Sasol Ltd (SSL) 2016 Q4 法說會逐字稿

Please stand by. Good morning and good afternoon, ladies and gentlemen, and welcome to the Sasol annual financial results conference call. Today's call will be hosted by Stephen Cornell and Bongani Nqwababa, Joint Presidents and Chief Executive Officers, and Paul Victor, Chief Financial Officer.

Following the formal presentation by Sasol management an interactive Q&A session will take place. Today's call is being recorded. A copy of today's slide presentation is available at www.sasol.com. I would now like to hand the call over to Bongani Nqwababa. Please go ahead, sir.

Thank you, operator. If I can start by referring you to slide 2 of the presentation of the forward-looking statements to make sure that we are all aware of those and you can go over them when you've got time.

Good day to you all and thank you for joining us for Sasol's annual results presentation. As you currently referred, today with me is my Joint CEO, which is Steve Cornell, and Paul Victor, the CFO. And we are also joined by a few of our chiefs and colleagues who can contribute when we come to the Q&A session.

Today we'll be announcing another resilient Group-wide performance, notwithstanding an extremely tough macroeconomic environment created by the further dramatic drop in the global oil and commodity prices. This achievement was made possible by our valued customers, our people and other stakeholders.

This financial year we saw oil prices drop to as low as $27 per barrel in January 2016. It recovered somewhat, to $48 per barrel by June 2016. As anticipated, commodity chemical prices also followed the declining trend of global oil prices.

Turning to the key messages you'll hear today. The joint CEO model is working well and we have a solid foundation upon which Stephen and I start our tenures.

On our Lake Charles chemicals project LCCP, we have completed a detailed review. We therefore have a sound basis on which to take the project execution forward.

The current low oil price environment has, as expected, impacted our financial results as well as those of our competitors. Despite this, we have again delivered a solid operational and financial performance for the year. Paul will go into more detail on our financial and operational performance for the year.

Through our business performance enhancement program, BPEP, we have achieved higher sustainable cost savings than forecasted and our low oil price response plan has exceeded our cash conservation expectations.

Ahead of the LCCP's completion we are also delivering incremental margin and volume growth in other capital projects.

And in Mozambique, the execution of the field development plan for the production sharing agreement license area is on track.

Before wrapping up we will conclude by outlining how Sasol is transitioning to the future and ensuring we deliver maximum sustainable value to our shareholders. We'll then open up for any questions you might have at that time and Steve will be responsible for the questions.

Thank you, Bongani. Looking at the joint CEO model, Bongani and I can confidently state that we are working extremely well together. We had six months to prepare for our shared role to ensure a seamless handover from our predecessor, David Constable. We also used this time to refine, together with our Group Executive Committee, ways of working on a day-to-day basis. This is vital to ensure constant alignment and information sharing between the joint CEOs as well as how our integrated decision-making process works.

We are, and will remain, a more cost-competitive organization than we have been in the past. This has allowed us to lead from a position of strength, given the proactive measures taken under our business performance enhancement program, BPEP, and the excellent outcome of our response plan.

Our focused efforts to embed operational excellence in the recent years is also paying off. Our operations are more reliable, continue to perform better and have been a significant factor in our business remaining profitable.

From a finance standpoint, our balance sheet is strong and has sufficient flexibility. This allows us to manage the Company's gearing and credit rating, ensuring continued balance sheet strength to fund our growth plan and protect our dividend policy.

We are maintaining a strong focus on successfully delivering the milestones of our large project in Mozambique, namely, the execution of the field development plan for the production sharing agreement license area.

In North America, our Gemini high-density polyethylene joint venture with Ineos will achieve mechanical completion in early calendar year 2017.

The LCCP, which provides a platform for long-term growth, is approximately 50% complete and ramping up field construction.

Given the strength of our diversified asset base and high-performance culture we are in a strong position to continue to deliver maximum sustainable value to our shareholders.

Last month, in August 2016, we completed a detailed LCCP review and confirmed the total capital quote for the project to be about $11 billion. This includes sufficient contingency to successfully complete the execution. We have confidence that we can deliver the LCCP within this revised budget.

We also confirmed a revised schedule for LCCP.

As a reminder, the first unit linear low-density polyethylene unit, is expected to achieve beneficial operation in the second half of calendar year 2018. This will be followed by the ethane cracker, the ethylene oxide and mono-ethylene glycol units, later that year. The low-density polyethylene unit will then follow in early calendar year 2019, allowing over 80% of total output from LCCP to reach beneficial operation.

While the capital requirement for LCCP has increased, returns are expected to be slightly above the US dollar-weighted cost of capital of 8%. Projected returns over the remaining construction period also remain in excess of our hurdle rate. Based on the detailed review process, management has taken decisive action to ensure that we successfully deliver the LCCP execution and start-up.

These actions include key project management changes, improvement of control base detail and changed management processes overlaying the control base, amongst others. We remain confident that the fundamentals for the LCCP are sound in regards to our strategy and future earnings. This project is an ideal opportunity to build a world-scale chemicals facility that will be placed in the bottom quartile of the cost base. Large quantities of attractively priced feedstock are available and the location provides easy access to domestic and export markets.

