Sasol Ltd (SSL) 2009 Q2 法說會逐字稿

Good morning and good afternoon ladies and gentlemen and welcome to the Sasol interim financial results conference call. Today's call will be hosted by Pat Davies, Chief Executive and Christine Ramon, Chief Financial Officer.

Following the formal presentation by Sasol management, an interactive Q&A session will be available. A copy of today's slide presentation is available on www.sasol.com.

I would now like to hand the call over to Mr. Michael Campbell, Investor Relations Officer. Please go ahead sir.

Thanks very much Pat, good afternoon ladies and gentlemen and welcome to Sasol's interim results presentation for the six months end of December 31, 2008.

As you heard, we will have Pat and Christine on the call this afternoon presenting our results. And talking on our results, please note that we do make some forward looking statements and that there is a disclaimer that goes with those forward looking statements.

Following the presentation, as you heard, we will have an interactive Q&A and I think that without any further ado, over to Pat Davies.

Thank you Michael. And good morning and good afternoon respectively to all of you, thank you very much for joining us. It's a nice bright sunny day in South Africa as it was this morning when we started. I hope you can say the same about your part of the world.

The world has changed remarkably, as we all know, since we last had a results presentation. It's certainly not business as usual. And our presentation will be a little unusual, in that during the course of it Christine and I will endeavor to make the following six points.

First of all, we've had a very good first half but the world has changed and the markets have deteriorated, both in terms of price and volumes, particularly on our Chemical business, where we've seen some contraction. So things are very different for the second half.

Secondly, that we are trimming the ship to suit the conditions. We're taking decisive actions to conserve cash, which we'll go into. This is clearly not the time to be running off to the banks for liquidity.

Thirdly, the Company is in a solid healthy position. We've generated a lot of cash in the last half. Our balance sheet is strong. And this is because of these actions that we have been taking, but also because of the way we run the Company and the decisions that have been taken over the last number of years.

Our gearing is at 2%. Not many companies can say that at this time.

Fourth point is that our value proposition is intact. Of course, there's some slowdown in demand in the short-term, but in the medium and longer terms, countries, other companies will want to use our technology to convert their natural resources into transportation energy. We know they're still keen to do this and are doing this, because we talk to them.

Fifth point, we have the cash to support not only our existing businesses. We can support a healthy pipeline of projects. We can fund our pre-feasibility and feasibility studies into our large strategic growth projects; very important to signal that we're continuing with those large projects.

And the last point, the sixth point, is that we have the strategy we have skilled and committed people; we have the cash; and we have the determination to successfully navigate through what is quite a substantial storm.

And the strategy, and I'm now on slide number two, the strategy has been successful in the past, taking us through previous storms. Strong rand currencies, weak currencies, high oil, low oil, Asian crisis and so on. And while the storm was different, we sincerely believe the strategy is going to take us successfully through the current one and continue in the medium/longer term to provide us with the exceptional growth that we've achieved in the past.

So I'm not going to talk through the slide in detail, but it says the same thing. We'll take care of our existing -- our foundation businesses. We'll look after them. We will look after our people and we're going to grow, on the basis of our technology, to provide sustained quality growth into the future.

In the short-term, on to the next slide number three, the strategy has delivered and Christine will be telling you a bit about that in a moment. And we see the operating profits up 53%; we see our interim cash dividend at ZAR2.5 and we need to talk to that in a moment.

But a very important signal here is that we are maintaining our dividend policy. We've always said it would be between 2.5 times and 3.5 times cover; just to get the inverse of that for the payout ratio. But we -- as we see things now, and I must add that caveat, we see ourselves sticking for this for the full year's dividend when we make the announcement on the final in six months' time.

We are -- or further signaling that we are investigating. We haven't made decisions. We are investigating the possibility of a capitalization award for the final dividend as well.

Gearing's at 2%, as I've said. Volumes are up, new capacity Arya Polymers and Oryx GTL are doing very well.

On to the next slide, a number of positive fundamentals have been highlighted about how Sasol is and how Sasol can respond to the current turmoil. We have these healthy foundation businesses, pretty robust even at fairly suppressed market conditions.

Secondly, our growth is on track, a nice pipeline of projects. Oryx; and perhaps we can pause there, because Oryx is so important to our future and our future value offering and growth that that's doing particularly well. It's achieved 22,000 barrels a day average for the six months. It achieved an average of 26,000 barrels a day for the month of December. And I'm very pleased to tell you that it's on a day basis achieved up to 36,000 barrels a day.

I'm particularly relieved. Many of you will know that I have been personally involved with this project. I haven't got grey hair. My hair falls out. So I've left a little hair, because of this project with all the problems that we've gone through in the early stages of start up, but it is producing where we want it to produce, so we're very happy with that.

So pipeline is strong on the growth. On sustainability, the right hand column on that slide, these matters are critical to our future. They're very much part of our value proposition. We know that. We're giving these matters of sustainability our very serious attention. And just one example there is that we've created a new division called New Energy, and this looks specifically and solely at low carbon and no carbon sources of transportation energy for the longer term future.

