Sasol Ltd (SSL) 2018 Q2 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Sasol 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 presentation, an interactive Q&A session will take place (Operator Instructions)

I would now like to hand the call over to Mr. Stephen Cornell. Please go ahead, sir.

Thank you, Cathy. Good day, everyone. This is Steve Cornell speaking. Thank you for joining us on the call, during which Bongani, Paul and I will discuss Sasol's 2018 interim results. We have published a slide presentation of our results, which you can download from the Investor Centre on the Sasol website. In the interest of time, we want to strictly follow this presentation through the call as we like to make for more time available for questions. Before we begin, I'd like to refer you to the safe harbor note on the forward-looking statements contained on Slide 2 of the presentation.

This is our first results announcement since we have shared our foreign corporate strategy, which sets on a clear path to deliver sustainable growth and accelerated shareholder returns. As confirmed in November last year during our Capital Market Day, our short-term focus between now and 2022 is to enhance our robust foundation businesses. Well, this entails delivering the Lake Charles Chemical Project and the Production Sharing Agreement in Mozambique. In addition, we will maximize value from our existing portfolio of diversified assets through robust asset reviews, continuous improvement and digitalization initiatives, which will ultimately enhance our competitiveness, reduce our cost base and improve our return on invested capital. Our results for the first 6 months of financial year 2018 reflect a largely strong performance, and continuing progress in delivering on these strategic priorities.

At that, over to you Bongani.

Thank you for that introduction, Steve, and good day to you all. What you'll hear from us is the following -- I'm now on Slide 4 of the presentation. Our sustained focus on cost, cash and capital conservation drove a largely strong set of results within the context of a volatile but broadly growing global economy. Our result reflects both a continuation of prudent cost and capital management for the period as well as the impact of several growth projects requiring additional resources for certain and continuous operation. We are making steady progress in delivering the LCCP with our focus fully on commissioning, operations and business readiness. In addition, other projects, such as our Gemini joint venture high-density polyethylene plant in the U.S. and the 17th oxygen train in Secunda have now reached beneficial operations. In line with our intent to deliver sustainable returns earlier to our shareholders by increasing dividend payouts, we are changing our dividend policy to a more consistent core headline earnings per share base. Paul will elaborate on this later.

We continue to actively manage our balance sheet, enhanced through a proactive hedging program. This hedging program has been quite successful in mitigating global volatility impact for Sasol, and we have hopes to remain active in this space for the year 2018. We have also improved our overall funding position.

Here at home, our commitment to Southern Africa remains strong and active. We are and we continue to ensure that our stakeholders derive benefits from our presence, and that we are regarded as a trusted partner. For this reason, we maintain a robustness, sustainability and heightened-investment forecast in the region.

To conclude what Steve and I will share on the call today, I will elaborate on the reasons why Sasol remains a compelling investment proposition, underpinned by our focused strategy and disciplined capital allocation framework. Paul will, of course, go into more detail on our financial and operational performance for the reporting period. After that, we will open the session for any questions you might have.

If you'll turn now to Slide 6, we'll speak about the Lake Charles Chemical Project, LCCP. As we said before, LCCP is a game changer for Sasol. Once commissioned, this world-scale petrochemicals complex will triple our chemicals production capacity in the U.S., enabling Sasol to further strengthen our position in a growing global chemicals markets. It will also add up to 20% to EBITDA or USD 1.3 billion by financial year 2022.

As of 31 December, 2017, the project is 81% complete, with construction execution around 54%. Capital expenditure is currently at USD 8.8 billion of the USD 11.13 billion project cost. We're very pleased to see an improvement in productivity post Hurricane Harvey. We will continue to closely monitor the productivity rates as we approach beneficial operation for the first units in the second half of calendar year 2018.

The tax reform in the U.S. has positively impacted on the returns of the project. We expect, based on our current interpretation of the reform, that it will contribute around 0.5% to the returns or equivalent increase of USD 500 million in net present value of this investment. Based on our internal assessment, we're of the view that the long-term internal rate of return is in a range between 7.5% to 8.5% based on conservative ethane prices. We will be reviewing these assumptions in the current months in light of the accelerated shale oil development in the Permian Basin of North America. At spot prices, using the last quarter of calendar year 2017 as a reference, the IRR is between 9% and 9.5%. These updated numbers include the benefits from the tax reform and lower spot ethane prices.

Our focus for LCCP remains commissioning operations and business readiness. And to this end, the progressive startup of utilities is already ongoing and gaining momentum. We continue to engage with prospective customers, and around 90% of our specialty chemicals products will be placed with existing customers. We're also very happy to confirm that our first sales from the Gemini High Density Polyethylene joint venture have been completed.