Looking at our operational performance for the full year, our Group safety recordable case rate, excluding illnesses, remained solid, at 0.29. Regrettably, we did experience two tragic fatalities in financial year 2016. These were in our Secunda Synfuels operations and Sigma mine in Sasolburg.

During the period we had strong, stable operations across most of the Sasol value chain. Secunda Synfuels operations delivered a record performance with volumes up 1% to an unprecedented 7.8 million tons. We also had record performance from our production facilities in Marl and Brunsbuettel in Germany.

In performance chemicals, our normalized sales were up 1.8%, while base chemicals was down 2.6%. Liquid fuel sales remained flat for the reporting period.

Through focused management action our normalized cash fixed costs in real terms were down 8.1% across the entire value chain.

The execution of our BPEP and response plan is going extremely well. We remain ahead of target for both these interventions.

Over the period, headline earnings per share were down by 17%, to ZAR41.40 per share, despite a 25% decline in the rand oil price per barrel. Subsequently, and as a result, the Company has declared a final dividend of ZAR9.10 per share for financial year 2016.

Turning to our low oil price response plan, you may recall that in March 2016 we confirmed an increase in our cash conservation target range to between ZAR65 billion and ZAR75 billion through to FY 2018. We did this to place the Company in a strong position to operate profitably within a $40 per barrel oil price environment.

For the reporting period, the response plan yielded cash savings of ZAR28.2 billion. This is ZAR12 billion ahead of the target set for in the end of financial year 2016.

Since we initiated the response plan in January 2015 we have delivered ZAR37.1 billion in cash savings through several core levers. These levers are margin and working capital, capital structuring, cash cost savings, and capital portfolio reductions and phasing.

Looking ahead, we will explore additional opportunities to enable us to reach the upper end of the cash conservation target range. These include variable cost and our global external spend. We will continue to ensure the current streams achieve the targeted commitments.

Coupled with the sustainable cost savings from our BPEP, we expect sustainable cash cost savings from our response plan of ZAR2.5 billion for financial-year 2019. This is ZAR1 billion higher than our previous estimates.

As we reduce costs and conserve cash, safety and reliability of our operations will not be compromised.

Our BPEP and response plan are both key enablers in delivering on our strategic aspirations.

If we look specifically at BPEP, we delivered ZAR4.5 billion in sustainable savings, which is ZAR500 million better than our target forecast of ZAR4 billion.

Furthermore, we expect our full-time equivalent sustainable headcount, excluding our growth projects, to remain at approximately 30,000, a 15% decrease from the 2013 base.

One-time restructuring charges for the program to date are ZAR3.4 billion.

With ongoing market volatility and uncertainty, the management team re-evaluated our cost savings target and, to this end, we increased the BPEP target to an exit run rate of ZAR5.4 billion by financial year 2018.

Prior to the LCCP's completion we have several other capital projects at various stages that we are pursuing in line with our near- to medium-term strategy, which takes us to 2020.

As mentioned earlier, our Gemini HDPE joint venture with Ineos in Texas is scheduled for mechanical completion in early calendar year 2017. The complex will produce 470,000 tons annually of high-value, bimodal high density polyethylene.

Closer to home, delivering on the first development plan of the production sharing agreement PSA in Mozambique is crucial to our future. The total estimated project cost for tranche one of phase one of the PSA license area is estimated at $1.4 billion. The project is in its early stages of execution with the drilling rig proceeding with the 13-well drilling program.

During the drilling of the initial well, analysis and floor tests confirmed the presence of gas in the reservoir. This has positive implications for future reserve certification and gas volumes.

The construction of the ZAR2.7 billion natural gas pipeline project is progressing well. This second loop line will increase pipeline capacity from 169 to 191 billion standard cubic feet per annum. Beneficial operation is expected by the end of calendar year 2016.

Phase two of the wax expansion project in South Africa is on track and we have incorporated learnings from the first phase, which has led to improved execution. We expect to achieve beneficial operation in the first quarter of calendar year 2017. The entire project will see Sasol invest a total of ZAR13.6 billion.

The Shondoni colliery achieved beneficial operation in April in 2016, as per our previous guidance. This project, as well as the Impumelelo colliery, which achieved beneficial operation in October 2015, form part of our ZAR14 billion mine replacement program. The program will ensure uninterrupted coal supply to our Secunda Synfuels operation.

Our commitment to Southern Africa remains unequivocal. Our capital spend for FY 2016 totaled approximately ZAR20 billion for ongoing industrial projects. We also remain one of the largest corporate taxpayers in the region, contributing nearly ZAR38 billion to the fiscus.

I will now hand you over to Paul, who has taken over as CFO, to unpack our results in more detail.

Thank you, Steve and Bongani, and good morning and good afternoon to you, ladies and gentlemen. It is a pleasure to present the 2016 financial results to you today. Please allow me to make a couple of introductory remarks.

