Sasol Ltd Q2 FY2024 Earnings Call

Good morning, and welcome to Sasol Limited's Financial Year 2024 Interim Results Presentation. Thank you for dialing in and listening to our announcement. My name is Tiffany Sydow from Investor Relations. With me is Fleetwood Grobler, President and CEO of Sasol; and Hanre Rossouw, Chief Financial Officer. Fleetwood will start today's presentation with an overview of the business performance in this period. The financials will be covered in more detail by Hanre. Fleetwood will then conclude with a brief update on our social commitment and sustainability and strategy. We will commence with a Q&A session immediately thereafter, where you will have an opportunity to engage with management and ask a few questions via our webcast or teleconference facility. I'd like you to note our forward-looking statement shown on the slide. Please peruse in your own time and note the important information regarding statements that are made in the presentation. Thank you. And now handing over to Fleetwood to commence his presentation today.

Good day, everyone, and welcome to our interim financial results update for the 2024 financial year. The last six months have again seen an incredibly challenging external environment for us to navigate, with a high level of macro uncertainty, inflationary pressure, weak economic growth and specific operating constraints in South Africa. These factors have had a material impact on our business, particularly with lower prices and demand across many of our chemical products. But they are not the sole determinants of our performance. As an organization, we have worked hard to mitigate the external pressures to the extent that we can through focus on the issues that we can control. As part of this, I'm pleased that we continue to deliver against our Sasol 2.0 improvement program targets, and we dealt with further operational improvement in South Africa. Unfortunately, though, our efforts were hampered by persistent underperformance of the state-owned enterprises involved in Sasol's value chain, and in some instances, by plant safety-related production stoppages. Moving forward, whilst we are well positioned to benefit from a turn in the chemical cycle at this stage, we need to keep absolutely focused on our priorities, to step up cash flow generation to make sure that we maintain the robust balance sheet needed to cope in these extremely uncertain times. As with previous results presentations, I will start by reviewing our half year performance across our people, planet and profit pillars. From a safety standpoint, the period has been marred by four tragic fatalities. We express our heartfelt condolences to their families, friends and colleagues. Safety is our priority, and we must continue our work towards zero harm. Our recordable case rate of 0.024 for the half year is below 0.027 of the corresponding period last year. Our dedication to enhancing social welfare in our communities remains steadfast, exemplified by our investment of over ZAR280 million in social impact programs. We continue to actively participate in initiatives aimed at uplifting communities, yielding positive and impactful results for the most vulnerable members of society. Staying with the theme of people, in November last year, we announced the appointment of Simon Baloyi, our EVP for Energy Operations and Technology, as my successor with effect from 1 April, 2024. I'm also pleased to confirm that Gerrit Viljoen, our SVP Secunda Operations, will assume Simon's current role on our Group Executive Committee on the same date. I share the Board's confidence that the wealth of experience and leadership capabilities that both Simon and Gerrit possess will be a considerable asset to Sasol in delivering sustainable performance improvements. On our planet pillar, we again recorded excellent progress in our renewable energy procurement program. Over 600 megawatt has now been procured for Secunda operations and a further 69 megawatt for Sasolburg, of which approximately 498 megawatts has reached financial close and some of which is under construction. In Mozambique, our gas drilling campaign continues to yield positive results, with four additional wells coming online during the period under review. On profit, our continued focus on operational improvement is yielding results, with productivity improvements realized in Mining and higher volumes delivered at Secunda operations. These and other notable areas of delivery helped partially offset the impacts of severe macro headwinds and challenges that we continue to face with South African state-owned entities involved in Sasol's value chain. Despite continued volatility over the period, the Board decided to declare an interim dividend of ZAR2 per share. Turning to safety. Earlier, I acknowledged that we suffered four tragic fatalities over the past six months. Any workplace fatality is a deeply heart-wrenching experience for all, with a profound sense of loss felt not only by the loved ones and friends but Sasol colleagues too. Any loss of life or harm is simply unacceptable to us, and we are working incredibly hard to realize a zero harm workplace because we want all our people, employees and contractors alike, to return home safely each day. While safety incidents often lead to unplanned work stoppages, which impact our production. Our commitment to excellence in safety is an embedded priority and we have bolstered existing safety initiatives through institutionalizing learnings, reinforcing our lifesaving rules and focused leadership visibility and engagement to help prevent future incidents. Furthermore, our high severity injury prevention program remains the backbone for improving our SHE performance. As we mature the program, we can see that it is reaping results as we continue to see our fires, explosions and releases, or FER severity rate, decreasing. There were no major FER incidents during the first half of FY '24. Through our humanizing safety initiative, we are driving a culture that looks beyond safety statistics. We are striving to provide an enduringly safe work environment. This requires a dedicated leader champion safety culture, and as important, employees who are fully engaged and comply with all safety rules and procedures, who speak up, report and stop unsafe work immediately if that is required. As I referenced in my opening remarks, Sasol faced a challenging macro backdrop during this period, and many of these factors continue to pose near-term challenges to our business.