Moving on to Slide #7 of the presentation. Within the 2018, '22 time frame, we are driving a focused strategy to ensure we actively mitigate our financial risks and maintain a prudent approach to protect and strengthen our balance sheet. This will ensure we maintain our investment-grade credit rating. As confirmed in November last year, we will step up the shareholder dividend payout to 40% or 2.5x cover by 2022. As mentioned earlier, this payment will now be based on core HEPS.

During this time frame, we will also undertake incremental investment in our existing assets, adopting a balanced approach of growth and returning value to shareholders. We have entered into various hedging contracts to protect the company against volatility in commodity prices, currencies and interest rate changes. This will continue beyond our peak gearing period.

Within our existing business, we are looking to drive further value to get us through our continuous improvement program. Notwithstanding our past success, we see more opportunity, supported by our assets reviews and digitalization efforts, to provide even higher earnings and returns from these facilities. A relentless focus to capture these opportunities can be expected.

We will also actively and continuously manage our portfolio of assets. We will fix or return what assets that will increase our returns, while exiting those that are not in line with our strategy or have lower-than-desired returns. Here, we are targeting more than USD 1 billion in divestment opportunities, which we view with additional liquidity benefits. Our actions will result in a deleveraged balance sheet, targeting a 30% gearing and net debt-to-EBITDA ratio of 1.5 to 2x.

Furthermore, unwinding the Inzalo transaction will be structured to ensure that our credit ratings are maintained at investment grade, while ensuring the least amount of dilution to our shareholders. These deliberate, proactive and focused actions, in addition to lower capital spend, will ensure we are free cash flow positive in financial year 2019.

I will now cover Slides 8 and 9 together. Today, Sasol is a global company. But in so far as South Africa is concerned, we remain proud of our home market, and our commitment to the country has never wavered. We are particularly encouraged by recent developments in South Africa that signal a more stable political and investor-friendly outlook, and work in this business environment will create even greater opportunities for Sasol to be a force for good.

We're firmly committed to sustainable transformation and broad-based economic empowerment efforts. In our recent verification, Sasol achieved a Level 6 contributor status, representing a key milestone in our journey of achieving at least a Level 4 contributor status by 2020. Our shareholders approved the Sasol Khanyisa BBBEE transaction on 17 November of 2017, which marks a significant milestone in achieving our BBBEE ownership credentials.

On capital projects, we recently inaugurated our completed FT Wax Expansion Project. And in March, we will inaugurate the world's largest oxygen production unit built by Air Liquide in Secunda. Over the past 3 years, our capital investments have totaled over ZAR 20 billion in South Africa. And for this reporting period, we have invested ZAR 8.7 billion in our home market.

In Mozambique, since 2004, at the time of the initial investment made by Sasol and our partners, over USD 3 billion has been invested in developing the country's hydrocarbon industry. This investment has contributed over USD 1 billion to the government of Mozambique. On the PSA field development plan, we have successfully drilled and tested 9 wells relating to the first phase of this license area. We anticipate oil production to be between the mid- to lower end of the range presented in the field development plan. The gas wells have confirmed there's sufficient gas to cover all of our initial downstream opportunities. Sasol is actively working to ensure greater alignment and mutual benefit with the government of Mozambique and its people. Our ongoing investment in Mozambique confirms a steadfast commitment to the country, entrenching Sasol as a trusted partner.

Now moving on to Slide 10. We strongly believe that Sasol remains a compelling investment proposition. Our overarching objective is to deliver superior value to our shareholders. Our investment case is rooted in our identity as a chemicals and energy company, a focus on value-based growth and increasing shareholder returns by leveraging our competitive strength. Investing in Sasol provides exposure to our robust portfolio, comprising feedstock-advantaged operations combined with our human talent and unique technologies. We expect a further catalyst to be the upcoming free cash flow inflection point, post commissioning of the LCCP. Combined with our refined strategy and the refocused approach to capital allocation, we have targeted EBIT growth of at least 5% in U.S. dollar terms, and the expected long-term ROIC of more than 12% in U.S. dollar terms through this cycle. We aim to achieve this target against a backdrop of capital expenditure on sustenance of USD 1.5 billion per annum; an optimal capital structure with a long-term gearing target of 30%; increased dividend returns, stepping up from the current 2.8x cover to 2.5 by 2022 and moving to 2.2 on a sustainable basis thereafter; and continued investment in growth opportunities via industrial expansion as well as M&A opportunities.

One of the priorities in refining our corporate strategy was to map the best way forward for Sasol as a compelling investment. We are confident that we are well underway on this journey.

