but because of these units achieving beneficial operation, those interest charges will now flow through to the income statement. For these reasons, earnings per share decreased by 73% to R6.56 per share compared to the prior period. Core headline earnings per share was R9.20 per share, down 57% compared to the prior period. We expect the second half earnings to be improved as we anticipate a much bigger revenue-cost matching from the LCCP as it increases production and sales volumes, and as capital spend comes to an end. Macroeconomic factors reduced operating profit by 39%, as shown on slide 14. Turning to items within our control, total costs reduced operating profit by 19%. However, as stated before, this is mainly as a result of the LCCP losses due to higher depreciation and operating costs. On a normalized basis, our cash fixed costs increased by 5.4%, which is below our 6% inflation target. The benefit of higher sales volumes, mainly from the LCCP, had a positive impact of 9% on operating profit. We do expect further positive contributions from the LCCP in the second half of financial year ‘20, with a significant uplift in earnings expected for financial year ‘21. Our actual capital expenditure for the period amounted to R21.4 billion of which R10 billion or $647 million related to the LCCP as depicted on slide 16. Our capital expenditure forecast of R38 billion for financial year ‘20 is sufficient to sustain the foundation business and support the final execution of the LCCP. I need to reiterate that we have stayed committed to our capital allocation framework and will ensure that operations and asset health is not compromised. We have limited growth capital significantly to the LCCP’s completion and Mozambique drilling activities. Going forward, we forecast R30 billion of capital expenditure for financial year ‘21. Discretionary growth capital specifically for FY21 spend will mostly be limited in support of our deleveraging objectives, and we remain committed to our overall capital allocation framework as we navigate through our peak gearing phase and during this volatile period. Turning to slide 17, it shows that our gearing is at 65%, and our net debt to EBITDA is at 2.9 times, which was within the bank agreed covenant levels of 3.5% and the market guidance of gearing of between 55% and 65%. The increase in gearing from financial year ‘19 was impacted by the adoption of the new leases standard IFRS16, which added 4% to our ratio, coupled with the impact of the LCCP. We have reached peak gearing and have started the transitory deleveraging phase of the balance sheet. Careful navigation of the balance sheet’s deleveraging will be required during this period as we have limited headroom. Our objective remains to maintain our long-term gearing range to between 25% and 35% and a net debt to EBITDA ratio to below 1.5 times. Protecting our investment-grade rating remains quite essential. Over time, we remain committed to increase our dividend payout ratio to a targeted rate of 45%, or 2 times dividend cover, allowing shareholders full participation in our cash flows. Again, very important to note that as soon as the balance sheet starts to deleverage, the first part of capital allocation will be towards the increased dividend. It’s also quite important that we obtain and maintain an effective capital structure for the balance sheet. More specifically, over the course of the past couple of months, we have refinanced asset-based LCCP loan with several other financing instruments in place. We have staggered our debt maturity profile to better match the cash-generating ability of our assets. We currently have a liquidity buffer of around $3 billion which allows us to complete the remainder of the smaller portion on the LCCP in terms of capital spend but with sufficient headroom to withstand further macroeconomic volatility. We will continue with our fit-for-purpose strategic program to mitigate against any market exposures, which we may experience. We are committed to taking all prudent actions necessary to ensure that we manage our balance sheet to the targeted gearing levels over the short to medium term. It is important to note that also in line with our capital allocation to protect the balance sheet, we did take a very hard and tough decision to also pass the interim dividend. In terms of our outlook per slide 18, financial years 2020 and 2021 are probably the most critical periods for Sasol. Macroeconomic volatility is expected to continue and within this context, we expect the following delivery from our assets: Mining to ramp up to targeted production levels as we focus on safety and efficiency; Performance Chemicals’ sales volumes are expected to increase by 7% and 9%; And average U.S. dollar margins will trend in line with the global macroeconomic outlook. The increase in volumes in the Performance Chemicals is mostly as a result of the constitution of the LCCP units and without that the performance of sales volumes are flat on a year-by-year basis. Base Chemicals’ sales volumes are expected to increase by 15% and 20%, and excluding LCCP we still expect a 1% to 2% increase in sales volumes. U.S. dollar basket prices are also expected to remain soft, given the ongoing trade wars and the potential impact of the coronavirus. South African liquid fuels sales volumes will range between 57 and 58 million barrels, with Secunda Synfuels Operations forecast to achieve production volumes of between 7.7 and 7.8 million tons. An ORYX average utilization rate of between 55% and 60% is expected due to the extended planned shutdown during the second half of the year. Our expectations for the Chemicals and Energy business thus come with the health warning and could be revised as the full impact of the coronavirus is fully understood. Our balance sheet leverage is expected to be in the range of between 2.6 times to 3.0 times net debt to EBITDA as per the covenant definition agreement with the banks, and gearing to remain within our previous guidance of 55% to 65%. In conclusion, we continue to face significant challenges as a business, and with our focus on the key actions required at this point in time, I am confident that we will be successful in managing this critical phase in the history of the Company. On that note, we can open the floor for questions and answers which will be facilitated by Fleetwood Grobler. Fleetwood, over to you.

