Sasol Limited
Q2 2020 Earnings Call Transcript

Published: 24 Feb 2020

[Operator:]

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.

[Fleetwood Grobler:]

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 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, 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.At the time of my appointment, I said we needed to prioritize some practical, short-term objectives. In short, we needed 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 on 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 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 [technical difficulty] with volumes from the new alkoxylation unit in China. This unit’s operation has been impacted following the coronavirus outbreak. And 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 on line. It is noteworthy that in the second, 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 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.

[Paul Victor:]

Thank you, Fleetwood.

[Operator:]

Hi, sir. I think, the line might be muted.

[Paul Victor:]

Hello, is it clear?

[Operator:]

It is now clear. Please go ahead, sir. Thank you.

[Paul Victor:]

Okay. 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 very 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 do so in future, especially in the current volatile macroeconomic environment.We are also advancing our portfolio activities as we are progressing currently to achieve 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’s 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 messaged to the market before. Previously we would have capitalized interest to the balance sheet, and 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 cost 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 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 LCCP.We have reached peak gearing and have started as of 24 [ph] the transitory deleveraging phase of the balance sheet. Careful navigation of the balance sheet’s deleveraging will be required [technical difficulty] 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 main 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 to complete the remainder of 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 take 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 on our assets

[Fleetwood Grobler:]

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

[Operator:]

[Operator Instructions] Our first question comes from Chris Nicholson of RMB Morgan Stanley.

[Chris Nicholson:]

My questions will really revolve around the balance sheet. And so, I’ve got three sub questions here. So your guidance would indicate that where we are at the moment in terms of 2.9 times net debt to EBITDA and the gearing levels should be very close to the peak. We are already two months into this year. Could you give us a feel for how confident you are that we will actually start to see some of that deleveraging come through in this half or should we expect potentially this half to kind of take a long close to current levels? That’s the first and one. Linked to that, clearly there’s a lot of concern around the global demand environments at the moment. Maybe what would be of help is maybe some sensitivities around rand, oil or whatever the metric you think is useful in terms of where we wouldn’t stop, where we -- the balance sheet wouldn’t deleverage and it could actually start trending in the wrong direction from here if some of those demand concerns do play from product pricing.And then just finally, I know you have mentioned in your presentation that you would expect to explore further prudent measures to kind of protect the balance sheet. It looks like a lot of the obvious things in terms of passing the dividend, working capital measures have already been taken. Other than accelerating asset sales, is there other things available to you that you could do? Maybe if you could just help us on that? Thank you.

[Fleetwood Grobler:]

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

[Paul Victor:]