Paul will now take you through the detail of our financial and operational performance. Then we'll open up the session for questions with Steve and I. Thank you.

Thank you, Steve, and good morning and good afternoon, ladies and gentlemen. It's my pleasure to highlight some of the details of our 2018 interim financial results to you today. Our results are at the upper end of the earnings range provided for in our recent trading statement.

If you turn now to Slide 14. I'm very pleased to note that our core headline earnings per share, which is regarded and presumed adjusted for once-off items as well as the impact of period-end currency and derivative revaluations, amounted to 18.22%, which is 5% higher compared to the comparative period, and it which really reflects the sustainability of our business. The operating profit of ZAR 11.8 billion is 14% down, as the benefits of the higher dollar-based oil and chemical prices were, in part, offset by the stronger rand/dollar exchange rate and also as a result of the impact of the new remeasurement items and once-off items, which I will highlight to you on the following slide.

Our strategic focus to diversify earnings by product slate and by geography is also gaining momentum. The earnings profile will now be further diversified once the LCCP comes online in the following 2 years. And the product slate will be moved much more to chemical, with the contribution of U.S. being amplified in earnings contribution. Headline earnings per share increased by 17% to ZAR 17,67, while earnings per share increase by 21% to ZAR 11,29.

Following shareholders' request, and also after careful consideration and approved by the Sasol board, the core headline earnings per share will in future form the basis on which we will determine our dividend payout ratio, but still within the payout corridor of 2.2x to 2.8x now core headline earnings per share. We do believe that this approach will shield investors from the impact of period-end currency valuation as well as once-off items, such as the IFRS 2 charge of Sasol Khanyisa. Accordingly, an interim dividend of ZAR 5 per share has been declared in line with the company's cover-based dividend policy.

Capital expenditure, dominated by the spend on the LCCP amounted to ZAR 27.7 billion for the period. It was, however, lower than our internal forecast, mainly as the result of the impact of the stronger rand also playing out in the capital forecast as well as optimizing the spend on the LCCP, but very important to note, without compromising the schedule of the project.

I will now move on to operating profit. I'll take you through the items that impacted the move in operated profit, as highlighted on Slide 15. The stronger average and closing rand/dollar exchange rate led to a 11% deduction on operating profit. On the positive side, the higher dollar-based crude oil, fuel and chemical product prices positively impacted operating profit by 36%. Operating profit, however, was mostly negatively impacted by the following significant once-off and remeasurement items. We'll be focusing on the negative entries first: a partial impairment on our Canadian shale gas assets amounting to ZAR 2.8 billion, or CAD 281 million, really on the back of lower-for-longer U.S. gas prices. And in addition to that, the scrapping of our U.S. GTL fee cost assets amounting to ZAR 1.1 billion, with USD 82 million following the strategic decision, which we communicated at the Capital Markets Day, to no further invest in greenfield's global GTL ventures.

These negative variances were partly negated by a ZAR 600 million positive net impact as a result of the mark-to-market valuation of our hedging positions as well as the impact of the mining strike cost in the prior period amounting to ZAR 1 billion. And because of (inaudible) incurred in the first half of 2018, (inaudible) to that positive impact.

Operating profits were now also negatively impacted by growth and base cost, which I will highlight and unpack on the following slides. Finally, it's also very encouraging to note the increase in sales volumes and margins, which increased operating profit by 2%.

Turning now our focus to Slide 16. We still hold the view that we very much have an entrenched and embedded strong cost culture in Sasol. We're continuously looking for areas to sustainably drive our cost as we strive to improve also our return on invested capital. During the half year, cash fixed cost escalated in absolute and nominal terms by 10.7% or 6% in real terms. On a normalized basis, cash fixed cost, excluding growth costs and once-off charges, increased by 2% in real terms. In order to better understand these movements, I will now be taking you through the most significant items impacting the real cost increase of our cash fixed cost.

Firstly, our LCCP and HDPE Gemini facilities as well as the new capital projects, such as the 17th oxygen plant, added 1.5% in additional growth cost in the form of cash fixed cost compared to the prior period. Whilst this represented increase in cash fixed cost, the net positive benefit in terms of higher earnings and cash flows are and will in the future be reflected in our results.

Second to this, once-off costs also contributed 2.5% to the cash fixed cost increase and is really -- is mainly related to 3 items: first, the power purchase agreement with Eskom, which reached its end in April 2017 and wasn't renewed by Eskom, and was -- that improved the benefit that we gained in the previous year; the pre-investment cost associated with our digitalization journey as well as transaction costs associated with our Khanyisa black empowerment transaction. These 3 increases were partly offset by the prior year's mine strike cost.