Thank you, Fleetwood, and good morning, ladies and gentlemen. As Fleetwood already mentioned, whilst we saw some operational improvements, this was not enough to mitigate the external challenges and resulted in a weaker financial performance in this half. I'm confident that enhanced by the initiatives we are already implementing now, our business will, however, be better placed for the second half. Let me start with some detail around the macro environment and some of the key metrics we track. Oil prices softened during the first half of the financial year, decreasing by 10% to an average of $85 per barrel. This was offset by the rand weakening 8% to an average of ZAR18.69 to the dollar. As such, a 3% decrease in the rand oil prices realized compared to the prior period. However, the weaker closing exchange rate negatively impacted the translation of our U.S. dollar-denominated debt. Although we have seen a significant decrease in ethane and energy input costs in the first half of the financial year, they remain elevated compared to historic levels. As such, Chemical margins remained under pressure due to weak market conditions. Polyethylene prices continued to decrease on the back of weaker demand as seen in the 19% decrease compared to the previous period. Looking ahead, we expect pricing and demand volatility to continue in the short term given the uncertain global market sentiment and ongoing geopolitical events. Locally, the South African economy continues to face multiple challenges relating to the underperformance of state-owned enterprises, which needs to be factored into our business planning. These headwinds require us to adapt quickly to the prevailing situation and optimize our integrated cash cost and margins across our portfolio.

We have a question from Adam Cambuli from Allocated Capital. Can you take us through how you reached a dividend of ZAR2 per share that seems to be out of balance with the indicated dividend cover in the capital allocation strategy? Similarly, also from Ezek Fenikha from Mergence, why not link the dividend policy to free cash flow rather than earnings?

Thanks, Tiffany. So I think it's important to note that the current dividend policy, as rightly pointed out, links our dividend payment to dividend cover based on core headline earnings per share. And I think the feedback that we've seen and comments post by analysts is, of course, that there's a significant disparity between core headline earnings and the underlying cash flow generation of the business. And I think to that extent, which links to Ezek's question as well, why not link the dividend policy then to free cash flow? I think what we've noted is that we are currently reviewing the dividend policy. So we will announce an updated dividend policy at the full year. And I think that will then be very clear on a link and kind of, in most probability, to cash flow. And I think we've got to be very specific about which element of cash flow. To that extent, important that we link this clearly to our capital allocation framework as well, which looks at cash flow before growth and dividends, and then also the ultimate cash flow generation of the business. So in consideration then of what is a reasonable interim dividend, the Board looked at these two as book ends. And I think effectively to give that signal of confidence in free cash flow generation for the full year, we deemed a ZAR2 per share interim dividend as a vote of confidence in the free cash flow generation then of the business for the full year with the promise then also of kind of paying out a full year dividend on the back of a revised policy.

Thank you, Hanre. A few more questions around dividend and perhaps some more color on the new dividend policy from Faisal Al Azmeh from Goldman Sachs as well as Benny Shrader from Momentum. Will you expand on the current dividend policy? Where are you going? And if you can please provide more details on the new dividend policy and how to think about the link to free cash flow generation?

So I think Tiffany, that it really links back to the comment I made that we are looking to link this specifically then to free cash flow. The feedback we've gathered from shareholders, analysts, and we'll continue to do that on the roadshow, is to effectively get clarity on what level of free cash flow. I think what we've seen in other examples that we've looked at that sometimes it's not clearly communicated to shareholders. So the intention would be to clearly link it to a specific metric on the free cash flow statement that we can be tracked. To that extent, if I look at our current capital allocation framework, which I've outlined in the presentation, where we talk about first-order capital allocation, we look then at free cash flow after sustaining and maintaining capital. That is a key aspect that includes, of course, tax payments and interest payments. So that would be in my mind an appropriate level to look at then to gain insight into what is the appropriate level of cash to allocate to debt reduction versus payment to dividends, but then also allowing sufficient capital to allocate to a second-order capital allocation.

Yes, thank you for that question. I've a number of times emphasized that our targets are quite clearly published and it comprise areas that we're working hard on to achieve. And it is also a balance between people, planet, and profit. And that is an assessment that will take place continuously going forward. So if there is an area that we need to assess having regard to those factors, we will do that. If we can execute and those factors remain in balance, we will do that. So I think at this point in time, the plans are to assess and to make sure that with the targets and with our means that remains in balance.

Thank you very much. Chorus Call, could we please have the last question?

Thanks, Sashank. I want to emphasize that free cash flow is an important measure for guiding our performance and determining our debt and dividend payout. Therefore, our expectation for the full year dividend will depend on our ability to generate free cash flow. For now, all I can say is to stay tuned, and we will provide a detailed update at the end of the year.