Good afternoon, Chris. Nice speaking to you. Yes, Chris. I’ll basically be obliged to say that the gearing levels that we see at year-end, the 2.9 times and 65%, on the one side, what did work in our favor was effectively that the rand did at the end December at roundabout R14 to the $1. So, the conversion impact of the debt to rand ultimately was more positive than if you do the same sum today with the rand. So, it’s about 15. And I think for Sasol, it’s all important to consider what their translation impact will be on May exact date. But if one excludes that in this argument -- and arguably to say, why do we expect the underlying EBITDA performance of the business to be. Because that really talks to the cash flow generating ability other than valuation impacts at period end. And your question then to say, can we see positive green shoots in terms of the first two months of the year, then we can argue, yes. The month of January was a very good month for Sasol. And the EBITDA realized for January far exceeded in the average performance that we’ve seen for the first six months of the year.We’ve got no reason to believe that today will be any different in the sense that we also expect a very robust performance on EBITDA in terms of that. The warning that I did issue was that we are not inclined currently to give a certain view on corona as it really needs to be fully understood. And based on what we know today and based on the factors today, we have seen uplift in our EBITDA run rate using January and February as a proxy.I think the second thing is in terms of our EBITDA that will significantly shift is that we have made losses for the first six months on the LCCP EBITDA losses. January was the first month we broke even, and February is the first month we really started to anticipate a significant uplift in the EBITDA of the LCCP, so to say that it will kind of push us on a run rate base within that $50 million to $100 million range. And that in itself is a significant shift also to our EBITDA.So, the long and short to be -- to say, I will not be able to answer you exactly where the balance sheet will end off at the end of the year. We are very comfortable with our EBITDA run rate. But let’s watch the closing conversion rate in terms of the debt levels because that can have an influence. But what we see now is we are still very comfortable in terms of today’s rand per barrel rate where our EBITDAs are planning out.In terms of your second question on sensitivities, and again, I think it’s quite important that macroeconomics can over the next four months have an impact on our balance sheet gearing. I would say that for the first six months, if we argue that we started the half year, the second half at the first of January, then we can sustain oil prices on an rand per barrel basis of say above R800 per barrel [indiscernible]. So, the leverage that we’ve seen so far is on average roundabout R850 to R860 a barrel, which is higher than kind of what we can sustain. So, ultimately, very much comfortable with the way things are at, although still being extremely tight. We will ultimately also consider from aging perspective attacking potential protection out on oil. Although our rand and ethane coverage ratios are quite high, which gives us still some prediction, but we will consider specific in the first six months of the next financial year some protection against oil below, let’s say $55 to $50, in that range.In terms of [indiscernible], you are 100%, right. I mean, not really kind of pulling all the management levers to our disposal. I think we’ve been quite successful in the sense that we have been able to manage costs within our inflation targets. The working capital is a very strong positive trend towards the 14% to 15% working capital to turn over. Our capital allocation is really just to sustain our business. So, we’re quite frugal in that sense. Obviously, we need to also push harder on our asset optimization and we start to see some fruits bear on that perspective.We do believe if we push these leavers quite consistently that it should get us over line. And we’ve done that in the past and will continue to do so forward. There’s actually other measures currently that we want to pursue other than this. And obviously, managing the optimal debt maturity on the balance sheet is quite essential. So, these are kind of actions that I cannot talk about right now, but ultimately will also push that to make sure that it has a sufficient flexibility.I think, the last point is Chris is that we feel very comfortable with our access to liquidity. So, even in the event of a potential downgrade on South Africa that might impact us on Moody’s, we do believe that our liquidity position through the cycle is actually quite strong. So, there is many [indiscernible] that we need to manage, but hopefully that answers the questions that you’ve asked.

[Operator:]

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

[Gerhard Engelbrecht:]

Couple of questions. Fleetwood, you talk about a piping structure that failed at the LCCP leading on to the explosion. Have your investigations uncovered why this has happened? And 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 maybe give us some indication where you are selling those products, local markets, domestic markets, maybe Gemini as well? And then, I just see in your analyst book, it looks like you’ve downgraded your EBITDA guidance for the LCCP from about a $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?

[Fleetwood Grobler:]

Okay. Thank you, Gerhard. So, I’ll deal with the first question. So, 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 company that was involved with that section of the plant. And I think we surmise that we know exactly what is the cause of the failure. As you can imagine, at this point in time, we are busy with insurance dealings, we’re busy with the commercial contracts that it’s got 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 what is the situation and that we will pursue over the necessary details through our commercial agreements, as well as there is still the insurance investigation that is ongoing. But suffice to say is that in a plant like the LDPE plant, it is ultra-high pressure. And when a upset condition occurs, the emergency vent system is put into operation. An incident occurred during the commissioning, which is quite normal for these type of plants. You can expect a number of those incidents to happen throughout the lifetime of the plant and even every year of running. So, the response of how the system reacted in terms of the incident that occurred, it worked exactly as intended. And the only thing that we are very disappointed about is that a component being failed during such an incident of pressure release.So, that’s as far as I would like to give context in terms of that. Rest assured that we do know and that we would be able to remedy the situation in terms of that part of the plant.With respect to the sales distribution and way we sell, I’m going to ask Brad to give you context there.