Thirdly, production interruptions at some of our operations resulted in a 2.3% real cost increase in the form of variable labor cost as well as maintenance cost. If you look at our labor headcount analysis in the analyst book, and we normalize that for growth, you will see that our labor headcount pretty much stayed flat, and in some parts, actually reduced compared to the comparable period. On a macroeconomic level, the South African producer price inflation increased our cost by 4.7%. And the impact of the rand/dollar exchange rate had a positive impact on our overall cash fixed cost by 0.3%.

Despite the higher midyear cost increases, we do, however, remain very confident that our nominal cash fixed cost increases for financial '18 will still track our forecast inflation assumption of 6%, and that normalized cash fixed cost in real terms will remain flat for financial year '18 compared to financial year '17.

Moving on to the capital expenditure slide on Slide 20. Our capital expenditure amounted to ZAR 27.7 billion, and this includes the accrual -- so it's not our cash flow number. It's accrual number. This includes ZAR 16.7 billion or USD 1.2 billion relating to the LCCP. We've also adjusted our 2018 capital forecast downwards to ZAR 54 billion. We now estimate the capital expenditure on the LCCP to be approximately ZAR 2.4 billion for financial '18 and ZAR 1.1 billion for financial '19. All this -- although this represents a slightly smaller amount on the LCCP, again, I want to reiterate that the LCCP remains on track for the start-up of its first modules, as previously mentioned to the market, as scheduled for the second half of this calendar year.

Our near-term focus is detailed on Slide 21, and I would like extract the following key and salient points. As we drive future shareholder value, we will be guided by our prudent financial risk mitigation strategy; our continued focus on delivering operational efficiencies, enhancing our robust foundation businesses; and lastly, delivering all of those in an optimal capital structure. Our hedging program is a key component of our financial risk management framework, and it provides certainty to manage peak gearing and ensure sufficient liquidity.

We did undertake in November 2017 to update our shareholders globally with regards to the funding plan to refinance the Inzalo preference shareholder bid. The headroom created by our current hedging program as well as the contributions of our cost management and cash conservation programs allows us to settle the first tranche of the 9.5 million preference shares, which is scheduled to unwind by June 2018 by using existing cash and credit facilities. This will bring about a high gearing number for financial year '19, but it will not impact our investment-grade ratings, and it will not dilute shareholders.

Continued market volatility will be considered in providing the final decision with regard to the second tranche of 16.1 million shares, which will only unwind in September 2018. The Sasol board will inform our shareholders of its decision in August 2018, and again, will base its decision on balance sheet health, sustaining investment-grade ratings, and again, looking at ways of minimizing equity dilution for shareholders at that point in time. Steve and Bongani have also outlined the progress on our asset review process. And this, coupled with our continuous improvement process, will improve profitability and cash flows of our foundation businesses. It is positioning us quite favorably to deliver a 2% ROIC uplift by financial year 2022 off a financial 2017 baseline. Details of these plans will be shared to the market later during the year.

Finally, we'd focus on us delivering all of this within an optimal capital structure. Proactive liquidity management and also following a very disciplined capital allocation process allows us to deliver a superior ROIC and increased free cash flows to our shareholders now and going forward. In executing our near-term funding plan, we have increased our U.S. dollar revolving credit facility from USD 1.5 billion to USD 3.9 billion, and extended the maturity to 5 years, with the option to extend it by a further 2 years at very favorable terms. We've also established an ZAR 8 billion Domestic Medium Term Note Programme to enable us to access the South African debt capital markets if and when required. Our refined strategy capital, coupled with enhanced focus and disciplined capital allocation, also allows and will ensure that we continuously focus on delivering and investing in high-quality investments for our shareholders.

Lastly, our investment credit rating is a critical focus area for us. We are very pleased to announce that Moody's decided to decouple Sasol's credit rating from the sovereign rating, thus aligning its approach with that of S&P. And if you compare our credit rating against that of the sovereign, we are now, in terms of the S&P rating, 2 notches above the sovereign rating and 1 notch in terms of the Moody's rating above the sovereign rating.

Before I hand back to Bongani and Steve, I would like to share our outlook for the second half of financial year 2018 on Slide 22. With the risk of market volatility to continue in financial '18, but we also anticipate that all of this comes at the background of a growing global economy. And this strength allows us to leverage our strong position and deliver sustainable value to our shareholders. We expect our Mining business to continue to safely return to preproduction levels, as we focus on continuously supplying coal to Secunda Synfuels. Total production for the mining complex will, however, be lower compared to what we planned for, for the full financial year 2018 without impacting a continuous supply to Secunda Synfuels.