Our results are well within the earnings range provided in our recent trading statements and ahead of market consensus. Strong overall performances from our global assets set the base for our result, despite what has been a continued highly volatile and uncertain macroeconomic environment. This was largely evidenced in the 25% decrease in rand oil prices for the period under review.

We delivered a stellar cost performance and have also increased our cost and cash savings targets that will enable us to mitigate the challenges of the current macroeconomic environment.

Lastly, we remain confident that under our new leadership, and given the strength of our diversified asset base, we will continue to deliver maximum sustainable value to our shareholders while focusing on volume and margin expansion, effective cost management and, lastly, strategy- and quality-driven capital allocation.

Turning to slide 12, as Bongani mentioned, in 2016 we saw oil prices to drop as low as $27 to the barrel in January 2016 and somewhat recovering to a $48 per barrel environment by June 2016.

Commodity chemical prices also followed the declining trend of global oil prices. We continue to adapt to this tough operating environment and remain focused on delivering on the factors within our control which today's results will highlight.

Oil prices averaged $43 per barrel on concerns of the global oil oversupply as well as lack of clear signals from OPEC in rebalancing the oil market.

Our commodity chemical basket prices measured in dollar terms declined by 22%, relative to a 41% drop in oil prices. The average margins of our specialty chemicals continue to remain quite resilient.

The rand/US dollar exchange rate weakened by 27% due to the negative market sentiment on the South African economy, coupled with continued dollar strength. The weaker rand did provide a buffer against the lower oil and commodity chemical prices.

The Sasol business remains highly sensitive to significant movement in the rand/US dollar exchange rate and oil prices. We estimate that a $0.10 change in the annual average rand/US dollar exchange rate will affect our profit from global operations by approximately ZAR650 million, while a $1 change in the crude oil prices will have an impact of approximately ZAR820 million.

Turning to slide 13, Sasol undertook a large-scale restructuring program in 2012 to reposition the Company and, this, coupled with the response plan, has proved invaluable in making our business more resilient in the current operating environment.

Overall, we delivered a solid operational performance through most of the value chain, with record production volumes being achieved at Secunda Synfuels and from our European assets. We are seeing increased stability in production volumes as a key outcome of capital investments made in the last few years.

Profit from operations, of ZAR24.2 billion, was down 48% largely as a result of the lower Brent crude oil prices and the negative impact of once-off items of ZAR11 billion. This was partially offset by the weaker rand.

Headline earnings per share decreased by 17% to ZAR41.40 per share despite a 25% decline in the rand oil prices per barrel.

A total dividend of ZAR14.80 has been declared, in line with our current dividend cover of 2.2 times to 2.8 times headline earnings per share.

Capital expenditure, dominated by the spend on the LCCP, increased to ZAR70 billion, which is below our market guidance of ZAR74 billion, due to our cash conservation initiatives as well us actively managing the capital portfolio.

Turning to slide 14, I will now be taking you through the items impacting the change in operating profit compared to the previous financial year.

The weaker rand/US dollar exchange rate increased profitability by 51%. This benefit was negated by lower Brent crude oil prices and product prices, which adversely affected profit by 68%.

Profit from operations was further adversely impacted by 32% as a result of the following once-off items and period-end adjustments. These items can be summarized as follows.

First, a further partial impairment of the Canadian shale gas asset totaling ZAR9.9 billion, or CAD880 million; a ZAR370 million cash settled share-based payment expense in the current period compared to a credit of ZAR1.4 billion last year on the back of a 29% decrease on the share price; an increase in the rehabilitation provision of ZAR1.9 billion following a credit adjustment of ZAR1.7 billion in the previous year mainly as a result of implementation of the 2050 strategy. These once-off items were partially negated by the ZAR2.3 billion reversal of the Nigerian tax provision.

Contributions from our cost and cash savings initiatives of ZAR6.1 billion positively impacted on profit. This benefit was partly negated by the higher depreciation charges in respect of new plants and inflation.

Unfortunately, sales volumes were down 2% due to lower volumes in our chemicals business. This was as a result of planned extended shutdowns, subdued demand and, lastly, building inventory in areas focused at improving customer supply.

Turning onto slide 15, we continue to drive our cost and cash containment programs, which underpinned our outstanding cost performance.

Normalized cash fixed costs were down 8.1% in real terms for the financial year. Savings in excess of our targets from our business performance enhancement program and response plan resulted in this reduction in our cash fixed cost base.

Restructuring costs and once-off costs in the prior period resulted in a decreasing cash fixed cost of 1.9%.

On a macro level, the South African producer price inflation increased costs by 5.6%. Although overall we benefited from a weaker rand/dollar exchange rate, the impact of a weaker rand did add 4.6% to the total cash fixed cost base.

Turning to slide 16, focusing on our operating business units. Profit from operations in mining increased by 9% to ZAR4.7 billion mainly as a result of a continued strong and sustainable cost performance as well as stable mining operations delivery.

Meaningful contributions were made from our business performance enhancement program and our response plan. This resulted in normalized unit costs from our mining operations being contained at 5% below inflation for a second consecutive year.