Thank you, Paul. Operator, we now open the floor for questions.

Our first question comes from Chris Nicholson of RMB Morgan Stanley.

My questions will focus on the balance sheet. I have three sub-questions. Your guidance suggests that with a net debt to EBITDA ratio of 2.9 times, our gearing levels should be nearing their peak. Since we are already two months into this year, how confident are you that we will see some deleveraging in this half, or should we anticipate maintaining these levels for a while? That's the first question. Related to this, there is significant concern about the current global demand environment. It would be helpful to understand some sensitivities regarding the rand, oil, or other relevant metrics that could affect our balance sheet. Specifically, in what scenarios would we not see deleveraging, and could we potentially experience a negative trend if demand concerns influence product pricing? Lastly, I understand you mentioned in your presentation that you plan to explore further prudent measures to protect the balance sheet. It appears that many obvious actions, like suspending the dividend and working capital measures, have been implemented. Besides accelerating asset sales, are there any other options available to you? If you could provide some insight on that, I would appreciate it. Thank you.

Thank you, Chris. I’m going to ask Paul to deal with the first question.

Good afternoon, Chris. It's nice to talk to you. I want to mention that the gearing levels we observed at year-end, which were 2.9 times and 65%, were positively influenced by the rand being approximately R14 to the dollar at the end of December. This made the conversion impact of the debt to rand more favorable than it would be if calculated today. It's significant to consider the translation impact on the exact date, but setting that aside, we focus on the underlying EBITDA performance of the business, which speaks to our cash flow generation independent of valuation impacts at period end. Regarding your question about seeing positive indicators in the first two months of the year, January was strong for Sasol, with EBITDA significantly exceeding our average performance for the first half of the year, and we anticipate similarly robust performance going forward. However, we are not ready to provide a definitive outlook on the coronavirus situation as it is still being assessed. Based on current information, we have witnessed an improvement in our EBITDA run rate by using January and February as benchmarks. Another important point is that we incurred losses in the first half from LCCP EBITDA, but January marked our first month of breaking even, and February has shown a promising increase in LCCP EBITDA, potentially contributing between $50 million to $100 million, which positively impacts our overall EBITDA. However, I cannot predict exactly where the balance sheet will end up at year-end. We feel confident about our EBITDA run rate, but we must monitor the conversion rate for debt levels as it can affect our position. Currently, we are comfortable with the rand per barrel rate our EBITDA is projecting. Regarding your second question on sensitivities, macroeconomic factors could influence our balance sheet gearing in the next few months. If we consider that we began the second half on January 1, we could manage oil prices above R800 per barrel. The average leverage observed has been around R850 to R860 per barrel, which is beyond our sustainable levels, though we remain comfortable with the current situation. We are also contemplating protections against oil prices dipping below $55 to $50 in the first half of the next financial year, even though our coverage ratios are relatively high. For your last question, you're correct that we are not utilizing all management options available. We've successfully managed costs within our inflation targets, and our working capital is showing strong positive trends with a turnover of 14% to 15%. Our capital allocation focuses on sustaining the business, and we aim to enhance asset optimization, and we are beginning to see results from those efforts. By consistently implementing these strategies, we believe we can succeed, as we have in the past. There are no additional measures we are currently pursuing outside of these. It remains essential to manage our debt maturities effectively. While I can't discuss specific actions at this time, we are working on ensuring sufficient flexibility. Lastly, we feel confident about our liquidity access, even in the event of a potential downgrade that could affect us with Moody's. While there are many variables at play, I hope this addresses your inquiries.