For financial year '18, we expect the South African liquid fuel sales volumes to be approximately 59 million barrels, which is very much in line with what we mentioned during our BPM, released earlier in February. Our ORYX GTL utilization rate will average above 92%, and Secunda Synfuels Operations forecast to achieve production of around about 7.7 million tons.

Normalized Base Chemicals sales volumes are expected to be between 1% to 3% higher, and the normalized operating profit for the Base Chemicals business to range between ZAR 3 billion and ZAR 5 billion for the year. Normalized Performance Chemicals sales volume are expected to be between 2% and 3% higher, with our Wax Expansion Project its producing capacity will increase to 116 kilotons of hard wax. We also expect that the average margin in the PC business to remain very much resilient. Normalized cash fixed costs, as mentioned earlier, are expected to track our forecasted inflation rate of 6%.

On the macroeconomic front for financial year '18 and '19, we expect the rand/dollar exchange rate to average between ZAR 12,50 and ZAR 14 to the dollar, and the average Brent crude oil prices to remain between a trading band of USD 55 and USD 65 to the barrel. Finally, we expect our balance sheet to reach gearing levels now of between 40% and 44%, and (inaudible) to now be below 1.7x.

On that note, I'll hand back to Steve, who will facilitate the Q&A session. Thank you, Steve.

Thank you, Paul. Operator, you can open up the lines for questions.

(Operator Instructions) And we will first go to Gerhard Engelbrecht from Macquarie.

I've got a couple of questions. The first one is, can you just give an estimate of the ramp-up time at Gemini? How long can you get at full production and is this a read through for the ramp up on the polyethylene plants at the LCCP? And can you give me more details on this outstanding tax litigation? It looks like the SARS tax claims are increasing and could increase even more if the 1999 to 2004 systems are followed? And then lastly, can you talk about realizing the billion dollars of asset sales -- Canadian shales, about CAD 300 million on the books that's substantial? Additional assets if you get book value for those assets? Can you elaborate on that? That seems quite significant to me.

Thank you, Gerhard. I'll take the asset sales. Paul, will you take the outstanding tax? And Fleetwood, can you start with how the Gemini startup -- how it went?

Gerhard, thanks for the question. So with respect to Gemini, we started up in November. Beginning the mono-model production mode for the first 2 months, we switched now to the bi-model production mode and in the first month of January, the preceding month, we had some operational issues to switch truly to the bi-model mode, but things are settling down. So coming back to your ramp-up question, I think, our general approach and this is consistent with our approach also in terms of ramp up on LCCP is to ramp up to full capacity in the first 3 years of operation.

And, Gerhard, good afternoon. And so just to provide some color on the tax methods, effectively we use these 2 tax methods and before I start to explain those, I must say that until now there's only 2 tax methods that have been significant that have been used by SARS. All the other tax assessments have been updated, checked and cleared and it's not only SARS, it's also globally. It doesn't take away that the revenue services globally can from time-to-time launch investigation, but we feel that most of the tax offense (inaudible) to investigation is in good state. If I can briefly talk about the first one, which is a known one, which was communicated before to the market, which again goes to the [several] soil, oil procurement challenge that we received from SARS. The latest update since we spoke to you is exactly the same, well, there's one difference that we have been allowed to appeal to the Supreme Court of Appeal. That case will serve to the Supreme Court of Appeal in early October. And by November -- early November, hopefully we will get kind of a closure in terms of this specific method. We still have few customers based on the legal advice that we proceed and further visual information, which we can share with you when we meet with you that we still have a very high prospect of success in winning this case, but it needs to go through the court. We're quite comfortable that there will be 5 judges hearing our court case in the Supreme Court of Appeal and we just need to go through the process now. So other than that, there has been no change compared to what we communicated before. The additional item with respect -- SARS completed with regards to our offshore financing treasury entity that in prior years, prior to 2012, we operated from the Isle of Man before shop or the Reserve Bank actually allowed us to actually move the treasury onshore without incurring currency losses or revaluation. So before 2012, they operated the treasury function in the Isles of Man. SARS completed the principle of effective management and they actually applied a change practice note that they released in 2015 and they backdated it. Now, our legal advice is that we cannot backdate a practice note to prior years and based on that, we believe that's unlawful. And again, we now just as objection front of the assessment, we will file our objections in the coming weeks. And then the process really will start. So I wish these matters have been resolved between parties, which I doubt. We will revert on our legal right and probably resolve this case at the earliest by 2020 or 2021. But we, again, believe that we've got a strong legal team and we'll keep on challenging these cases on legal merit through the normal court legal process.