Slide number five, again makes the point that this is not business as usual. We are taking extraordinary measures to conserve cash to stay on course. And Christine will deal with it later.

We have the full menu of costs cutting, looking at working capital; suspending share buybacks, which we did many months ago; lowering our gearing targets; and, of course, the important one on reprioritizing and, in fact, reducing our capital spend quite significantly.

And if I pause there for a moment just to talk about our philosophy, which I'm sure many of you will have an opinion on. But, frankly, we don't know how long this turmoil is going to last. We don't believe that oil prices are going to pick up in the short-term.

So we've created a scenario where we've factored in low prices for the next couple of years. We've factored in a number of risks. And based on that scenario, it's very clear that we must conserve cash. We must be flexible in our approach, but we must conserve cash. And hence, the decision on CapEx, and we have many attractive projects I must add, so we have lots to choose from, but we need to reduce our CapEx and this has also informed in our dividend decisions.

Flexibility is important though, because maybe we're not being as bullish as we should be, and things pick up and we must be able to step up and re-accelerate projects rapidly, and we're planning our process to do exactly that.

You know as well or better than I do, that there's an asymmetric risk here and the risks are not asymmetric, let me put it that way. Many companies are stretched; called it wrong. They were too bullish on assumptions, are now running around looking for cash to keep their businesses going.

The downside risk of being too bullish is enormous. The downside risk of being too conservative means you probably miss out or slow down on a number of opportunities, but the one risk is much larger than the other and that has informed our decision making too.

But despite the fairly significant reduction in CapEx, the next slide, number six, indicates that our pipeline is strong and it's progressing well. I must though put a caution in here that, clearly, we've made this announcement on 40% reduction in our CapEx spend over the next three years, but we thought working out the details of exactly which projects are affected.

So largely the ones that you see on the slide are fine, but there may -- there might be some adjustment to schedule and there might even be on or two of them that drop off and we will certainly communicate that as we go forward. But by and large, the pipeline is sound and is moving ahead nicely.

If we look at the ones specifically in idea and pre-feasibility stage there, very happy to report that the India CTL has moved now, as of the last day or two, into the pre-feasibility stage, because we've just had news that we have got -- we've won the bid for the coal block that we were looking for against 21 other bidders. And we're delighted with help that we got from Tata & Sons, our partners there. So that's one on its way. The team is in place and we're on our way with the pre-feasibility study there for large coal to liquids facility.

On the pre-feasibility ones, if we look at the top, Mafutha is progressing nicely. I'm happy to answer questions on that one later. The Secunda growth program phase 2 I'll, in fact, discuss that a little later on when we're talking about implementation.

The third one in that second column is on the Mozambique exploration offshore. And there, as you know -- many of you will know that we did discover gas. We're delighted by that. Of course, it is offshore, so it's fairly early days and we need to do a lot of extensive testing between now and the end of the year to determine the commerciality of that particular gas find.

And then Uzbekistan, my colleague Leon Strauss is here and I'm sure you may have questions on Uzbekistan GTL, which is also a new one that has been added to the pre-feasibility stage.

Moving on to the ones in feasibility and implementation, I'm on slide eight, we have a new mine coming in. This is just to continue the sustained supply of coal to our own facilities and also to the export market.

China CTL is the big on that list and that's going ahead at pace and we see completion of that early in the next financial year, that feasibility study.

If we look at the ones in implementation, I guess the important one there that we certainly plan to continue with, the gas pipeline expansion is well underway.

The Secunda growth phase 1, now we've re-jigged that a little. It's now making a little less liquid fuel and a little more electricity and that will come in now in 2012. Second phase is in pre-feasibility and we need to do a bit more work on exactly the technology choices and the feedstock sources of that one. So that one is a little further down the road.

Yes, but the stuff in Mozambique is certainly going head nicely; very happy with the progress there.

Moving on to the last one on production side, Oryx, we've spoke about; delighted with the progress there. That one will certainly be coming off this list. As will possibly be the Arya Sasol Polymers one. That is -- all three plants there have started up successfully producing products, selling product; and this has been a world class performance by any standard. Cost and schedule you can compare with the best in the world and this project has done incredibly well. So we're delighted with that.

So we've covered foundation, we've covered growth if we look along the bottom of the slide onto sustainability and we're not really dwelling on that today. This is very important to our future. There are many important sustainability issues.

If you look on slide 10, we've highlighted just one of them and that is the safety performance, where we have had significant improvements. We're at a bit of a plateau at the moment and, frankly, while we're at world class, we want to see this improving further and we most certainly will do so.

So in summary, as I put Christine's title slide on, number 11, let me say that we've had a good first half, but markets have deteriorated. The Company is in a solid position. We've generated a lot of cash. Our balance sheet is strong, but we have gone into a cash conservation mode. We think that's absolutely the wise thing to do. Our value proposition is in tact and we have a great foundation of businesses and a healthy pipeline of growth projects.

With that, Christine, over to you.

Good morning and good afternoon ladies and gentlemen. We have in the past spoken about scenario planning and stress testing at much lower oil price levels in the past and this has now become a reality.