Thank you. The next question comes from Gerhard Engelbrecht of Chronux Research.

A couple of questions. Fleetwood, you talk about a piping structure that failed at the LCCP leading to the explosion. Have your investigations uncovered why this has happened? Maybe dig a little bit deeper into that. I’m quite curious as to the sales of the LCCP product, the polyethylene and the MEG that you’re producing, can you give us some indication where you are selling those products, local markets, domestic markets, maybe Gemini as well? I just see in your analyst book, it looks like you’ve downgraded your EBITDA guidance for the LCCP from about $1 billion to $700 million to $900 million, $100 million to $300 million down. Is that downgrade just a move in recent prices, or is there anything else in that downgrade?

Okay. Thank you, Gerhard. So, I’ll deal with the first question. With respect to the root cause analysis that we have completed recently at the LCCP for the LDPE plant, we’ve gathered a lot of information, we’ve used all the experts and the licensors and all the companies that were involved with that section of the plant. I think we surmise that we know exactly what caused the failure. As you can imagine, at this point in time, we are busy with insurance dealings and the commercial contracts with certain things we need to consider. So, I would not like to give you a final exact answer today. Be rest assured that we know the situation and that we will pursue the necessary details through our commercial agreements, as well as there is still the insurance investigation that is ongoing. But suffice it to say, in a plant like the LDPE plant, it is ultra-high pressure. When an upset condition occurs, the emergency vent system is put into operation. An incident occurred during commissioning, which is quite normal for these types of plants. You can expect several of those incidents to happen throughout the lifetime of the plant and even every year of running. The response of how the system reacted in terms of the incident that occurred worked exactly as intended. The only thing that we are very disappointed about is that a component failed during such an incident of pressure release. That’s as far as I would like to give context there. Rest assured, we do know, and we will be able to remedy the situation in terms of that part of the plant. With respect to the sales distribution and where we sell, I’m going to ask Brad to give you some context there.

Hi. This is Brad Griffith. Thanks for the question. Can you hear me clearly? You asked about Gemini first, which is the plant that’s been operating the longest in this value chain. We continue to see a strong placement of high-density polyethylene in both domestic and global markets, and there is good demand for the types of products we’re producing. As Paul mentioned earlier, we’re very pleased with how that plant is performing, and it has exceeded our expectations for this year. Regarding linear low-density polyethylene, we also see excellent placement of products globally. We have observed ongoing improvements in our production rates and quality, which positions us competitively with our cost base in the piping and film market. We have a solid customer base with over 800 customers for linear low density. The EO/EG plant is also functioning well, and we have successfully placed all of our MEG. As previously disclosed, we have an exclusive distribution partner for MEG that is not solely focused on fiber resin grade, so we are not facing issues with placement. Additionally, as Paul noted, we are keeping an eye on the coronavirus situation. While we are not exposed to China with our sales, any impact there could disrupt global markets, and we will continue to monitor that. We have recently started the ethoxylates unit, which achieved beneficial operation in January, and we are pleased with how that unit is operating. We are now integrating the production of those ethoxylates into our global network.

Just a follow-up on that. And all the ethylene that you’re producing in the absence of the LDPE plant working, can you place that easily?

Yes. Thanks for that. Yes, for sure. We’re well-connected on the pipeline system. So, in this period that we’re waiting for the LDPE plant, remediation to be completed, we’re able to place the ethylene. With the current state of the ethane pricing, we’re still seeing good margins on the ethylene merchant sales.

So, Gerhard, with respect to your last question on the EBITDA guidance, we can confirm that nothing changed in terms of our outlook in terms of ramp-up, etc. That’s still as we’ve indicated before, barring the LDPE, which we see getting online later this year. However, the impact largely has been our revised price deck from the industry experts that we have been using in our forecast.

The next question comes from Harsha Pappu of HSBC.

Yes. Hi. Thank you for taking my question. Could you give us a little bit more detail on the disposal program, please? You’ve had these targets in place for a while now. Progress to date has been rather slow, do you have any concrete targets or timelines in terms of what you’re looking to sell and what proceeds we can expect over that period? Thank you.