[Brad Griffith:]

Hi. This is Brad Griffith. Thanks for the question. Can you hear me clearly?

[Gerhard Engelbrecht:]

Yes, sure.

[Brad Griffith:]

Okay. You asked about -- let me speak with Gemini first, that’s the plant that’s been up the longest in this value chain. We continue to see a good placement of the high density polyethylene in the domestic as well as the global markets and we see good demand for the grades, those products that we -- that we’re making. And I think as Paul mentioned earlier, we’re very pleased with how that plant is operating and it’s been above our expectations for this year. As for linear low density polyethylene, also very good placement of products globally. We’ve seen continued improvements in our production rates and quality, which allows us participate competitively with our cost base there in piping and film market. So again, really good customer base in excess of 800 customers for linear low density.The EO/EG plant is also running well and we’ve been able to place all of our MEG. I think we’ve disclosed previously that we have an exclusive distribution partner for MEG that’s not focused only on fiber resin grade, and so really no issues placing it. Of course, as Paul has mentioned, we’re also monitoring the coronavirus. We’re not exposed to China with our sales. But obviously any impact that we see there will -- can disrupt the global markets, and we continue to monitor that.We’ve recently started up the ethoxylates unit, achievement beneficial operation in January. And we’re very happy with the way that unit’s operating. And we’re now integrating the production of those ethoxylates into our global network.

[Gerhard Engelbrecht:]

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?

[Brad Griffith:]

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, are able to place the ethylene. And with the current state of the ethane pricing, we’re still seeing good margins on the ethylene merchant sales.

[Fleetwood Grobler:]

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

[Operator:]

The next question comes from Harsha Pappu of HSBC.

[Sriharsha Pappu:]

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. And progress today has been rather slow. So, 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.

[Fleetwood Grobler:]

Okay. I’ll start. Thank you for the question. So, again, to just recap, 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 100 of those. We have determined that the various assets are categorized into various 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 has been successfully divested. And so, we also indicated that we have -- we are tracking that this financial year we still would see to realizing 25% of the so-called $2 billion we’ve announced last year. So, whilst that program is ongoing, we would not comment on specific divestment that is under review at this point in time. When we are ready, we will communicate to the market on that. But, 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.

[Operator:]

The next question comes from Alex Comer of JP Morgan.

[Alex Comer:]

Hi, guys. Thanks for the opportunity to ask a couple questions. First of all, you talked a $3 billion liquidity buffer. I mean, there’ve been some rumors about potentially having to have an equity issue. That looks unlikely to me. I wonder if you could kind of want to 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. And 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.

[Fleetwood Grobler:]

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

[Paul Victor:]