In a global economic recession that is unprecedented, and in an environment of weaker global growth and lingering risk aversion, we think that it is wise to plan for an extended period of suppressed and volatile market conditions.

Sasol is no different from other local and global companies that have taken cognizance of the current economic climate and reviewed their levers of discretionary spend, being capital expenditure and dividend.

For the first time, we've adopted a more cautious approach to our interim dividend. And, for the first time in many years, we have reduced our capital expenditure program for the next three years, adopting a more flexible approach.

Cash is king in these times and our prudent balance sheet management has stood the Company in good stead to navigate the storm. In order to better position the Company in what is very uncertain credit markets, where liquidity has dried up, we have adopted a cash conservation approach.

As I go through our very solid half year results, the positive fundamentals of Sasol will come through. We are a robust business that continues to deliver solid returns. We have renewed our focus on the basics, being cost containment, operational efficiency improvement, a focus on working capital improvement and risk management. And, last but not least, we continue with our investment for growth in the pre-feasibility and feasibility studies of our large growth projects.

Moving on to slide 12, we can see here that each six months period tells a very different story. Reflecting on the first six months of this financial year indicates a high average [dated] brent and fuel prices. And one notes the sharply declining trend with dated brent bottoming out in December at less than $40 a barrel, at a third of what it was at the beginning of the period. This is quite the opposite of what we experienced during the previous financial year.

Chemical prices have again shown a strong correlation with oil prices as the knock on effect of falling oil prices quickly got passed on through to Chemicals.

In the top right hand graph, we see that the weakening of the rand also contributed to higher fuel pricing. However, under the period under review, it also marked higher inflationary trend than what we experienced in South Africa in the recent years.

We do remain sensitive to these economic variables. And for budgeting and forecasting purposes, we estimate that for every $1 change in the annual average crude oil price, our Group operating profit before tax will be impacted by ZAR500 million. And a $0.10 change in the rand dollar exchange rate will impact on our operating profit by ZAR760 million.

So having set the scene for the half year results, we see that for the first half, headline earnings per share was up by 51%. However, we do expect the second half to be more challenging.

The Group operating profit of ZAR21.5 billion was 53% higher than the comparable period of the previous financial year. We see that the increase in operating profit was on the back of the higher prices in crude oil and refined product prices and a weakening in the average exchange rate.

In addition to that, the crude oil hedges in places during the period cushioned the effect of the decline in oil prices and resulted in a net gain of ZAR5 billion. The current hedge expires in May this year, after which we will reconsider a new hedge, depending on the outlook and the pricing available at that time.

Overall, the Group delivered higher production volumes, despite lower Synfuels volumes and that was mainly due to the additional volumes from Oryx and Arya.

There were large other expenditure items such as the Wax fine of ZAR3.7 billion and the Inzalo IFRS2 charges of approximately ZAR3 billion that negatively impacted our operating profit.

The Group operating margin despite that is 26%, which is in line with the prior year. The operating margin, excluding these two large other expenditure items, would be 34%.

Moving on to slide 14, we see the analysis of the increase in the half year operating profit compared to the prior year. We note the contribution of the weaker rand of ZAR7 billion approximately and the increased oil prices including the positive effect of the hedge is ZAR10.7 billion.

We also note the negative impact of declining product prices, which we expect to increase in the second half and the impact of high inflation during the period under review.

We will now review the cash fixed costs on the next slide, 15.

The weaker rand contributed to a high inflationary environment and we do note that the increase in Group cash fixed costs before taking into account the Wax fine and new business and study costs has been contained within PPI inflationary levels in South Africa.

We have embarked on various initiatives in the Group to reduce cash fixed costs. The current economic climate also presents opportunity for us to be tougher in negotiations with contractors and suppliers, with the focus on more competitive procurement.

We are reviewing other costs in the Group where it does not impact on the sustainability of our businesses, and we have also renewed our focus on improving operational efficiencies in the Group with the view of reducing our long term unit production costs sustainably.

Moving on to slide 16, we see the overall improvement in the first half cluster performance. Just to point out, all these subsequent slides relating to the cluster performance will exclude the impact of the Wax fine.

When we look at the breakdown of profitability by cluster, we again see a very strong contribution by the South African Energy cluster.

The Chemicals cluster also shows a marked improvement on the prior year and we are delighted by the strong contribution made by the International Energy cluster for a second successive reporting period.

We note the healthy operating margins that are reflected in all the clusters. However, we do note a small decline in the margin in the Chemicals cluster and we are expecting this to further contract in the second half of this year.

Moving on to slide 17, the South African Energy cluster contributes more than three quarters of the Group's operating profit. With the exception of Sasol Oil, the SA Energy cluster benefited from the higher prices and the weaker rand.

Synfuels remains the largest contributor to the Group operating profit and it does include a hedge gain of ZAR4.9 billion. Synfuels produced about 3.8% lower volumes due to plant instability and the gasifier problems that were being experienced, amongst others, are in the process of being addressed. Synfuels expects its production volumes for the full year to be marginally down on last year.