Okay. I’ll start. Thank you for the question. We started our asset review process in 2017. We had a very thorough and robust assessment of all our global assets. We’ve come over a hundred of those. We have determined that the various assets are categorized into different classifications that we’ve assessed, and we are busy with that program. So, at this point in time, we’ve indicated a number of assets that have been successfully divested. We also indicated that we are tracking this financial year to realize 25% of the so-called $2 billion we’ve announced last year. While that program is ongoing, we would not comment on specific divestments that are under review at this point in time. When we are ready, we will communicate to the market on that. Rest assured that we believe we are still on track for the 18 to 24 months we’ve announced last year to reach this $2 billion target in terms of our divestment proceeds.

The next question comes from Alex Comer of JP Morgan.

Hi, guys. Thanks for the opportunity to ask a couple of questions. First of all, you talked about a $3 billion liquidity buffer. There have been some rumors about potentially having to have an equity issue. That looks unlikely to me. I wonder if you could comment on where that would lie in terms of priorities and how safe the dividend is for the year end. Maybe also you could let me know how the 2.9 net debt-to-EBITDA calculation is worked out, because obviously when you do it from the numbers we see, the ratio is much higher than that sort of what the gaps were. Then also just regarding the LCCP, can you help me with regard to run rate? You’re talking about $50 million to $100 million this year and then $600 million to $750 million, I think, for next year. So, where will you be, let’s say in June? What do you think your monthly run rate EBITDA would be at the end of this year? And does that then run smoothly through next year, or do we see additional step-ups through the year? So, maybe those questions, please.

Thank you, Alex. Paul is going to deal with those.

Thank you for your questions, Alex. I’ve noticed some remarks regarding equity issuance in the market, and I think they’re a bit premature. We’ve clearly communicated the strategies we are implementing and the hedging measures we have in place for protection. Previously, we discussed what could trigger an unexpected event and the assumptions involved, but those situations haven't materialized. We remain committed to our guidance on net debt to EBITDA and gearing ratios. While our gearing is at the higher end of our expectations, it still falls within what we considered possible. I do not want to downplay the situation; the market is quite volatile, and significant drops in oil prices below $50 a barrel could impact us over time. I’m open about the significant effect of macroeconomic volatility, though it would require drastic changes over an extended period to be a concern. Moving on to specifics, we have a $3 billion liquidity buffer that we aim to extend to manage potential disruptions. It's vital that we capitalize on our monthly EBITDA run rates, which positively impacts our financial standing. At 2.9 times at the year's end, we still maintain adequate headroom. What will be critical is where we find ourselves at year-end. We have examined scenarios, and oil prices would need to remain significantly low for us to reach 3.5 times coverage, considering that the rand exchange rate is stable as of June 30. We are doing everything within our control to avoid exceeding the 3.5 times covenant. It’s worth mentioning that by the end of December, we must lower our target from 3.5 times to 3 times, depending on macroeconomic conditions. We believe the LCCP will help reduce some of our risks as we approach December. If we are at 3.1 times or just above by the end of December, we can discuss temporary relief options with our banks. While I don’t think it’s necessary to adopt an overly cautious approach, companies with limited headroom should be prepared for potential equity issuance in extreme circumstances. We weigh all options but primarily focus on managing our balance sheet and its controllable factors. If those efforts don’t pan out, we’ll transparently inform the market about possible equity issuance, although we perceive that as unlikely. I acknowledge the current market volatility, which is why I emphasized the need to remain vigilant for prolonged low oil prices. Regarding how we arrived at the 2.9 times figure, I won’t delve into specifics over the call, as our banks prefer this calculation to remain confidential. However, I can say that, on the balance sheet side, operating measures like IFRS16 aren't factored into our debt metrics, which significantly alters our gearing by about 4 percentage points. On the income statement side, standard exclusions apply such as depreciation, unrealized hedging gains and losses, and translations relevant to our post-retirement benefits. Lastly, concerning the LCCP run rate, we target a monthly run rate of around $30 million from February onward. By June, assuming stable macroeconomic conditions, we expect to increase it to approximately $50 million, and potentially more as production increases in our LDPE and alcohol units. I’ll keep you updated, but by July, I aim to have reached about a $50 million monthly run rate.

Just to add to that as well, we are very encouraged with the current run rates of the LL unit, EO/EG unit, and crackers. In terms of our plans, it’s tracking well. We believe that we would be at a full run rate on those high commodity units in the next financial year. The other ramp-up of the latter units in terms of the ZAG will continue to ramp up in FY22.