Exploration and production international recorded a loss from operations of ZAR11.7 billion largely due to a ZAR9.9 billion impairment of our Canadian shale gas assets, which I referred to earlier. Excluding the impairment, the business still suffered a loss of ZAR1.1 billion on the back of mostly lower oil prices and gas prices.

Our Mozambican operations recorded an operating profit of ZAR1.1 billion compared to an operating profit of ZAR1.8 billion the prior year. This decrease was mainly as the result of translation losses recorded. However, the successful debottlenecking of the production facility resulted in a 5% increase in production volumes.

The lower oil prices continues to have a significant impact on our assets in Gabon. It is, however, encouraging to note that production was up 15%.

Lastly, with regards to our Canadian assets, we have concluded an agreement with our partner to settle the outstanding funding commitment that will enable better strategic alignment through the low gas price environment. We have, therefore, agreed a revised 18-month drilling program that results in reduced drilling activity until we see a sustainable increase in gas prices.

Moving onto slide 17. The chemical businesses contributed 64% to the Group profit and continue to provide resilience to the overall Group's earnings in a low oil price environment.

The average dollar basket price of commodity chemicals decreased by 22% despite the 41% drop in oil prices.

Average margins for specialty chemicals remained resilient despite global market volatility.

Performance chemicals continues to deliver strong results, underpinned by resilient average gross margins. On a normalized basis, profit from operations increased by 5%. This robust performance is largely as a result of the weaker rand, coupled with strong margins in our surfactant and alcohol businesses. Our US value chain has been negatively impacted by lower US ethylene prices.

Record production volumes at our Brunsbuettel and Marl facilities resulted in our Eurasian operations reporting an exceptional performance, with a 4% improvement in production volumes.

Our US production volumes remained flat, mainly as the result of an extended planned shutdown.

Profit from operations in our base chemicals decreased by 56% to ZAR4.5 billion largely due to a 22% decrease in the average chemical basket prices as well as lower sales volumes.

Normalized sales volumes were 2.6% down as a result of an extended planned shutdown to enable the commission activities related to the C3 expansion project. Volumes were also down due to softer demand for the explosives and fertilizer businesses as well as planned stock build to improve stability of customer supplies.

Cash fixed costs were 1.5% down in nominal terms mainly through the benefit of our cash and cost savings initiatives.

Moving to slide 18. Underpinned by record production and solid cost performance our energy business delivered a fair set of results relative to the current macroeconomic environment.

Secunda Synfuels and Natref increased liquid fuels production by 1%.

The South African energy portfolio benefited from the weaker rand/dollar exchange rate. However, the impact of the 41% lower oil prices negated these gains.

Operating margins held firm at 22% as a result of record production and higher liquid fuels sales margins by constantly targeting higher-yielding marketing channels.

Liquid fuels sales volumes remained flat year on year, on the back of challenging market and trading conditions experienced in the first half of the financial year.

I'm extremely proud to announce that as a result of the attractive returns generated by Sasol Oil Pty Limited over many years, our BEE partner, Tshwarisano, settled the remaining portion of their outstanding debt in February 2016. This milestone is just one of our key objectives as we deliver on our transformation commitments.

Gas sales were 1% higher mainly due to higher methane-rich gas sales to our commercial customers.

Our ORYX GTL joint venture contributed ZAR462 million to the energy business. The plant achieved an annual average utilization rate of 81% due to the guided planned shutdown.

The volume decrease, coupled with the significant drop in oil prices, resulted in our share of the profit from the joint venture decreasing by 75% compared to the prior year.

In Nigeria, our EGTL plant is still in its ramp-up phase towards design capacity and stable operations.

Turning to slide 19, our 2016 capital expenditure decreased by ZAR4 billion compared to our previous guidance due to our cash conservation initiatives and us actively managing our capital portfolio. The capital expenditure of the LCCP amounted to ZAR42 billion, or $2.9 billion, for financial year 2016. Our 2017 capital estimate has increased by ZAR2 billion, to ZAR75 billion, and our 2018 forecast now stands at ZAR60 billion as a result of the increased LCCP capital expenditure and the impact of the weaker rand.

We estimate that the capital expenditure for the LCCP to be approximately $3.4 billion for financial year 2017 and $2.2 billion for financial year 2018.

We have based our forecast on a ZAR15 to the dollar exchange rate. Any further exchange rate volatility will affect this forecast, as the bulk of the expenditure over the next few years is dollar based, relating to the LCCP and the PSA development in Mozambique.

While we continue with the execution of these projects, our other projects such as FTWEP phase two, and our HDPE joint venture investment with Ineos in US, only to name a few, are currently underway or nearing the end of construction. This will provide us with incremental volume and margin improvement to enable sustained earnings growth in real terms over the next couple of years prior to the LCCP reaching beneficial operations.

Moving onto slide 20. Our balance sheet will become increasingly geared as we continue to execute the LCCP, the Mozambican PSA and other projects in our portfolio. However, through the continued contribution of our response plan, the business performance enhancement program, as well as the sustained performance of our diversified global assets, we do foresee that this will enable us to effectively manage the balance sheet going forward.