Thanks, Paul. Just before we -- in regards -- sorry, sorry, Stephen. Just to conclude on the tax issue, to say, the SARS have also modified Sasol on issues that took place, a field audit for 1999 to 2004 on hold. Could that be additional liability or risk?

So the current case and this small matters on the practice of substance as a full and that's the principle that needs to be kind of conserved by the court. Whether it was -- whether the operating entities will slow that substance in procuring oil from the Isles of Man and from the U.K. And based on the current court case, SARS then agreed to stop the field audit subject to the court hearing. So it's related to the unfavorable tax hearing or tax outcome to engage. It will mean that a further tax exposure in addition to the ZAR 1.2 billion, in terms of what we currently provided for. It's a favorable hearing from SARS that we're being obviously blocked at field audit because it cannot challenge kind of a principle that the court is (inaudible).

Your last question was in regard to the asset review process. Gerhard, what we've said is that we expect to derive something greater than USD 1 billion in terms of at the end of assets that may be disposed of. It's not a hard target. It's our current view basis the process. We have said, we're about 70% complete with the analysis of all our assets. We will finish that up throughout the rest of this calendar year. And we have announced to the market that we are actively pursuing the sale of the Canadian shale gas. There are others that are progressing through the process and we expect though that the right time to be announced as well. So I wasn't sure exactly sure what your question was, given the size of our company in terms of market cap, the fact that we expect about USD 1 billion seems extremely reasonable and basis the analysis that we've done to date, it seems to be reasonable as well.

We will take our next question from Chris Nicholson of Morgan Stanley.

I have 2 questions. The first one is that in the (inaudible) statement last week the Minister of Finance has announced the introduction of carbon tax in South Africa from the beginning of 2019. My question revolves around the offset that would be available to Sasol. I understand there's a basic offset of 60%, 70% and a potential maximum offset of about 90%, 95%. Are you -- could you provide some detail, I guess, based on the amount of offset that you believe will be available to Sasol against that carbon tax? That's the first question. And the second question just revolves around ORYX. I noted in the notes and to the release you put out this morning that Sasol is now liable for 100% of the tax in ORYX. Could you just confirm if that is correct? And then what the anticipated dollar or rand impact would be going forward, specifically for modeling purposes?

Thanks, Chris. Bongani will you take the one on -- our view on the carbon tax? And Paul, will you take the tax liability?

Okay.

Okay.

Thanks, Chris. The carbon tax (inaudible) the first in 2 stages, let's say, it's not secret that we are opposed to the imposition of carbon tax because in our view, it makes the South African companies uncompetitive if there is no level playing field with the rest of the world, which we compared with -- which we compete with. But at the same time, also it's not solving the issue of emission because the emissions are actually on a lower trajectory than what we promised the rest of the world. So in all indication, it looks like a revenue-ready mechanism rather than dealing with the fundamental problem. If that is here today, where are we? We received the second draft in December last year. And then we are supposed to submit our comments and then hear the (inaudible) in Parliament. That's -- and I think it could take time because it has still not happened, but we'll still go through these processes. And in terms of credits, we are going to have. We -- in our previous analysis, the credits were going to be substantial. So that the incremental checks on the (inaudible) will confirm this, was going to be not much significant compared to what it would be post 2020. Our problem is still the lack of transparency as to what are the post 2020 adaptation. And if we assume that there will be no credits because we are assuming that it is not significant prior to 2020. If we assume that we have no credits, the last time we calculated it was going to be about 3% of earnings post-2020 budget, Paul can confirm the number pre-2020.

So the -- and analyzing the number, we -- as you rightly say for financial '19 and '20, we don't expect that to be significant. It can still range from a low number to a mid number. But we would rather update once we update our clarity of engagements of who is exactly, what will be affected. We can also discuss that more with other people involved in the basis -- just to give verification of what are the different scenarios that can potentially impact the low end or the mid-end of the carbon tax. But as what you say, it's not going to be a significant impact on the earnings. And when it comes to GTL's joint venture, effects of the tax holiday has stopped in 2017. Chris, let's make it easy for you. Our assumption based on the current year's forecast is that the annual tax, which we officially have to pay 100% of our contribution is going to reduce our operating profit, which we normally have from ORYX joint venture by around about $40 million per annum. So that's around about the tax exposure from an earning's perspective. It obviously depends on the earnings number but is around about $40 million per annum.

40% effective tax rate. Is that correct? If I just look at this year's numbers.

35%, Chris.

We will now take our next question from Alex Comer of JPMorgan.