The next question comes from Wade Napier of Avior Capital Markets.

How should we think about the trigger within the balance sheet for Sasol to recommence dividend payments? Given cost inflation for labor and electricity both running ahead of sort of 6%, what’s your sort of line of sight for continuing to achieve fixed cash fixed cost inflation below 6% per annum level? How sustainable is this for the next sort of 2, 3, 4, 5 years? Finally, with 80% of LCCP’s production units now operational, have the guys already begun to identify debottlenecking opportunities within the broader complex? Thanks very much.

I’m going to start with your last question first. With respect to the units that are in operation, I think we all along say that we have seen the potential for higher than nameplate capacity options. We’ve seen that is realistic and feasible in our HDPE unit; we could run higher than the nameplate capacity. I don’t think we think differently on any of the LCCP units, namely the cracker. We’ve got upside potential there as well as the high-volume commodity unit. Yes, that would be a focus. We want to get the first stable operations in the biggest portions of the plant, and then we will focus on opportunities to run above that. As the last stage, we will also consider low-cost bottlenecking opportunities as and when they present themselves. We believe there is good potential to see higher nameplate capacities realizing.

Wade, on your first question regarding balance sheet figures, it’s safe to say that the balance sheet needs to be well below 50%. It does not need to be below 40%, but it definitely needs to be below 50% to reintroduce the 36% payout ratio or the 2.8 times covenant related to core headline earnings per share. We will keep monitoring it. Our balance sheet currently sits at 65%. So, it needs to go down 15%. You can do the math; it will probably take us at least 12 months to get to that level, maybe even longer. The Board will want to understand that, given the macroeconomic environment, the sustainability of the dividend can be maintained because we cannot chop and change to pay out. That will not be good. Anything below 50% on a sustainable basis will be the first trigger. To step it up to 2.2 times will probably not involve a lot of cash. It’s more about the trajectory and sustainability of that. We suspect that the timing between the 2.2 times and 2.8 times is not a long distance to cover, but we need to ensure that we are at least below 50%. In terms of your second question regarding labor rates, you are 100% correct. It does put the company under pressure as any other company in South Africa where we have inflation rates or labor escalation above what we can manage. However, we communicated to you in the past that we drive continuous improvement as a cultural focus through the organization, and we will continue to do so. As part of our digital initiative, we anticipate that through efficiencies, getting more robotics in our processes, and using big data in analyses will allow us to keep ahead of inflation on a continuous basis. There are discussions within Sasol on how to step these efforts up moving forward.

I think that covers it, Paul.

The next question comes from Tom Wrigglesworth of Citi.

Thanks for the presentation. A couple of questions left, if I may. Firstly, on refining margins. They look to have taken quite a step down at the end of the year. Could you share your thoughts on how you see the white product margins evolving through the course of the second half and into 2021? Coming back on this dividend, sorry, it’s not clear to me. Is the base case that you pay the final dividend, or is the base case that we have to wait for conditions to improve before a final dividend can be approved?

Yes, Tom. Let me take your final question. Let me be quite clear. I think the probability of us paying a final dividend is extremely remote. Our gearing is between 55% and 65%. This implies that it’s above 50%, and for us to reintroduce the dividend at those levels of gearing will not be advisable. Expect that the final dividend will also be passed, given the current prevailing market circumstances. The Board still needs to evaluate it at that point in time, but given where we are now with the facts at our disposal, I think there is a very high probability that the final dividend will also be passed. I cannot comment on next year’s interim dividend; we will see based on these factors and figures that Wade asked me about. The second part of your equation in terms of the refining margins is that yes, we did see a significant drop in refining margins. I always caution the market in saying we are not as bullish on IMO as the rest are. In our planning, we did plan for a more downbeat outlook for diesel and for the petro crack spread, which we also anticipated to be lower. Petrol prices are expected well below $10 a barrel for the next 6 to 12 months, and the diesel crack spread is projected to be around $10 to $12 over the next 12 months. That’s really where we see it.

The next question comes from Henri Patricot of UBS.

A couple of follow-ups, please. First, I wonder if you can give us just a bit of sense of where your chemical prices and the volumes are tracking in the first couple of months of the year with regards to your guidance for the full year for volumes in particular, before taking into account any impact of the virus for the rest of this financial year? Secondly, on the restart of the startup of the LDPE unit, is it fair to assume it should be somewhat towards the end of this calendar year? Also remind us of the ramp-up time for that unit?