So basically, Alex, before -- I have also heard about the comments being made in the market in terms of equity issuance, which I believe is a little bit premature, given the fact that I think we’ve been quite clear in terms of what levers we want to pull, what hedging activities we’ve got in place to protect ourselves. In the past, we did speak to the market quite extensively about what will trigger a black swan event and what assumptions flows into that. And that even really has realized. We’ve also stuck to our guidance in terms of net debt to EBITDA and as well as gearing. Although that gearing sits at the upper end of the range, it was still within what we assumed would be a potential outcome.Now, I don’t want to underplay that. The world is very volatile and any significant change in oil prices [indiscernible] on a consistent basis below $50 to the barrel can over time expose us definitely. So I will be quite open to admit that macroeconomic volatility can have a significant impact, but it needs to be really steep changes in macroeconomic volatility for a extended period of time. So, let us keep moving to the specifics. So yes, we have a $3 billion liquidity buffer and obviously we want to extend that and even make it bigger to ensure that we can sustain these shocks. Again, it comes back to the point that we need to capitalize on the run rates on EBITDA per month because that just kind of puts us so much further away from a potential kind of bridge of our current level.Now, 2.9 tons at -- as at the end of the year still leaves us with sufficient headroom. And I think what will be quite telling is to say, where do we end over at the end of the year. We’ve run these scenarios and the oil prices really need to be very subdued, well below $50 to the barrel for us to really get to 3.5 times cover, given the fact that the rand closure rate doesn’t kind of jump around very oddly as of 30th of June. So we feel comfortable that we’re doing all we can and drive the controllables to ensure that we stay clear of 3.5 times covenant. I will say that what is important thing is towards the end of December is where we have to step it down from 3.5 times to 3 times. And again, the macroeconomics needs to play along.We then believe that the LCCP will start to really kind of mitigate some of these risks that we are face to step it down. But ultimately as we get closer to December and we see in a scenario that it’s maybe 3.1 or not 3, then surely we will engage with our bank consortium to see whether we can get a temporary relief or whether we actually can cure the situation, because remember if you may be end of -- at 3.1 at the end of December, you are still being granted time by the banks to cure this situation. So, I don’t think one really needs to take a position of being super dovish. However, the equation still remains is in unlikely event that the perfect storm does dawn on you, are you ready for equity issuance. And any company in terms of balance sheet where we have limited headroom needs to be ready.So ultimately, we consider all options. However, our plan A is -- and also with the scenario analysis that we do is to keep on managing the balance sheet, managing the controllables. And ultimately, if none of it works, we ultimately need to come to the market and update the market in terms of potential equity issuance. We really see that kind of with the low probability. Although the markets are volatile and hence the health warning that I did issue is to always need to consider that that will be only in a case where oil prices on the prolonged base are quite negative.The second part of your question is to say how do we calculate the 2.9 times. I’m not going to do it over the phone or over the line. I think that the banks are extremely sensitive for us to disclose this calculation methodology. But just very high level, on the balance sheet side, the operating levers as IFRS16 is not being considered as debt or net debt. So, we will usually exclude that impact. And that increased our gearing quite considerably by 4 percentage points. So, that part you will exclude. On the income statement front, the normal stuff. Depreciation will be excluded, unrealized hedging gains and losses, translation conversions. And I think the one that you may be missing also the evaluation or devaluation of our employment contributions, so employment exposure in terms of the post retirement benefits. The team can sit with you and show you more in detail, but that broadly is kind of what the delta between [indiscernible] EBITDA to negative EBITDA calculation is versus what we apply.I must say that the banks do issue us with the certificate after they’ve audited their results, certainly very much in line with that.The last question on LCCP run rate. So currently, you can do the math but we are roundabout -- targeting roundabout $30 million from February onwards. By the end of June, even all things being equal in terms of the current macroeconomics playing out, we will probably be step it up to roundabout $50 million, and then further step it up, as the LDPE and alcohol units come to a level higher than that. I will obviously update you as we’re getting on. But by July, I’ll probably need to be at roundabout a $50 million per month run rate.

[Fleetwood Grobler:]

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

[Alex Comer:]

Could I just confirm? Did you say your run rate in the middle is about 30 million?

[Paul Victor:]

Yes.

[Operator:]

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

[Wade Napier:]

How should we think about the trigger within the balance sheet for Sasol to recommence dividend payments? Then secondly, 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. And then, finally, with sort of 80% of LCCP’s production units now sort of operational, have the guys already begun to identify debottlenecking opportunities within the broader complex? Thanks very much.

[Fleetwood Grobler:]

I’m going to start with your last question first. So, with respect to the unit that’s 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’ve seen that we could run higher than the nameplate capacity. And I don’t think we think differently on any of the LCCP units, namely the cracker. We believe it’s got upside potential as well as the high volume commodity unit. So, yes, that would be a focus. We want to get first stable operations in the most and the biggest portions of the plant, and then we will focus in on opportunities to run above that. And then, as the last stage, we will also consider low cost bottlenecking opportunities as and when that present itself. But we very -- we very sort of looking forward and we believe that there is a good potential to see higher nameplate capacities realizing.

