Sasol Ltd (SSL) 2018 Q4 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.

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

Thank you, operator. Good day, everyone. This is Steve Cornell, and thank you for joining us on this call. Paul and I will discuss Sasol's 2018 annual results. And then Paul, Bongani and I, along with other members of our management team will take Q&As.

We have published the slide presentation of our results, which you can download from the Investor Centre on the Sasol website. In the interest of time, we are not going to strictly follow this presentation on the call, as we'd like to make more time available for your questions. Before I begin, I would like to refer you to the safe harbor note on forward-looking statements contained on Slide 2 of the presentation.

Moving to Slide 4, we see a summary of our key messages. Notwithstanding a volatile rand environment on which average rand was 6% stronger than the comparable period last year, we still delivered a resilient set of results in the financial year 2018. We did experience unplanned outages at our Secunda Synfuels Operations. We consider these and other operational challenges as isolated issues and remain confident that we have a robust asset management strategy to keep our plants running safely, efficiently and reliably. We continue to record steady progress in delivering the LCCP. The steam utility system, which is a critical component and a key enabler for the startup of the other units, was safely and successfully commissioned earlier this month. Finally, as we continue to maximize value from our existing portfolio of assets and drive our growth in our chosen areas, we'll provide you with a high-level update on our strategy. Paul will, of course, go into more detail on our financial and operational performance for the year. And after that, we will open this session for any questions you may have.

I'll move now on to Slide 6. As highlighted, Sasol experienced isolated challenges with regard to our performance during the year to improve the reliability of Eskom's interface. With our Synfuels Operations, we have taken various steps. Firstly, we have brought in redundancy into the electrical supply system to improve asset management. And secondly, we have initiated a longer-term capital project to limit any future electricity supply interruptions by creating more flexibility of electricity feed to our plant.

We also had 2 internal outages at Synfuels. The first related to a fire on a transformer, and the second related to a crack on an oxygen line. The result of these 2 incidences caused a volume loss of around 115 kilotons for the year. These events, which occurred mainly in the first half of the year, galvanized us to steadfastly improve on our operational processes and plant efficiencies to realize better production yields. By way of example, our production run rates achieved during May and June of 2018 support a full year production of approximately 7.8 million tons at Synfuels. This substantial improvement in performance [argues] well for our anticipated performance in FY '19. Notwithstanding our strict focus on cost, we have kept maintenance spend within industry norms. And this, combined with our standardized asset management process, which is delivered by a strong and experienced team, ensures that we will not compromise on safety, reliability or sustainability of our operations.

Now let's turn our attention to North America and LCCP, which is on Slide 7. Calendar year 2019 will be a defining year for Sasol, with the startup of the LCCP in the U.S., which is a catalyst for transforming our earnings profile. This transformation will be both in terms of geographic spread of our earnings streams as well as the combination -- excuse me, the contribution split between our chemicals and energy businesses. We're making good progress on the project in Lake Charles and indications are that the cost of the project will remain within the previous market guidance of USD 11.13 billion. At the end of June 2018, engineering, equipment fabrication and procurement were complete, and the overall project was 88% complete with field construction at 68% complete. Capital expenditure amounted to USD 9.8 billion. A significant milestone was achieved when the first steam was produced on the 1st of August, which was a few weeks earlier than planned, and the project remains on track to start up the first 3 major production units by the end of December 2018. These first units are: the first polymer unit, the stream cracker itself and the ethylene oxide unit. The remainder of the manufacturing units is in calendar year 2019. Our marketing and distribution channels have been negotiated for effective product placement. And this, bolstered by the market demand that is poised for a long-term growth, will allow us to deliver a differentiated product mix through the LCCP. We expect to deliver on our FY '19 EBITDA guidance of USD 250 million to USD 300 million, as we target LCCP's steady-state EBITDA of USD 1.3 billion by FY '22 and probably by FY '21.

I'll now provide a strategy update, which is covered on Slide 12 to 15. As you will recall, in November last year, we shared a value-driven strategy, which sets us on a clear path to deliver sustainable growth and accelerated shareholder returns. As confirmed then, we will deliver value-based growth underpinned by a number of clear choices that drive our focused strategy enhance our foundation businesses. I'll provide a synopsis of the progress made in executing our strategy.

On Slide 12, we show that our growth areas are in the upstream, in energy and the chemicals businesses, and we are advancing opportunities in all 3. In chemicals, we are analyzing growth options in high-value specialty chemicals market. We're doing this by, first, streamlining the Performance Chemicals portfolio with a focus on organics, waxes and advanced materials. Secondly, we're developing incremental growth options in key end market applications for our chemicals. And thirdly, we're advancing our business readiness for the near-term growth from LCCP and the expansion of our China surfactants business.