In Sasol Oil we note that the sharp decline in product prices resulted in an operating loss of ZAR1.6 billion, and that was compared to an operating profit of about ZAR2 billion for the prior year. This sharp decline in product prices resulted on the back of fast falling crude oil prices and this resulted in negative -- actually quite large negative, stock effects and pressure on refining margins.

We do expect Oil's performance in the second half to improve and with much lower stock effects anticipated. However, the refining margins will remain under pressure.

Moving on then to slide 18, we're delighted with the production ramp up at Oryx and the positive impact that it's had on the profitability of SSI. Sasol and its JV partner in Oryx QP have recently decided to repay the project finance loan facility and that was with the knowledge that Oryx is generating healthy cash flows.

It's important to note that half of SSI's profit includes a once off profit of ZAR509 million that has been realized on the reduction of our interests in EGTL.

Pat spoke about the project pipeline earlier, and one should also note that SSI's costs include increased project activities in areas such as China with Pakistan and India amongst others.

It's encouraging to see the increase in SPI's operating profit for the six months period. The profit for the half year of ZAR1 billion equaled that of the full year for 2008, and that was on the back of higher volumes and prices. Pat also spoke about the exploration and new business development that continue in Mozambique, Nigeria, Gabon and Papua New Guinea for SPI.

Moving on to the Chemicals cluster, slide 19, we see that the Chemicals cluster delivered a strong performance. However, as Pat mentioned earlier, the sharp downturn in worldwide chemical markets is expected to have a significant impact on the second half's performance.

The production ramp up of the Arya Sasol polymers plant contributed to the increase in Polymers profits, despite them experiencing declining sales prices in the latter part of the period.

Our Solvents business did quite well, benefiting from higher prices and margins, as well as some exchange gains even though lower sales volumes were achieved. The Solvents European business is in the process of being restructured as part of a business improvement plan and this could entail the rationalization of certain production facilities, and will result in long-term cost optimization in that business.

The O&S business, as we can see from the reduced profitability, has been impacted by the economic recession as -- due to its exposure in the automotive and construction sectors.

The turnaround process at O&S is progressing well; seven production facilities have been shut down and there has been a headcount reduction of approximately 300 people. And that has already -- this reduction in cash fixed costs has already improved the robustness of the business. Our intention is to further optimize this business and to explore selective Group cost optimization and growth opportunities.

Moving on to slide 20, our cash on hand, which was about ZAR22 billion at the end of the period, and our de-leveraged balance sheet position, positions Sasol well to navigate the global economic crisis.

We've mentioned the capital expenditure has been reviewed and reprioritized where appropriate. We've reduced our three year capital expenditure forecast by approximately 40% to spend roughly the same levels as the current year's ZAR15 billion on the next two years capital. So in other words, to maintain for the next two years per annum the same spend for the current year.

We emphasize that we will adopt a flexible approach to our capital expenditure program and we continue with pre-investment for large growth projects. Pat spoke about our healthy project pipeline, reflecting that we have many attractive projects from which to choose.

We are focusing on working capital improvement, although I need to mention that it is challenging in the current economic environment. And from a risk management perspective, we are monitoring Group credit exposure and counterparty risks very carefully.

We have lowered our targeted gearing range to 20% to 40% to take cognizance of the economic climate.

Pat spoke about the share buyback program that we've suspended. And to mention, to date, we have bought back 6.4% or our issued share capital.

We have considered it prudent to adopt a more cautious approach to our interim dividend, taking into account the volatility and the uncertainty in the current economic climate, the Company's long-term growth strategy and the preservation of shareholder value.

As Pat has said, we aim to maintain within our targeted range of 2.5 times to 3.5 times annual earnings cover when it comes to dividend. However, we will be giving consideration to the capitalization award for the final dividend.

I'd just like to make an additional point on the dividends; that it would be wrong to extrapolate the current interim dividend to estimate what our annual earnings are, because it's actually -- it's been a far more complicated calculation than that for us. Importantly is that we are factoring in liquidity buffers to take cognizance of risks in the current environment.

Moving on to the outlook, slide 21; we are planning for tough times ahead. The current volatility and uncertainty in global markets has made forecasting very difficult in this environment. And thus, when you look at our earnings outlook, when we talk about an expected reduction in earnings for the full year compared to last year, it does lack adjective in that profit outlook.

Because of the current economic, it's very difficult to be more precise than that. But one should note that we do have a very short-term view with respect to product demand, crude oil and product prices, and we are expecting that some of those effects will be partly mitigated by a weaker rand dollar exchange rate for the second half.

On the production side, we are expecting marginally lower volumes at Synfuels, as I mentioned earlier, and we're expecting increased volumes from Arya Sasol and Oryx.

Moving on to slide 22, which is my conclusion slide, we see that we have a strong track record of meeting our set targets over the cycle through the highs and lows as reflected in the top two graphs. You will note that we have increased our weighted average cost of capital from 11.75% to 13.25% in South Africa. This means that growth projects will have to meet or exceed an internal rate of return of 17.25% in South Africa to be approved.