[Paul Victor:]

Wade, on your first question, good afternoon, on balance sheet figures. So, I think it’s safe to say that the balance sheet needs to be well below 50%. It doesn’t 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. And if you -- sorry, not covenants, in terms of multiple, in terms of core headline earnings per share. So ultimately, we will keep on monitoring it.Our balance sheet currently sits at 65%. So, it needs to go 15%. So you can do the math. It will probably take us the base of 12 months at least to get to that level, maybe even longer. And the Board will want to understand that given the macroeconomic environment and the sustainability of the dividend that it can be sustained because we cannot chop around and pay out -- sorry, not to pay out going forward. That will not be good.So, anything below 50% on a sustainable basis will be the first trigger. And then to step it up to 2.2 times will probably not so much cash. It’s really kind of about the trajectory as well as the sustainability of that. So, I suspect that the timing between the 2.2 times and 2.8 items is not a long distance to cover that we ultimately need to make sure that below 50% is at least as it as port of call will want to -- kind of want to be at.In terms of your second question on labor rights. Yes, you are 100% correct. It does put kind of the company under pressure and so -- any other company in South Africa where we have inflation rate -- or labor escalation above that. But, we have communicated to you in the past that we drive continuous improvement as a cultural focus through the organization and we’ll continue to do so. So, as part of our digital initiative, we anticipate that through efficiencies, getting more kind of robotics in our processes, use big data in terms of analyses, it does make our cargo faster and it does allow us to beat inflation on a continuous basis. However, I think we can be more agile, more smarter going forward, and there is currently a lot of talk within Sasol to see how do you really kind of step these efforts up going forward. Fleetwood, I don’t know whether you want to add anything to this.

[Fleetwood Grobler:]

I think that covers it, Paul.

[Operator:]

The next question comes from Tom Wrigglesworth of Citi.

[Tom Wrigglesworth:]

Thanks for the presentation. A couple of questions left, if I may. Secondly -- firstly on refining margins. They look to have taken a quite 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? That’d be helpful.And just 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, and then, a final dividend can be approved?

[Paul Victor:]

Yes, Tom. Let me take your final question, let me be quite clear. I think the probability us paying a final dividend is extremely remote. Again, as I can reach, our gearing range is between 55% and 65%. That implies that it’s above 50%, and aim for us to reintroduce the dividend at those levels of gearing will not be kind of advisable. And I think you can 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 this is a very, very high probability that the final dividend will also be passed. I cannot comment on the next year’s interim dividend. That we will see based on these factors and figures that Wade asked me about.The second part of your equation in terms of the margins -- in terms of refining margins. Yes, we did see a significant drop in refining margins. Always caution to market in saying we are not as bullish on IMO as the rest are. And in our planning, we did plan for a more kind of a -- very much of the same or even lower scenario on diesel and then ultimately on petro crack space, we were also kind of be bearish in terms of base rates. So, petrol definitely well below $10 to the barrel for the next 6 to 12 months, and then on the diesel crack space, pretty much roundabout $10 to $12 over the next 12 months. That’s really where we see it.

[Operator:]

The next question comes from Henri Patricot of UBS.

[Henri Patricot:]

A couple of follow-ups, please. The first one, I was wondering 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? And then, secondly, on the restart of the -- startup of the LDPE unit. Is it fair to assume it should be -- it will be a start-up towards the end of this calendar year, and if you can remind us of the ramp-up time for the unit?

[Fleetwood Grobler:]

Can you repeat the last question please, Henri?

[Henri Patricot:]

Yes. The second question was around the LDPE unit and the precise timing for the start-up, is that it can be towards the end of the calendar year 2020 and also just to the ramp-up period for that unit to full capacity?