Our current net debt to equity, which increased to 14.6%, is well below our 20% to 30% range, which provides us with some headroom compared to what we've originally estimated. We remain confident that we will not exceed our self-imposed gearing ceiling of 44% and manage the net debt to EBITDA to below 2 times. This remains well below any covenant triggers currently sitting at 2.5 times.

We've also secured sufficient facilities and funding to provide us with the necessary liquidity to continue executing our growth strategy despite the very challenging macroeconomic environment in which we operate.

Our current credit ratings remains a critical focus area for us and we will strive to remain them at above the current investment grade levels.

We remain confident that the interventions already in place will ensure that we'll navigate a volatile and constrained macroeconomic environment in a safe manner, while continuing to deliver value to our shareholders, aligned with our current dividend policy.

Moving onto slide 21. Even though we anticipate continued oil price and exchange rate volatility, we expect an overall strong operational performance to continue for the 2017 financial year. We project South African liquid fuels sales volumes to be approximately 61 million barrels with ORYX GTL's utilization rate averaging approximately 90%.

Base and performance chemicals sales volumes and margins are expected to be higher than the prior year. We expect cash and cost savings contributions from our low oil response plan to deliver towards the upper end of the ZAR15 billion to ZAR20 billion range.

Sustainable cost savings from our business performance enhancement program and response plan will continue to drive normalized cash fixed costs to remain in line with inflation.

We expect our balance sheet to reach gearing levels of between 25% and 35% and the net debt to EBITDA to be between 0.8 times and 1.5 times.

In closing, we are well positioned to continue to delivering strong operational performance despite the volatile macroeconomic environment. We will continue to focus on the factors within our control as we gear up the balance sheet and execute our growth plans in pursuit of delivering maximum sustainable value to our shareholders.

And on that note I will hand back to Steve and Bongani.

Thank you, Paul. We will move to slide 23. As we transition to the future our focus is to ensure that we deliver maximum value to our shareholders. This will be achieved by delivering on a number of key factors.

We will continue our diligent efforts to realize our zero harm aspirations. In the near term, our safety focus will be on critical controls associated with key undesirable events, leadership engagement and increased risk awareness across the organization.

Delivering on our BPEP and response plan targets for FY 2017 is imperative. The excellent progress we have made to date clearly establishes a path to achieve the increased targets for both cost savings and cash conservation going forward.

Furthermore, as a major employer in South Africa and internationally, we must ensure ongoing engagement with our stakeholders to manage issues that are mutually important. This requires that we fulfill our commitment to build trust and credibility in Sasol.

Delivering on our major projects is, without doubt, non-negotiable. Our steadfast focus will be on sound project execution and delivering on our schedule and cost commitments for LCCP in Mozambique as well as other projects.

Operational and capital discipline are business imperatives that are crucial to how we run the organization. Maintaining operational discipline is key to sustaining predictable, reliable and efficient operations, while capital discipline will ensure we effectively allocate capital and keep costs in check.

At Sasol, our people are what makes us a great organization and ultimately drive our success. In recent years we have been through profound and all-encompassing change. Bongani and I are committed to building a future organization which is both diverse and inclusive. We will also continue to build on the capability of our leadership while ensuring that we have the necessary critical skills to drive our performance.

Given the strength of our diversified asset base and high performance culture we will continue to deliver maximum sustainable value to our shareholders despite the uncertain global markets and volatile macroeconomic environment.

Moving to slide 25. We have included in our results presentation a few recent visuals from our LCCP mega-project under construction in the US. We believe these will give you a very good sense of the scale of activity that is currently under way.

That concludes the formal presentation for today. We will now open up the floor for any questions you may have. I will co-ordinate the Q&A sessions between Bongani, Paul, myself, along with our various GEC colleagues as needed.

Operator, I'll turn it over to you.

Thank you. (Operator Instructions). And we'll take our first question from Jarrett Geldenhuys with Investec.

Hi, Jarrett.

Hello everyone. Thanks. Hi guys. Thanks very much for the questions. I just want to just unpack that gearing band, that 44% of yours, to the end of FY 2018. Is that the year which you now envisage your peak gearing level, so we shouldn't really be worrying too much about FY 2019 and onwards? I see that CapEx is obviously down ZAR10 billion in FY 2018 as well, so maybe that's just the way the read that.

And then the second question is regarding your base chemical volumes. If I do some adjustments it looks like the impact of the C3 stabilization implementation is about 5%. So it's that too simplistic to push maybe a bit of higher volumes through that unit into next year?

And then just a last question is just on the tax rates. Just for my modeling purposes going forward, is 28% to 29% something where you're comfortable guiding tax rates, all else equal? Thank you.

Thank you, Jarrett. I'll take the first one. Then I'll ask if, Paul, you can take the second one and the third one on the tax rate.