We have cash on hand and a strong balance sheet position. In this environment liquidity is the constraint, not necessarily gearing, due to uncertain and illiquid credit markets. As you would have heard from both Pat and I, we have taken proactive measures to conserve cash and to improve liquidity, to improve costs and operational efficiencies and reprioritize capital expenditure adopting a flexible approach.

In conclusion, Sasol is well positioned for the tough times ahead. We are planning for an extended period of economic downturn and we are providing for sufficient liquidity, for further downside risks on volumes, prices, working capital, etc. We are still a robust business with strong fundamentals and we will continue in the pre-investment for growth as we believe that this is in the long-term interests of all our stakeholders.

Over to you Pat.

Let me wrap up. There's a saying there up on the slide there that smooth seas do not make for skilled sailors. With all that is going on at the moment, our sailing skills are being greatly enhanced. Our crew is getting a lot of experience, you can imagine, and that obviously bodes well for the future too.

Sasol's been around for a long time. We've been around for 50 years plus. And we've been through many storms and crises and upsets, many cycles, and we've continued to grow on average through all of those quite successfully.

Yes, this cycle is a different one. It is a huge storm. But I hope we've been able to convey to you that we believe certainly we have the strategy. We have the people. Our team has the skills, the experience, the commitment, the values and, of course, we have the cash to successfully navigate and provide all our stakeholders, particularly our shareholders, with quality long term growth. And we plan to do this in a sustainable way.

Coming out of this, we want the ship to be in even better shape. We want to be around successfully for the next 50 years.

With that I think, Michael, we're ready to do the questions.

Right. Thanks, Pat. Thanks, Christine. We'll now cross to the conference organizer to talk to us on Q&As. Organizer, do we have some questions on line?

Thank you, sir. (Operator Instructions). Thank you, sir. The first question today comes from Gerhard Engelbrecht from Citigroup. Please go ahead with your question.

Good afternoon. I've two questions, if I may, and the one is around the assumptions that you're using in terms of guiding low earnings for this year. Could you maybe tell us what you think the rand and the oil price will be in the fourth quarter?

And then maybe also just add on to that, do you expect positive operating profit contributions from the larger Chemical businesses; Polymers, Solvents, O&S and possibly Nitro?

Okay. Gerhard, as regards assumptions for the earnings guidance, what I need to tell you is that we have adopted fairly conservative assumptions. For this year it is at the current level in terms of oil price.

For the rand dollar exchange rate we can say that it is -- we've adopted a slightly stronger position than we'll be -- we're currently at, at around the ZAR10 to the dollar mark. So that's what I can talk about clearly from an oil price and the rand dollar exchange rate point of view.

Yes. On the second part of your question about the contribution of the Chemicals businesses, as you know we don't give individual forecasts per the Chemicals business going forward. But, Gerhard, collectively, yes, we are expecting a positive contribution from the Chemicals businesses, but not a big one; not a big one.

And also, of course, it depends on how things play out, how much de-leveraging of positions is there in the whole value chain. That changes quite rapidly. Prices, you can follow the chemical prices as well as we can. They also tend to be reasonably volatile at the moment. So hard to tell but, yes, a contribution but not a big one.

Okay. My second question just goes around that as well. You've now seen the third quarter of the financial year with oil prices much lower than the first half. What does the margins in O&S look like? Are they -- have they expanded as one would have anticipated?

They've expanded before the economic crisis hit. So the fundamental work that was done on restructuring and renegotiating contracts and so on certainly we saw the positive effect of that.

But obviously that business is pretty much exposed to the automotive industry and the construction industry, particularly in the US, and that's not looking great as we all know. So I'm afraid that's been an overriding effect that you've seen -- that we see coming through now.

So if we were to plan this business on today's prices and the price situation going forward we would be quite depressed. But one must believe that ultimately the cycle will turn, and then the work that -- the very positive restructuring work that we've already done will pay dividends as we go into the future.

Thank you.

Thank you. And the next question comes from Caroline Learmonth from Macquarie. Please go ahead with your question.

Thank you. A couple of questions. First of all, on the Synfuels volumes could you please comment perhaps in a little bit more detail about the operational stability problems that you experienced in the first half and any potential impact of those problems on to your medium and longer term expansion plans?

And then secondly, just on your view on oil price. You comment that in the, say, next few years you're maintaining quite a conservative view on oil price. What is your longer term view and over what period are you looking for that longer term view?

And then finally, just on the dividend, the interim dividend cut, could you just explain in a little bit more detail the rationale behind the extent of the cut, which seems very significant?

Sure. Sure, we start with the -- Caroline, this is Pat speaking. Benny's unfortunately not with us so let me deal with that. The volumes that were 3.8% down compared to the comparable period are still largely to do with the gasification and gas reforming sessions. We indicated I think last time we spoke that there are 80, eight zero, of these gasifiers and we're having to replace all these gasify jackets and internal lining. Technicalities aren't important.

But this is a huge job and we obviously have to take the gasifiers down one at a time to do that. And we were busy -- very much busy with that through the half. Obviously we got the worst of it done, but it still caught us out unfortunately. I think we've done something like 60 of the 80 gasifiers now, so obviously that's looking better for the future.