Looking at the upstream, which is crucial for the sustainable -- sustainability of our integrated Southern African value chain. And here, we are looking to secure, long term, our gas feedstocks to South Africa. The Government of Mozambique continues to be a strategic partner to develop and produce gas to market. Gas from the PSA and Mozambique is prioritized for the development of a gas-to-power plant in that country. And while the optimal size and capital investment is being determined, surplus gas monetization options will be jointly developed with our partners. Additional focused exploration will be prioritized in the near term where development will follow the demand to ensure we maximize shared value for Sasol and our partners.

In the Energy business, we've identified options for increasing our margin in liquid fuels marketing, opening 12 new Sasol-branded retail convenience centers in FY '18, with a further 15 planned for FY '19. We're also progressing with value-accretive acquisitions of super dealers and continue to evaluate major acquisition opportunities, which will be guided by our capital allocation framework.

Key to enhancing our foundation businesses is accelerating efforts to embed continuous improvement. In this regard, we are actively and continuously managing our portfolio of assets. We will retain or fix those assets that will increase our returns while exiting those that are not in line with our strategy and/or have lower-than-desired returns. Approximately 75% of our asset review has been completed, with the majority of the assets to be retained and with some earmarked for growth. Assets worth more than USD 1 billion in net asset value have been identified for divestment. These include our shareholding in our Malaysian assets, which we sold to PETRONAS for USD 163 million. We have also commenced active marketing for our Canadian shale gas assets. And as we progress with this and other divestments, we will update the market accordingly.

In terms of business enhancement, our continuous improvement drive is aimed at ensuring competitiveness at an oil price of USD 40 per barrel. Our target to lift ROIC by 2 percentage points by FY '22 through continuous improvements, with gross margin, fixed cost and invested capital being the key value drivers. We have already identified 50% of the value-enhancing opportunities, focusing on customer engagement solutions, our functions and improving the reliability and margins in our Energy value chain.

One of our key continuous improvement levers is digitalization, which has been positioned as an enabler across all of our businesses globally.

Paul will now take you through the details of our financial and operational performance, and then we will open up the call for questions. Paul, over to you.

Thank you, Steve. I am on Slide 17 of your slide deck. Good morning, and good afternoon, ladies and gentlemen. It is my pleasure to present the 2018 financial results to you today. Our results are at the midpoint of the earnings range provided in our recent trading statement. As shared with you during our Capital Markets Day of last year, our drive towards gaining shareholder value sustainably is guided by our continuous focus on, firstly, a sustainable delivery of operations and capital efficiencies; secondly, continuously improving our cost-competitive position; thirdly, to manage our balance sheet risk prudently by means of our financial risk mitigation strategy; and lastly, to growing the value of the business as informed by our focused strategy and disciplined capital allocation.

With this in mind, I will now turn to our 2018 financial results and how this contributed in delivering on our value-based strategy. First, improvement -- improving oil prices had a significant positive impact on our results. This was further complemented by very stellar cost performance during the second half of the financial year, resulting in us delivering a normalized cash fixed cost increase in line with market guidance. The stronger average and volatile closing rand-dollar exchange rate had some negative impact on our results in terms of the income statement and balance sheet.

Lastly, as a result of the stronger rand, the net present value of future cash flows of our South African chlor vinyls and PVC cash-generating unit have been adversely impacted, resulting in a ZAR 5.2 billion impairment. Looking forward and based on the successes of our business performance enhancement program and low oil price Response Plan, we are of the view and are well positioned and actively working on sustainably improving our cost competitive places, driving further operational and capital efficiencies in an environment of pursuing 0 harm. This is the culture of continuous improvement we've adopted to drive sustainable value for all shareholders and stakeholders. Our expectation of a robust rand oil price over the short to medium-term, a reduction of capital expenditure on the LCCP, combined with a step-up in incremental earnings from the LCCP will accelerate our free cash flow inflection point towards the second half of financial year '19.

Key to maintaining our optimal capital structure is our funding strategy, which concerns to top of that instrument, the maturity profile and the cost of funding. Our strategy is to better speak to the maturity profile of the debt instruments, which allow us the flexibility to execute on our value-based growth strategy.

Finally, I will also share with you management's outlook for financial year '19, which is a defining year for Sasol's compelling investment case.

Turning now to Slide 19. I am pleased to announce that the EBITDA increased by 10% year-on-year. Core headline earnings per share, which is headline earnings per share adjusted for the remeasurement in once-off items as well as the impact of period in-currency revaluations amounted to ZAR 36.03 per share, which is 6% lower compared to the previous year but still reflecting the underlying resilience of our business.