The short answer is, yes, we do see that FY 2018 will be the maximum gearing period. This is because, of course, we are continuing to expend heavily on the LCCP and the revenue stream will actually start flowing in very early calendar year 2019 or at the beginning -- seeing the beginning of it into our fiscal year 2019. So the revenue flow will start to show up more in FY 2019 and we'll start to see the gearing rate drop down.

I think it's key to realize the size of the cash that will be coming from LCCP once we bring it online. I think we've set out in our fact sheet that we expect between $1.4 billion and $1.5 billion in terms of cash coming from the project once we're up and running. So short answer is, yes, FY 2018 is the tightest period.

Jarrett, good afternoon. In terms of the BC volumes, the CT -- our CT expansion project did have a significant impact on volumes. However, if I can unpack it a little bit different for you, the volumes were down round about 260,000 tons for the year on a year-on-year basis. I think simply the fact that the market was soft and also the fact that the plants and specifically in that environment did deliver according to plan and overall it should reach around about 70,000 kilotons of the 260,000 to that sector.

We've also broke inventory, as I've mentioned, to ensure that we see a more continuous supply to our customers and don't run out of stock and that had an impact of around about 91,000 kilotons of the 260,000.

Then you will also notice we've also made reference that we had convention changes compared to last year versus this year. S we've stopped certain practices of not trading in certain volumes, specifically in fertilizers, and hence that will, on the sales volumes, reduce our volumes by 80 kilotons per annum.

Those volumes are really not margin accretive and, on the contrary, actually, it benefits the gross margin and operating profit line of base chemicals.

So, obviously to summarize then, the 260,000 is really 70,000 in terms of market factors, inventory stock of 91,000 and also convention changes around about 80.

If I move to your next question in terms of tax rate, we have messaged to the market that a normalized effective tax rate for us, the vicinity of 28% to 30% will be a good one. We have actively managed to do positive actions in reducing that rate. What will impact that rate will obviously be relational items which it's very difficult to say now will they be or will they not be. But excluding for that, a 28% to 30% range will be a good one.

What positively impacts the reduction in the rate is due to the fact of section 12 and we are claiming more energy benefits -- energy efficiency benefits as a result of us operating our plants more effectively and efficiently, and also due to the fact that we've made the field development plan announcement and that we've shared with you before. So now we can actually bring those exploration expenditures onto the books to actually claim against future income. And that also had an impact on the effective tax rate this year. But the range of 28% to 30% will be a good range.

Thanks very much.

The next question is from Gerhard Engelbrecht with Macquarie Securities.

Good afternoon. Thank you. I also have a couple of questions. You announced these additional cost savings as part of the business enhancement program and response plans. I wonder if you could elaborate a little bit more on that, especially in the light that you're saying that your headcount is going to remain stable. So where do these cost savings come from?

Secondly, I just looked at some older notes and the presentations you made around the LCCP earlier, and you always spoke about a mixture of lump sum and reimbursable contracts. More recently you said most contracts, or almost all contracts are reimbursable. Am I ready this right? Have there been changes in the way contracts have been set up?

And then lastly, Maurice, in his capacity as a peer chairman, recently said that refineries in South Africa faces -- face an existential crisis. How do you see the refining industry and your own competitive position in your Natref holding given this potential crisis?

Alright, thanks. I'm going to ask Bongani to take the first one on the cost savings and response plan. I'll take the second one and we're going to think about the third one and we'll respond.

Okay, thank you. If I can deal with the cost savings, first of all, let me start with the business performance enhancement program where we have delivered 4.5 billion compared to the initial target of 4 billion and then we'll increase the run rate of that to 5.4 billion. The important thing is that these are sustainable savings which I indicated. In particular, employees were supposed to exit the company exited largely by voluntary retirement or exit, so that has happened. We are well in the range of the implementation cost, so we have got the net benefit.

In addition, we further vacancies, which we continue to monitor. From time to time these are relaxed because we have actually empowered the senior vice presidents who ran the operations to stay instead of him being micro-managed by the GEC we will give you a budget, but do what is optimal for your operation. So those will be the savings in terms of the business performance enhancement program.

On the response plan, previously we saw ZAR1.5 billion of costs which were coming from across the board in savings. Our estimate is that now that will be ZAR2.5 billion. So in total then, come FY 2019, the total cost of the base will be ZAR7.9 billion, but we are not stopping there.

As you have heard in the announcement, we are looking at more initiatives on logistics management and supply chain and variable through cost in our global spend to make sure that we are as optimal as possible with one continuous proviso; safety and sustainability of our operations is not being compromised. So that's where we are in terms of cost savings.

In terms of the LCCP, they are -- the contracting strategy hasn't changed. It is a combination of lump sum and reimbursable. Most of the lump sum contracts had to do with the engineering, procurement, module fabrication of certain of the derivative units, and those have been let and a large percentage of the work for that is well underway.

What stands ahead of us primarily is the construction at site in Lake Charles and almost all of the construction activities in site -- at site are on a reimbursable basis. So looking ahead, what we have in front of us is primarily reimbursable. Not to say we don't have any lump sum contracts, but in terms of the activities going forward those are almost entirely reimbursable.