We did have some difficulty around the gas reformers as well, but that replacement program is also underway; not yet complete. So Synfuels in this quarter now -- that we're in now, certainly have been running quite a bit better. We have had a couple of heat exchanger problems in a plant called [Fina Solven], which is one of the gasification by-product plants.

So I think what we're seeing in Synfuels is that it seems to us that on a couple of the units we hadn't kept up with the renewal maintenance, as now we can say with 20/20 hindsight, as quickly as we should have. Now that's been rectified. We're spending the money and have been, but it's taking us a little while to get out of that. So I think we're indicating a marginal decrease overall for the year, which indicates there must be an improvement in the second half over the first half of the year.

This does not impact the expansion plans for Synfuels; absolutely not. Those remain independent. This is a short term phenomena and it's being taken care of. So it doesn't impact the long-term plans at all. We're still very comfortable with the overall status of the Synfuels plant.

As far as -- Christine, do you want to talk about oil price and then I'll talk about the dividends.

Okay. Caroline, we did say that in the short-term we're not expecting a recovery or certainly we haven't factored it in -- factored in a very conservative oil price for the short-term. And we are talking about the next about two years and we're saying assuming oil prices at current level. I think certainly for the longer term we've also made a very modest real term assumptions and we're saying for the long-term our view there is still unchanged.

Yes, it's pretty much as we indicated to you previously. So we believe the fundamentals are still in place which are going to drive up the oil over time. So it's the short-term that we need to get through.

As far as the dividends are concerned, obviously this is a delicious debate. Obviously, not going to run through all the pointers, but from the healthy states of projects we have to choose from, we're not short of opportunities that are going to give us attractive returns on the one hand.

On the other hand we've done the scenario where we've looked at a realistic -- we believe a fairly realistic couple of years ahead of us that are going to be very tough. And one must factor in a couple of the risks that also -- not just on prices, but there are a couple of other risks that pop up that we wanted to provide for so that we don't get into a situation where we start running out of cash and we have to stop some of our big strategic projects.

So putting that all into a scenario tells us that we have to conserve all the cash that we can; and yes, possibly, we are being a little bit on the conservative side and I promise you as soon as the signals are a bit more positive we'll adjust quickly again. But I think given our view of the future in the short-term these are wise steps to take.

Let's think of some of the other risks. The cost of equity is going through -- it is going one way only from now on, so if we have to go and raise money we know it's going to be expensive to do so. We have a lot -- I don't know what your view is on the dollar, but there's certainly some view out there that the dollar could take a bit of a dive. That will make the rand stronger and that will have a very material impact on our ability to generate cash at the level that we like to generate cash.

So one has to take -- make a judgment call and that's our judgment call. But I would not, if I was in the -- well, I am a shareholder. So what I take comfort from is the fact that we think that our dividend policy for the full year at the interim stage remains intact. And we've stuck to that dividend policy of 2.5 to 3.5 times pretty much through the years and through the cycles.

We can't promise we'll be there at the end of the year, because this is how we see things at this stage. But I think that's a given. Other companies in the world around us that have cut dividends, suspended dividends, not said anything about future dividends, I think this is fairly comforting that our Board and ourselves have taken the decision that we're going to do our very best to stick to the dividend range that we've indicated.

Pat, I'd just like to add on to that that, yes, we have factored in downside risk relating to prices and volumes. But I think one has to also take this in the context that we are operating in fairly illiquid credit markets at the moment. And that was one additional factor that we had to take into account when we've actually made this decision.

Yes. That's -- put in other words, gearing we don't see as our first constraint. Liquidity, and to increase your gearing you need liquidity in the markets otherwise you can't borrow the money. So that's our big constraint as we see it. And that's not Sasol specific, that's just what's going on in the financial market.

Yes.

Right. Thank you. That's very comprehensive. Thank you.

(Operator Instructions). And the next question comes from Campbell Parry from Investec Securities. Please go ahead with your question.

Thanks. Good afternoon, everyone. I just wanted to dwell a little bit on the Synthetic Fuels operations, because they're so important, obviously, to growth going forward and we've seen the contribution made to operating profit.

But volume growth there has been a problem for the best part of the last four years for a variety of forced and kind of unforced reasons. And as I understand it you face two more shutdowns; one this financial year and one next financial year, I think it's in October. The plant's getting older, there's no question.

So my question really is how confident are you that you can actually increase volumes in a sustainable manner going forward? At what point should we be confident that you've put in place the technology required to meaningfully grow volumes every year when price is kind of working against you? And that includes the one percentage annual increments from the switch to gas feed. That's just the first thing.

And then secondly, I believe that you're currently running some coal samples on a sort of bulk basis from the sites of the proposed Mafutha project in your gasifiers. Has that impacted yields or availabilities of those gasifiers at all in any way?

Sure. Let -- Campbell, good afternoon to you. Yes, the volumes growth is certainly something that warrants a little bit of a discussion. We, of course, have had earlier on -- to be fair on this thing we had a double whammy of a shutdown, which we shifted at the behest of the country to meet fuel demands a couple of years ago, so that hit us.