[Fleetwood Grobler:]

Okay. Thank you for those, Henri. So, let me start with LDPE first. And we’ve indicated that we have got long delivery time on some of the high pressure price -- piping components. And that is really driving our schedule at this point in time. So, the startup date has been indicated as the second half of this calendar year. So I think we will give the market update as we get more clarity around how those deliveries are progressing and we will then update the market, if anything change and give you, and give you a more focused time if we can improve.We’ve indicated that, we are doing everything in our power to try and expedite that date, because we want to believe that it is possible to improve all that period, and therefore we’ll give you a more specific timing once we really on the date.So, with respect to the sense of chemical prices, we have seen further softness in the market. I mean, the coronavirus at the moment is bringing quite a lot of uncertainty 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. But suffice it to say that that’s the case in most of our [indiscernible] type of products. But, when we look at our more specialty type of products, we see a much better outlook. One data point in that was that the weak oil prices have firmed up earlier this year. Of course, that helps us in terms of our alcohol range products and also were that goes into effect in applications. And so therefore our outlook on the Performance Chemical side, barring the MEG, which we know is not really going to go anywhere. In the meantime, we believe that there is quite a bit of resilience in that part of our product portfolio.So, as far as the volumes go, I think in terms of our base business, we’ve given you an indication of what the sales volumes would look like in our outlook. So, I think you can deduct from there what we see is going to take place. And then with respect to the LCCP, I think we’ve also given perspective on top of that, what is our outlook? So, I hope that answers the questions.

[Henri Patricot:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] The next question comes from Herbert Kharivhe of Investec.

[Herbert Kharivhe:]

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

[Fleetwood Grobler:]

Okay. Thank you, Herbert. I’m going to start off and I’m going to ask Brad also to come in, in terms of how markets and what it looks like. So, first of all, we have 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. And the impact started with the coronavirus when we returned from -- or our people returned from the Chinese New Year, and then there was a delay in the re-assuming all the continuing operations. I’m going to ask Brad to talk to what we see in the market currently.

[Brad Griffith:]

Yes. Thanks for the question. So, as Fleetwood said, we ramped up the plant through the second half last year. And really, we’ve done quite a bit of work to prepare the market for the plant. So we saw ourselves ease into the market. So, it’s a very wide and diverse application base that we see. And so, that was continuing to grow well. With the normal Chinese New Year timeframe, we would normally expect to see a dip. And then of course, as Fleetwood said, and Paul indicated earlier, we’re monitoring 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. We continue to cover some customer requirements, but we’re still having to monitor the situation.

[Herbert Kharivhe:]

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

[Brad Griffith:]

Yes. We’ve been able to achieve greater than 90%. So, really full capacity has been available to us on that plant.

[Operator:]

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

[Adrian Hammond:]

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? And then 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? And then 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 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?

[Fleetwood Grobler:]

Okay. Thank you, Adrian. I will deal with the first question. Let me start off with respect to the mining cost and outlook that we’ve seen so far. Yes, we had a productivity impact at the mining. And as we’ve indicated, those were driven primarily by a couple of events. One was in terms of our geological issues that we’ve encountered with one of the mines. Secondly, it was also impacted by heavy rains through the December period. And also, the fatalities at the mines that we had, those impacted the timing, and the focus during that time at those months during that investigation. So, where are we today? We have relooked the mining team has really developed a business improvement plan. We call it so-called [indiscernible] program. The first portion of that program has been rolled out. 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, February, so far, we could see things stabilizing. So, the improvement is already tracking to the recovery of those productivity losses that we’ve announced in the half year results. So, I think with respect to the cost, yes, it has gone up much higher than we would’ve anticipated, primarily driven by the fact that we had to buy in some coal and it costed us more to mine. Yet, we have also indicated that we will buy in some coal for the rest of the year just to make sure that we’ve got a sufficient stockpile, that our reserves is good as we go into labor negotiations and the rest of the activities that go along with that.So, -- and that will impact of course then our mining cost. But, as I said, we’ve got firm plan to remediate that productivity less and that will then restore most of the costs that we’ve seen -- increasing on the cost per ton of coal mines back to the normal levels that we were pursuing around R320 to R340 per ton.So, with respect to the Mozambique PSA gas project, I think we -- suffice it to say that we are progressing that further. We have approved, the Board has guided us to go through the basic development phase now. We are on track. We delivered the fuel development plan in February to the Mozambican authorities. We are planning to go further and develop the project through to the latter part of this year to get us to a point of a final investment decision. So, I think all of those plans, as far as the PSA are tracking. We are also continuing with the infill welling drilling campaign. And so the plateau and the decline of our existing reserves are being addressed. Now, is it happening as quick as we wanted to be? Of course, the answer is no. We would like to make it happen earlier. But, all efforts are focused on that. And we believe that we are well-positioned to address those.