Bongani, can you take the last question, please?

So if I could deal with the question of refineries, if I may start by saying our refineries in South Africa by modern day standards are actually subscale. So in terms of what needs to be done, the stakes -- almost an agreement as to what the stakes should be so there is not too much issue on stakes, although it's not finalized.

The big issue really is how this is funded, because the treasury had issued a proposal of accelerated depreciation, but when we did our analysis, it has removed the middle in terms of viability.

Therefore, we are continuously engaged in talks with the Department of Energy and the National Treasury because our concern is those continued impacts about when this will be done and how it will be funded, we will go the route of what has happened to the textile industry in South Africa and the same route as what has happened to the steel industry in South Africa, so that it is overtaken by imports. You already have seen any indications of that happening, of import terminals being built, and the increasing appetite in South Africa of -- by traders in our sectors.

So that combination of increased attention by the traders and indecision there is a high risk of the industry going downhill, but we are not despondent about it. We continue to do what we need to do as a company and invest with the stakeholders and so, hopefully, sooner rather than later we'll get clarity on the way forward.

Thank you very much. That's great.

And we'll go next to Alex Comer with JPMorgan.

Hello. I've got a few questions. Just to pick up on this cost saving target and labor, you've -- you haven't really changed the target on an amount of employees since you put in the initial business performance excellence program and yet the oil price is less than half what it was. So as far as I can see there's been no change in the amount of employees you need despite the fall in oil price. I just wonder whether you think you could go further there.

Also historically you've given us the number of man hours at Sasol and, specifically, the number of service man hours that you've booked. I wonder if you could let us know the numbers for this year for that please.

And then also on the CapEx could you just -- is there any CapEx expectation for clean fuels in your CapEx numbers in 2018 and 2019? And also perhaps you could let us know what the expectation is in terms of CapEx spend for Mozambique in 2018 and 2019. Thanks. Those are my questions.

Thank you, Alex. Alex, in terms of the cost savings target, we don't foresee -- I think I -- if I understand your question correctly, we don't foresee any significant additional restructuring in terms of the organization. And that's not to say we won't look for areas of opportunity to become more efficient, but I think your question was along the lines would we have further Phoenix-type actions in FY 2017, FY 2018, and we don't foresee those.

In terms of the man hours at Sasol for service employees, we don't have that with us in the room, but we will get that to you and provide that to you tomorrow.

The CapEx numbers in terms of clean fuels for 2018 and 2019, do you have that?

Yes. Alex, so basically our (inaudible) from a clean fuels perspective give you a grouping answer. You will see that on our disclosures in terms of significant capital projects, on environment projects we group our financial and fixed businesses now with our BOC project, CT8 and clean fuels. And by the CT, the combined expenditure in financial years 2017 and 2018 on those projects all together is ZAR2.3 billion for financial year 2017 and ZAR3 billion for financial year 2018. We are not disclosing any numbers now for financial year 2019, but the clean fuels' contribution in that number is less than significant. We did expect clean fuels' capital cost to be higher in the start of the second decade, so not a lot of capital expenditure have been allocated for that project at this stage.

Mozambique, the PSA development for financial year 2018, ZAR1.5 billion, and also for financial year 2018, ZAR3 billion, as we've messaged. We use a ZAR15 to the dollar exchange rate for both years. We haven't disclosed financial year 2019 numbers for the PSA, but you can expect in financial year 2019 that there will be a significant uptick in the capital expenditure compared to what you have seen for financial year 2018.

So a little -- much more compared to what the ZAR3 billion indicated in 2018 mainly as a result of the wells and the activity really picking up towards the financial year 2019.

Okay. Can I just confirm, so it's ZAR1.5 billion for Mozambique in 2017 and ZAR3 billion in 2018, yes?

Yes, it is.

And just if I might ask one more question. You said you'd settled the funding requirement in Canada. Have you made a prepayment on the CapEx there, or is that you've just agreed to substantially curtail the drilling?

(Multiple speakers) if I can just answer that question. So the capital commitment that we have settled on the MPV basis is round about CAD380 million. Now, that's basically -- it has two components. We've had an upfront payment of CAD305 million and a delayed payment that's due in financial year 2018 of CAD75 million. We have paid the upfront payment already, so that is already made, and the delayed payment will now only be made the next financial year.

On an MPV basis, in terms of the CAD380 million, it's contained at a much lower MPV value compared to the original capital commitment in terms of the carrying. I think we have previously disclosed our gross capital commitment in terms of the carrying and we can then see in terms of how much we will effectively reduce that capital commitment by paying it up front. So that has been settled, bar the CAD75 million.

Thank you, Alex.

Okay, thank you.

And we'll go next to Johann Steyn with Citigroup.

Hi guys and thanks for taking my call. And well done on a solid operational delivery this year. Guys, just quickly, most of the questions have been answered, just with regards to the business response plan. If we look back, the ZAR37 billion that you've achieved up until now, and the about ZAR20 billion that you're still targeting in the next year, if you can just put a -- you've given us the breakdown of where it came from, but not the numbers behind that. For instance, working capital, capital structure, capital phasing and all these. Can you just give an indication of what value we can attach to each of those categories please?