We then had Project Turbo which is a clean fuel specification-driven thing, not certainly by our -- particularly our own election. So that has played into this period that you refer to.

But yes, we have had difficulty and I think we must just remember that -- I know Synfuels is important to us. We are acutely aware of that. But when we're talking about 2% here and 3% here I hope you use the same measure when you're reflecting on mining production in this country and other places. These are not massive deviations.

But you refer to when -- the technology, when will we have the technology in place. This is not a technology thing so much. This is a people thing. And I think it's -- what we've had is a couple of decisions being made, which were perhaps made a little bit too late on the renewal program.

We've recognized that and we've given our very serious attention to that decision making process to make sure that those decisions are made timelessly to make the necessary renewals, whether they're technological renewals or whether they're renewals just in kind. So I can't say with absolute confidence today, to be honest.

And that's -- I would think in about six months time I'd be able to give you a much more confident answer that we've caught up on those decisions and that we feel comfortable that we can predict with a little bit more accuracy into the future.

Our comfort level has -- today is a lot better than it was a year ago. It's a lot better than it was six months ago, so I'd like to indicate the trend in this direction. But it's going to be -- take a little while longer until we can give you more of an absolute assurance.

As far as -- you referred to coal tests. Now there are no coal tests at Secunda that have impacted on yields in any way that I'm aware of at all and if they had I'm sure I would have been aware of it. So no, that's not an issue.

Okay. Thanks, Pat.

Sure.

Thank you, sir. The next question comes from Alex Comer from JP Morgan. Please go ahead with your question.

Yes, I've just got a couple of questions. Maybe you could just confirm what the cash breakeven oil price that you guys require is, bearing in mind obviously costs are going up, or they seem to be going up quite a lot, particularly at Synfuels?

And secondly, maybe you could quantify the inventory write-downs that occurred in the individual divisions?

And then finally, I think I heard you quote ZAR500 million per $1 a barrel move in oil prices. That seems a little bit light to me; when I go back and check through the 20F it seems to me that sensitivity was higher than that on the way up with oil prices. I'm just wondering how comfortable you are with those figures.

Okay. Sorry, the first part of your question was a little indistinct. Do you mind repeating it?

I just wondered what cash breakeven oil price do you need on a going forward basis, and considering the fact that costs will probably go up a little bit more as well?

Alex, I presume you're talking about the existing business here?

Yes, the entire Sasol existing business, I think we can work it out for --

No, Alex, you'll appreciate that this is very competitive information, so we're not likely to want to disclose it.

I was asked a question this morning, do you still make a profit at $45 oil, and the answer is very much we make a profit at $45 oil. And -- but we are signaling of course, a reduction in profits and the full effect of the $45 oil is going to be very apparent when we declare our results at the end of the year. But I really wouldn't like to get too much closer than that, other than to give you the assurance that current oil prices certainly do not scare us in terms of profitability for the Company as a whole.

Right, do you want to help? I'm sure you're not going through individual divisions' inventory write-downs, Christine.

No, but overall, I can talk about [but] write-downs. We did have to take some stock write-downs in this past period in the declining price environment. Overall in the Group, the stock write-downs amounted to ZAR1.5 billion. So that would have negatively impacted our profits in the past period.

And then, I'm sure you'll get to this, but the stock effect in oil was another large impact, and that was approximately about ZAR900 million in addition to that. That was your one question.

The other question related to the sensitivities. We said that for every one US dollar change in the annual average crude oil price, that it is expected to impact our operating profit by ZAR500 million. Previously the impact was less than that. It was around ZAR360 million. So the impact of the change in the crude oil prices certainly increased in terms of sensitivity, Alex.

Okay.

(Operator instructions). And the next question comes from Tassin Benn from Bank of America Merrill Lynch. Please go ahead with your question.

Good afternoon everybody. I just wanted to ask you a couple of questions. Firstly in terms of costs; we notice quite a sharp increase in costs in the period, primarily of concern being in the Synfuels division. I wonder if you could give me an idea of how you expect to control these costs in the next period in particular, given the fall off in prices we've seen.

And then secondly, if you could just give an update on the gearing levels expected at year end with your current crude and rand assumptions; what kind of gearing levels are you expecting? And would you actually be cash positive even in the current environment?

Hi Tassin, it's Christine here. I think just firstly to comment on Synfuel's costs; yes, Synfuels did experience a 35% increase in its cash cost per unit for the period under review. But I think you would note that a large part of that is clearly inflation related, with higher than PPI increases coming through on the coal and electricity side, as well as increases coming through on the increases in gas prices that have come through, so they're feedstock related increases, and that is pretty difficult to control because it is clearly market driven.

I think as relates -- there's a big part of the increase that also related to stability. The plant instability that's actually impacted on costs and Pat has given us some comfort as regards to the improved stability. And Synfuels are expecting to make up some of the production losses, clearly in the next six months.