[Paul Victor:]

Again, then the last question was on the cash flows for -- the capital cash flow. So ultimately, on page -- for the company 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 25 billion compared to the 21 billion. I’m just rounding the numbers off in terms of actual expenditure versus a cash flow of 25. And then for LCCP, we did quote that it’s R10 billion or $647 million in terms of actual expenditure and in terms of cash flows roundabout $950 million in terms of capital cash flows on the LCCP. So, what you will see is kind of a significant unwind of accruals on LCCP as the project is coming to an end.

[Adrian Hammond:]

And the CapEx of 38 for the full year, what’s the cash element?

[Paul Victor:]

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

[Operator:]

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

[Gerhard Engelbrecht:]

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.

[Paul Victor:]

Gerhard, we haven’t [indiscernible] we have accrued for it, roundabout R500 million.

[Operator:]

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

[Adrian Hammond:]

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?

[Paul Victor:]

So, there is two things happening on the actual coal business. On the one side, the pricing as at -- average pricing for the first half was down due to a more kind of subdued intentional coal prices. However, what we needed to do as we saw some supply constraints of the running mines into Synfuels that we had to swap over more middlings or export coal volumes to the value chain. And hence, you see the kind of decrease in volumes said to be sold externally and that more being consumed where we can. We have the fix ability to serve as part of this integrated Synfuels value chain. As soon as the stability on the mines return, we will ultimately then review a far larger export of -- export coal to the reaches [indiscernible] and ultimately to those destinations that we sell into. So, it was really kind of a short term blip in the way that we try to manage the supply between Synfuels. And the Synfuels margins are still much higher than on an integrated basis in what you’ll get for coal on the export market. So, it makes sense to swing it over.

[Operator:]

Thank you very much, sir. Next question comes from [indiscernible].

[Unidentified Analyst:]

I just wanted to follow up on the current issue. Initially, you had guided towards R800 million in current year, but you’ve already hit like R500 million. Would it be correct then to expect that for the full year there will be about R1 billion in current [indiscernible]. And follow-up question would be on -- with regards to the issue related 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? Thank you.

[Fleetwood Grobler:]

So, basically the first part of your question is correct. So, we have accrued for first six months, the R500 million. So, that makes sense to also for the second half. Just again, remember that it’s pretax and these numbers that we cut. So ultimately we -- because it’s a cost, we can deduct it for tax purposes. Vuyo?

[Vuyo Kahla:]

On that question related to NERSA. As you may be aware, following in 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 submission submitted on that -- the discussions and submissions on the 20th of Feb last week. So, we will await the determinations of NERSA. And of course, the key point there is around redetermination of the maximum gas prices and arising from that would be an assessment whether there is any kind of obligation from us. So we are waiting that and we have made submissions to NERSA.

[Unidentified Analyst:]

So, you’re not away of the -- you can’t keep that in terms of the potential financial impact that it may have on Sasol?

[Vuyo Kahla:]

No, we can’t do that because bear in mind the first point that the court set aside the maximum gas price, we actually price below that cap. And so, we wouldn’t know, for example, where would NERSA end up coming in relation to the revised maximum price. And whether -- once it has come down with -- assuming that it brings it down, whether it would be below the actual prices that have been levied, it may well be that it’s a revised maximum price but still higher than the actual prices levied. And so, we can’t really speculate it to what that effect would be.

[Fleetwood Grobler:]

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

[Operator:]

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