A couple of quick questions. While we are on the strategic topic of tax, I noticed in your release that the tax rates have changed in the business and you put that down to increases in the tax rate due to tax reform. I'm just quite surprised that there seems to be quite a big jump in your Energy business from 25% to 31%, which I would've thought was entirely a South African business, so that's the first question. Secondly, just on the LCCP, I mean, you talked about NPV is increasing due to -- or an NPV at spot is 8.5% or 9.5%. I think you gave a number of around about $1 billion in 2020 for financial year for EBITDA. I'm just wondering what EBITDA would you have in 2020 at spot, do you think? I just wondered what the impact on actual profits would be at spot. And then, just on labor costs, they primarily seemed to sort of pick up a little bit more than I expected. I'm just wondering whether you could give a bit more clarity on how you intend to hold labor costs down going forward.

Thank you, Alex. So on the tax rate, I'll start on the EBITDA of LCCP and if you need some help, and then Bongani will then do the labor. So as you reach tax rate of the tax reconciliation, often if you go, the first part of your question relates to the Energy business. and it's -- just remember that we got U.S. GTL fee cost that we impaired. And that ultimately was scrapped, and that ultimately a shift in the Energy business and that will have an impact on the effective tax rate for that specific business. The same goes for the Canadian assets that you also impaired. You normally when we do the actual payments, you do see that effective rate jumps because of the tax base and then ultimately on a normalized basis, you will see that, that's very much more in line in terms of what we expect. The same goes for Sasol. If you look at the Sasol effective tax rate, it was 31%. If we strip out the remeasurement items, it is actually sitting at 26%. And that's a very good rate if we compare them to the corporate rate of RHA of around about 28%, what we guided is 30%. It's kind of a number that we are targeting. And that really comes down to the energy efficiency benefit and allowances that we weren't successful in claiming over the past couple of years of operating our plants more effective and efficient. We can also share with you more details in terms of our tax effect, but it's really applied between the (inaudible) and then ultimately the benefits we're getting from energy efficiency allowances.

So Paul, to be clear. Sorry, so it's not due to the energy tax -- so it isn't due to the U.S. tax reforms? It's due to the write-downs?

Yes, definitely to write-downs and not the latter.

All right, because it doesn't say that in the release, but anyway nevermind.

Stephen, you're going to talk about LCCP.

Yes. So in terms of the LCCP, you've asked about the cash contribution or EBITDA. We originally had said that around FY '20, we would come close to USD 1 billion contribution in EBITDA. I think you're aware that was based on ethane price starting at about $0.30 a gallon and then moving up overtime to about $0.50 a gallon. The December '17 spot price is about -- ethane is about $0.24 a gallon. I don't have a number in terms of converting that to an EBITDA, if that was his question.

No. We also don't have insight or detail of spot prices to be presented to market. That (inaudible) maybe just share that, kind of (inaudible).

In terms of the labor cost, let me start by saying the actual physical number of employees is flex at 30,900 in spite of [Secunda] Operation. And then in terms of labor costs, we are not going into too much detail of the manuals. In terms of petroleum, it averages about 77.5% in terms of increases. What is (inaudible) increase to the labor cost also is a variable first element because we have plant maintenance as we've communicated this morning, not only do we incur additional maintenance cost, but with incremental labor cost because of the plant maintenance.

And our next question will come from Pavel Kushnir from Deutsche Bank.

I have 2 questions, if I may. First of all, looking now at your capital market in the presentation and for 2018, 2022, you mentioned dividends uplift to 40% payout. And that's created an impression that you will be paying out 40% of your earning starting this particular financial year. However, later until today and referring to Slides 7 and 10, I understand that you are likely to stay at dividend cover ratio of 2.8x, which is 36% payout. So which is right? Is it the Capital Market's Day presentation where you mentioned 40% in 2018, 2022? Or today's presentation, which implies a much smaller payout ratio? And my second question is about your working capital increase. It was quite dramatic in the first half this financial year. What kind -- and I know that in your financial release, you highlighted that you expect a reduction and you see working capital ratio at around 18%. Maybe you can elaborate on that and tell us whether we should expect a neutral impact of the working capital on your cash flow this year. And in general, how the working capital may be developed?

Thank you, Pavel. Pavel, I'll take the first one. And Paul, will you take the second one on working capital? We did not make the statement. In fact, we didn't say it at the Capital Market Day that as of FY '18, you would instantly move from a 36% payout to a 40% payout. What we did in the Capital Market's Day is break it into the near term, the period between FY '18 and FY '22 and the longer term, post FY '22. What we've said is, as our balance sheet delevers over this near-term period, as we start to move the gear and down, then we'll start to move the payout up. So as we just talked about the cash contribution of the LCCP generating about 1 billion -- roughly USD 1 billion in FY '20 and we'll start to delever. So we're trying to say that in that period, we will walk it up. We didn't want to signal, which quarter or which period, but in that period, maybe more than one step we may choose to do it progressively. So the answer is, our objective as shown in the Capital Market's Day is by FY 2020, we will be at a 40% payout. But that will not start instantly in FY '18.