Okay. Thank you for those, Henri. Let me start with LDPE first. We have indicated that we have long delivery times on some of the high-pressure piping components, and that is really driving our schedule at this point in time. The startup date has been indicated as the second half of this calendar year. I think we will give the market an update as we get more clarity around how those deliveries are progressing, and we will then update the market if anything changes, giving you a more focused time if we can improve. With respect to the sense of chemical prices, we have seen further softness in the market. I mean, the coronavirus is bringing quite a lot of uncertainty regarding how it will impact GDP. We’ve seen that various advisors and companies are indicating an impact on the Chinese GDP of up to 1%. That could also have an impact on some of the demand balances. So, that is still playing out. Suffice it to say that that’s the case in most of our product categories. When we look at our more specialty-type products, we see a much better outlook. One data point in that regard is that the weak oil prices have firmed up earlier this year. That helps us concerning our alcohol range products and applications. Thus our outlook on the Performance Chemical side, barring the MEG, which we know is not really going to go anywhere, leads us to believe that there is some resilience in that part of our product portfolio. For our base business volumes, we’ve given you an indication of what the sales volumes would look like in our outlook. I think you can deduct from there what we see taking place. With respect to the LCCP, I think we’ve also given perspective on top of that regarding what our outlook is. I hope that answers your questions.

Thank you. The next question comes from Herbert Kharivhe of Investec.

Hi, Paul, Fleetwood. Thank you for taking the question. Can you give an update on the new surfactant plant in China? Thank you.

Okay. Thank you, Herbert. I’m going to start off and then I’m going to ask Brad also to come in regarding markets and what it looks like. We had a very successful startup and commissioning of the plant last year, as we’ve indicated to the market when we achieved beneficial operation. Our ramp-up of the unit progressed really well through the best part of last year. The impact started with the coronavirus when we returned from our Chinese New Year, and then there was a delay in resuming all the continuing operations. I’m going to ask Brad to talk about what we see in the market currently.

Yes. Thanks for the question. As Fleetwood said, we ramped up the plant through the second half last year. We’ve done quite a bit of work to prepare the market for the plant. We saw ourselves ease into the market, so it’s a very wide and diverse application base. We’ve continued to grow well. With the normal Chinese New Year timeframe, we would normally expect to see a dip. As Fleetwood mentioned, we’re monitoring the situation around the coronavirus. So, it’s still a bit premature for us to comment on where we see that. We continue to run the plant and cover some customer requirements, but we’re still having to monitor the situation.

Are you able to offer some guidance in terms of the kind of run rates you are thinking you are getting from the plant pre-coronavirus?

Yes. We’ve been able to achieve greater than 90% capacity at that plant.

Thank you. The next question comes from Adrian Hammond from Standard Bank.

Hi, guys. Yes, a couple of questions from me, basically for you, Fleetwood. Just, could you give us some color on the rising mining cash costs, which you’re guiding up again? Is this something that’s something that you can recover from, and how does this impact the rest of the business? Secondly, on Mozambique, it looks like you delayed the replenishment of reserves there, that project towards another year or so. What is the potential impact on your business from that? For Paul, just your cash flow CapEx, trying to reconcile that with your slide 16. You’ve got some $900 million of LCCP CapEx, which I work out to be about $1.5 billion. So, could you just give us what the actual cash number is for CapEx rather than the accounting metric you’ve given us, please?

Thank you, Adrian. I will deal with the first question. Let me start off with respect to the mining cost and the outlook that we’ve seen so far. Yes, we had a productivity impact in mining. Those were driven primarily by a couple of events. One was in terms of geological issues that we’ve encountered with one of the mines. Secondly, it was also impacted by heavy rains through the December period. The fatalities at the mines that we had impacted the timing, and the focus during that investigation. So, where are we today? We have relooked, and the mining team has developed a business improvement plan. We plan to implement the first major productivity improvement initiative at the first mine during Q4 of this financial year. The team has really responded well over the last couple of months. So January and February so far show stabilization. The improvement is already tracking to recover those productivity losses that we’ve announced in the half-year results. We’ve indicated that we will buy some coal for the rest of the year just to ensure that we have a sufficient stockpile so that our reserves are good as we go into labor negotiations and the activities that go along with that. This will impact our mining cost, but as I said, we’ve got a firm plan to remediate that productivity and restore most of the costs that we’ve seen increasing on the cost per ton of coal mines back to the normal levels we pursued around R320 to R340 per ton. With respect to the Mozambique PSA gas project, we are progressing further. The Board has guided us to go through the basic development phase. We are on track. We delivered the fuel development plan in February to the Mozambican authorities. We are planning to advance that project through to the latter part of this year to get to a final investment decision. All of those plans related to the PSA are progressing. We are also continuing with the infill well drilling campaign. The plateau and decline of our existing reserves are being addressed. Is it happening as quickly as we want it to? Of course, the answer is no. We would like to hasten the process. All efforts are focused, and we believe we are well-positioned to address those.