Yes. Johann, I think we can give you some indication. Paul, if you'd like to walk him through that.

Yes, Johann, so basically there's a couple of key components. The largest contribution will come from the cash cost stream and also from the capital portfolio, so if I can run through them quickly.

Gross margin will contribute round about ZAR2.5 billion and that will be mostly brought about through our energy efficiency as well as variable cost efficiency which Bongani talked to. Obviously that's in fact the full benefit if you account in terms of the variable cost efficiency that we are driving.

On the cash mix cost side it's really a myriad of lots of vacancies of different structuring initiatives we've taken, also how we've pulled back on the external [sting] and traveling expense, so it's a whole basket of costs. But effectively, the contribution there is between ZAR9 billion and ZAR11 billion.

Working capital is round about another ZAR1 billion.

In terms of our capital portfolio, it's around about between ZAR11 billion and ZAR14 billion. The reason why I give you a margin range there is really predominantly because we schedule our capital portfolio and we can share more in the one-on-one tomorrow with you in terms of the project specific items.

Then on the capital structuring side we are also changing our employee long-term scheme. That's also subject to the approval of the AGM from a cash-settled scheme to an equity-settled scheme and that in itself allows you to actually have less provisions on your balance sheet and also remove a lot of volatility on your earnings as a result of it being more equity settled. And that also contributes roughly ZAR4 billion in terms of the total ZAR28 billion. Hopefully that gives you a sense of what the items are that contributes towards the ZAR28 billion.

And that will be the forward-looking one for FY 2017?

Of course, yes.

Or would that -- sorry, would that be for FY 2016? The total so far is for ZAR37 billion. For FY 2016 it was ZAR28 billion. If we look forward to FY 2017, would it be in the same split roughly?

Johann, it will be roughly the same split the ZAR28 million, understand correctly. It focuses on the current year.

In terms of financial year 2018, it will predominantly be focused on the capital structuring, on the cash cost side, the working capital, and then to a lesser extent the capital portfolio and gross margin stream.

Thank you.

And we'll go next to Adrian Hammond with Standard Bank.

Afternoon, gentlemen. Yes, a couple of questions, if I may. Just a follow on, on [Mont May]. Why did you decide to pay up front particularly in a low gas environment? Understand it's a lower MPV, but why pay that money now?

And then, secondly, on the energy division equity, entry of negative ZAR19 million, how does that get attributed to -- between ORYX and [Scrollz]? That's it for now, thanks.

Adrian, I'll take the first one. I'll ask Paul to handle the second one.

The main reason that we wanted to make the upfront payment, the previous structure basically incented our partner, who was the operator, to go as fast as possible on development, because the carry basically was paid as a percent of the development. So even in a low natural gas pricing environment they had incentive to increase development and increase the spend in this period.

So by getting the carry out of the way we're now completely aligned with our partner and we've actually reduced from a four rig operation in FY 2016 to down to one rig. And, in fact, right now we don't have any rig active and we're just doing completion of some of the previous wells. So the whole idea was to go at a very prudent pace while the prices are low and then be in a position to accelerate as the prices start to recover.

Paul.

Right. With regards to your question on the contribution of EGTL on ORYX, I can refer you to the analyst book under the energy section. You will see in the notes we do make reference there in terms of the EGTL contribution. So the losses at EGTL for the past financial year announced at ZAR571 million and then it brings the earnings impact of ORYX to ZAR552 million.

Great. Thanks. And then just interestingly, note your increase in reserves in Mozambique from 1.1 million barrels to 2.1 million barrels. As I understand, that's mostly oil. Is that correct? Not condensate? And is that just the beginning, or could you give us some indication of where you expect reserves could be? Thanks.

Adrian, we're just -- we're going to have to follow up with you later on that question if you don't mind.

Sure. Thank you.

Thank you. Operator, I think we may have time for one more.

And the next question is from Chris Nicholson with RMB Morgan Stanley.

Good afternoon, gentlemen. Hi guys. In the past couple of years you've given us some outlook for the two sets of chemical businesses in terms of what to expect from a margin perspective. I see you haven't given us anything in that respect this year. If you could provide some info that would be helpful, if not, just what you're currently seeing in the market. Thanks.

Sure. Bongani, would you like to take that one?

Okay, thanks. We actually had that discussion internally. The reason for that is that it's early in the year and there is uncertainty as to what's the price and market movement. But we expect continued pressure in terms of base chemical accounts with more resilience in performance chemicals. We'll however update you more at half year, as we did last year, because we'll be seeing a clearer picture of what has happened and what might happen.

Yes, thanks, Bongani. Some more of the same I think. Thanks.

Thank you, Chris. Thank you all for joining us. We really appreciate it. We look forward to engaging with you in the coming days and weeks as we go on the roadshow. Operator, I think that ends our session.

This concludes today's call. Thank you for your participation. You may now disconnect.