On LCCP, if I may, and just also moving over to working capital, we did also highlight that if we try to refinance in dollar on the balance sheet, it will deleverage the balance sheet for another year and because of the data we need to go over, we still have to go to closer to 30% targeted flow pressure before we come and step up the dividend in the first term and that will gradually happen over the next couple of years as you indicated. On the working capital side, basically from our analysis overall, we had a rough December. To be honest with you, we have poor constraints in the harbor of Richards Bay, which prevented us of shipping and selling our product. And then also from the liquid fuel side perspective, it really had a very (inaudible) industry in December, a very light tracker in terms of liquid fuel product of petrol and diesel during December. Now we have confirmed subsequent to in January and in February that our stock levels are (inaudible) down and will be moved further down towards June and that will (inaudible) in this normalized position of 18% working capital as a percentage of turnover. So we see that it's around about ZAR 4 billion impact that it had of working capital on the balance sheet that we couldn't sell, but we are quite comfortable -- we feel comfortable that, that will be released in the next 6 months and actually we've made some good inroads into that in terms of January and February. So it's not something to be concerned about in the second half, which is better as a result of stop that we had at the end of December.

Our next question will come from Johann Steyn of Citigroup.

Most of my questions have been asked. Just one remaining one. It's on the 12% return on invested capital target. If you can press -- just give a little bit more detail as to when exactly do you aim to achieve this? What kind of assumptions do you have on that in terms of prices? And then also, importantly, what exactly is your definition of return on invested capital, both on the numerator and denominator side as we've seen in the past that these things can be respectfully sludged to get whatever you want? Not you, but in general in the industry.

Thank you, Johann. Paul, can you give a basis on it?

Thanks, Johann, for your question. You are absolutely right, there are many interpretations when it comes to ROIC. And to make it easy for ease of reference, we've redefined our LTIs, we were also clear about the definition of what -- how we will calculate the return on invested capital. So for the benefit of everybody, I do want to refer you to the disclosure that is made as part of our remuneration policy and how we calculate and also adjust for the return on basis capital, which is also kind of main difference definition in the market. Ultimately, in reference to the 12%, the 12% as a base assumption, which use a 60-dollar real (inaudible) message during the Capital Markets Day that our strategy has been based on a 60-dollar overall growth in real terms going forward, but -- and that really improved our target. If old process is removed, I think 12% will be a challenge, but you don't anticipate a 12% ROIC growth through the cycle in a $50 growth. If it's higher than $60, then ultimately, you know that ROIC will be benefited as a result of that. Our all -- our plants shut up in terms of the 12% and how the 12% will be realized in U.S. dollar terms. I guess, what we will do is, we're going to lease our plants in terms of continuous improvement. We will also make sure to give you an indication of our plant to shape up not only our earnings growth on the wise basis plus LCCP and all of that culminates into the 5% EBIT growth as well as the 12% U.S. dollar ROIC target. So those results are planned to make available later during the year. We're still working those, but on a high level, $60 needs to [use] that (inaudible) to inform our 12% ROIC, guys. Johann, clear?

Our next question will come from [Rashmi Choudhary] of Waha Capital.

I just have one quick one. I wanted to know if you have any plans to come to the debt market in 2018.

Into the debt market? I guess, I need to look at our CFO perhaps.

So basically, the long and the short of it is to say that when we communicated, I think, at the Markets Day, we think that we first wanted to focus on our short- and mid-term funding strategy. With our alternatives being in place, also I think with other considerations in place, we feel quite comfortable about having sufficient liquidity over the short to mid-term. If that is what to worry that we need to think about longer term -- about our longer-term big maturity assets and the all currency in the process of considering various options and vehicles in terms of how we want to approach that. We will only be synchronized to the market because we don't want people to front view on this and the board also has to make a final decision in terms of (inaudible) representing to the board. So we can expect making this year probably during August as providing you an update of how we plan to proceed at Capital Market, Capital Big Market going forward and how we plan to actually manage and gear the company's funding liquidity over the long-term beyond the LCCP process and also its period. So more to come, but at this stage that's, I think, as much as we want to share to the market.

Operator, let me close. And thank you everyone for their attendance, and thank you very much for your continued interest in Sasol. We hope we were able to get clarity on the interim results and answer your questions. So we will talk to you again soon. Thank you so much.

Thank you, ladies and gentlemen. That does conclude today's call. We thank you again for your participation. You may now disconnect.