But, I think separate to that is that Synfuels has undertaken, in line with the Group initiative taken to reduce fixed costs, Synfuels has got its own initiative going, and that is to improve cash fixed costs going forward. And I think, particularly in the current economic climate, this is quite a bit focus for us.

As regards gearing Tassin, we spoke -- clearly, now we're at a 2% gearing level. And even with the current assumptions, you'd appreciate that I couldn't give you our exact gearing estimates for the year end, but we do expect to remain well within our gearing range by year end, even below gearing range.

Below gearing range, yes. No, I think we can be that accurate.

Well below -- let's say, well below the gearing range. But I think the issue that we've got to take into account here, which is the point we've tried to make, is that we are operating in particularly illiquid credit markets, and gearing is not the constraint and we have adopted a cash conservation approach in the Company, to better position us in these uncertain credit markets, in the interests of our long-term growth strategy as well.

Operator, can we take the next question now please?

Thank you. The last question comes from Matt [Lofting] from Morgan Stanley. Please go ahead with your question.

Hi, good afternoon. I just wanted to get a little bit of additional color around the access to credit markets at the moment as you see it. I was just wondering if you could give us a feel for how, or to what degree you think Sasol can access credit in the current environment, or whether costs are currently prohibitive. Thanks.

Yes, Matt. It's Christine speaking. The costs, as we all know that the long-term cost of debt has actually increased. So clearly, if we access credit markets now there would certainly be an increase in the pricing when it comes to that.

As for capacity, I think clearly we haven't tested it to the full yet. But I think we say this, and also the fact that credit markets only illiquid, but also taking into account that in the South African environment, we've got two large State owned enterprises that also have to access credit markets for their long-term capital expenditure programs as well.

So, we obviously follow this by the day in terms of as news gets released in the markets. We continue to maintain good relationships with providers of funding. But I think the real test comes when we really have to access these credit markets to source funding for our long-term growth plans.

And I think from the news that -- news flow that we actually see out there, we see that banks are tightening up on providing funding. They're ratios have been tightened up. And quite a few of the international banks have been re-capitalized by their own governments, and we also see protectionism coming into.

So one has to take cognizance of all these factors with South Africa being -- Sasol is largely a South African company, and also in an emerging market. And so, we've got to take cognizance of all of these factors when we actually take the availability of credit into account.

But we have facilities; some of them committed facilities, and they're under-drawn at this point in time.

Yes, they all are under-drawn.

So we have a buffer there, but we plugged that into the equation when we looked at that scenario that I spoke of, and when we decided on the extent of the capital cuts, etc.

Thanks operator. I think we have two more callers on the line if we could go there, and then wrap up please.

Thank you sir. We have a follow up question from Gerhard Engelbrecht. Please go ahead with your question.

Sorry, but I just want to make sure if I heard you correctly. Did you say Oryx is producing at 36,000 barrels a day? And if so, is that sustainable going forward?

And, can I just have a follow up on the inventory write-down?

Gerhard, we'll have to wrap up quickly. So, no, I certainly said 36,000 barrels a day, but I said that was on a day basis.

26,000 as a correction.

No, I said on a day basis, it was 36,000, but the average for December was 26,000 a day. And Gerhard, as you know, you're an old man around these plants, you know if you don't run at nameplate all the time, you run at an operating rate, which might be at 90% of nameplate.

So we're happy we can run at those levels sustainably. Running at 36,000 barrels per day, which is above nameplate, is something that I've asked Leon to do, but he tells me it might take a day after tomorrow to get there.

You had a follow up question on inventories you said?

I just wanted to -- Christine did you say that inventory write-downs in Sasol Oil is ZAR900 million?

I said the stock effect in Sasol Oil, which is different from inventory write-downs. I said there were Group inventory write-downs of ZAR1.5 billion, and stock effects in oil was approximately ZAR900 million; actually slightly below that, but yes.

Okay, just a rough calculation suggests then, there were inventory write-downs in O&S as well I see. Apart from the inventory effects, did the business have a positive EBIT excluding these inventory effects?

Are you talking specifically about O&S, Gerhard?

No, I'm sorry; I'm talking about Sasol Oil. I know the refining margins were still fairly high during the first half. So I'd just like to ascertain if there were other problems there that we might not be picking up in these numbers.

Gerhard, I suspect -- let's take it off line to make sure we understand your question. There were no other problems in Sasol Oil. Operationally it did reasonably well, so there is nothing else other than the ones that we've mentioned. But maybe you and Christine can have a chat so we understand your question.

Sure. Thanks.

Thanks. We'll now take the last question.

Thank you sir. The last question comes from Campbell Parry from Investec Securities. Please go ahead sir.

Yes, thanks guys. Just one more, more strategic question, assuming that --

Campbell, we've lost you.

Yes, think we've lost our last caller. And I think on that note, that wraps up our conference call today, so I wish you all a good afternoon, and a good morning in the United States.

And we'll be over in the road show later this week and through the following weeks in the United Kingdom and the USA. We look forward to catching up with our buy and sell side market at that time. Thank you very much for joining us today. Good bye.

Ladies and gentlemen, this concludes the Sasol interim results conference call. Thank you for participating. You may now disconnect.