Again, the last question was on the cash flows for capital expenditures. Ultimately, on page 50 of the analyst book in terms of the statement of cash flows, you can see kind of the movement there for the half-year in total—it’s R25 billion compared to R21 billion. I’m just rounding the numbers off in terms of actual expenditure versus a cash flow of R25 billion. For LCCP, it’s R10 billion or $647 million related to actual expenditure; in terms of cash flows, it's around R950 million for capital cash flows on the LCCP. You will see a significant unwind of accruals on the LCCP as the project comes to an end.

And the CapEx of R38 billion for the full year, what’s the cash element?

We will share that number with you during the year-end.

We have a follow-up question from Gerhard Engelbrecht of Chronux Research.

I just see on slide 14, you mentioned carbon tax as a cost increase. Did you pay carbon tax in the first half? When and how much? I’m just curious.

Gerhard, we haven’t paid it, but we have accrued for it—around R500 million.

Thank you. We have a follow-up question from Adrian Hammond of Standard Bank.

Thanks, Paul. Just looking at the— it may not be material, but I think to the bottom line, it is. The external sales from the coal business fell quite materially year-on-year although the sales volumes weren’t down that much. Is it something in the pricing perhaps that we didn’t see?

So, there are two things happening in the actual coal business. On the one side, the pricing was down due to a more subdued international coal market. However, we saw some supply constraints of running mines into Synfuels, and we had to swap over more middlings or export coal volumes to the value chain. Hence, you see the decrease in externally sold volumes and more being consumed where we can. The fixability of serving as part of the integrated Synfuels value chain allows for that. As soon as operations stabilize, we will review a larger export of coal to those destinations we sell into. This was really a short-term blip to manage the supply between Synfuels. The Synfuels margins are still much higher than on an integrated basis as what you would obtain in the coal export market. So it makes sense to swing it over.

Thank you very much, sir. Next question comes from an unidentified analyst.

I just wanted to follow up on the current issue. Initially, you had guided towards R800 million in the current year, but you’ve already hit around R500 million. Would it be correct then to expect that for the full year there will be about R1 billion in current expenses? A follow-up question would be regarding the issue related to NERSA. I think in your final year results, last year you indicated that there was a matter pending with the regulator. Could you give us an update on that, please?

So, basically, the first part of your question is correct. We have accrued for the first six months, the R500 million. So that makes sense for the second half as well. Just remember that it’s pretax and these numbers that we cut, so ultimately we can deduct it for tax purposes.

On that question related to NERSA, as you may be aware, following the constitutional court decision, NERSA had to revise the maximum gas price methodology. They issued out a draft discussion paper in relation to that. We have made submissions on it. In fact, there were submissions submitted on that discussion on the 20th of February last week. We will await the determinations of NERSA. The key point is around the redetermination of the maximum gas prices, and arising from that would be the assessment of any obligation from us. We are waiting on that and we have made submissions to NERSA.

So, you’re not aware of the— you can’t quantify that in terms of the potential financial impact that it may have on Sasol?

No, we can’t do that because the first point is that the court set aside the maximum gas price; we actually price below that cap. We wouldn’t know, for example, what NERSA would come in with regarding the revised maximum price and whether they bring it down. Even if it brings it down, it may still be above the actual prices levied. Thus, we can’t speculate on what that effect would be.

Operator, I will make some concluding remarks, and then we will close the call. Thank you for your participation this afternoon. We are looking forward to engaging further over the next couple of weeks as we commence our road show from tomorrow. Thank you for your time and participation. Have a good afternoon.

Thank you very much, sir. Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your line.