Operating profit of ZAR 17.7 billion was down 44%, as the benefits of the higher dollar base oil and chemical prices were offset by a stronger rand and the impact of significant remeasurement items and once-off items, which I will unpack for you on the next slide. The final dividend of ZAR 7.90 has been declared in line with the company's cover-based dividend policy, which results in a total dividend per share of ZAR 12.90 for the year. By using core headline earnings per share as the basis for the dividend, investors have been protected against the impact of significant noncash period-end adjustments, such as Sasol can use its income statement charges in financial year '18. Our gearing labels increased to 43% as at June 30, 2018 and remains below our peak gearing of 44%. This increase in gearing is mainly as a result of the settlement of the first tranche of Inzalo debt in June 2018 and the translation impact of our higher closing and rand-dollar exchange rate on our balance sheet debt.

Today, I'm pleased to announce that the Sasol board approved that we will also settle the second tranche of the Inzalo debt by repurchasing the final 16.1 million shares in September 2018.

The balance sheet health, the sustainment of our investment-grade ratings and minimizing the equity dilution for shareholders were key considerations in reaching this decision. While this decision will result in high gearing levels for financial year '19, this decision will not translate into a 4% dilution for shareholders and further demonstrates our commitment to predict and grow shareholder value within the context of managing balance sheet levels to within investment-grade.

Turning now to Slide 20. I will now take you through the key items impacting the change in operating profit compared to the previous year, and please allow me to walk you through the slide from top to bottom. The stronger average rand-dollar exchange rate negatively impacted operating profit by 7%, higher dollar-based fuel and chemical product prices positively affected operating profit by 34%, a number of once-off and remeasurement adjustments significantly negatively affected our operating profit by 48%. Let me deal with remeasurement items first. Remeasurement items were ZAR 8.3 billion higher compared to the prior year. These items were, first, a full impairment of our South African chlor vinyls and PVC business, a ZAR 5.2 billion on the back of a stronger long-term rand-dollar exchange rate forecast; second, a partial impairment of our Mozambican production sharing agreement of ZAR 1.1 billion or $94 million, mostly as a result of lower-than-expected oil volumes. The [PSA] gas investment case still remains very much comparable to board-approved FID return levels. Lastly, as previously communicated during our interim results, we have recorded a partial impairment of our Canadian shale gas assets as well as the scrapping of our U.S. GTL assets.

Focusing now on once-off items, and you will see that these items have mostly been reported as part of group functions under the segmental reporting. These items can be summarized as follows: first, and as also previously communicated, the ZAR 3 billion (inaudible) impairment charge relating to the Sasol Khanyisa's (inaudible); and secondly, unrealized losses of ZAR 1.9 billion on the valuation of open hedges as at 30th of June 2018, and mainly result to put option charges [back] to protect the balance sheet at oil prices of below $53 to the barrel. Moving on, operating profit was negatively impacted by 16% due to cost inflation. Normalized cash fixed cost increased by 5% or remained flat in real terms, which is within the guidance provided at our interim results presentation. Sales volumes were mostly affected by production interruptions, which Steve alluded to, in the South African value chain as well as the impact of Hurricane Harvey on our Performance Chemicals business in USA. Very important to note is that our production run rates recovered significantly from April 2018 and positions us very well for a much improved sales contribution in financial year '19.

Let's move to Slide 21. As mentioned before, we have firmly embedded the very strong cost culture at Sasol, and we are continuously looking for areas to sustainably reduce our costs in pursuit of protecting and improving our cost-competitive position. We delivered a very strong in stellar second cost -- a second-half cost performance. This resulted in our normalized cash fixed cost remaining flat in [year] terms. Walking you through the slides from top to bottom, we have normalized our cash fixed cost for the following items: first, growth cost increased our cash fixed cost by 1.1% and mainly relates to costs incurred on our capital projects in the USA. These growth projects will, however, significantly increase future earnings for the company. Second, business establishment cost and once-off items contributed a further 2.4% to the group's overall cash fixed cost increase and mainly relates to the pre-investment costs associated with our digital transformation program and at further improving our future cost competitiveness as well as once-off transaction costs associated to the Sasol Khanyisa transaction and the loss and benefit as a result of the termination of the ballot purchase agreements with [Hcom] since April 2017. Sappi remained below 5% and the exchange rate change had a rather muted impact on a cash fixed cost basis. Very important to note that delivering normalized cash fixed cost performance in line with the 6% inflation target remains one of the key business priorities.

Moving on to Slide 25, our actual capital expenditure, including accruals, amounted to ZAR 53 billion, which is slightly below the previous market guidance provided. This included ZAR 30 billion or $2.3 billion relating to the LCCP. Our capital expenditure forecast of ZAR 38 billion for financial year '19 supports the execution of our strategic projects in North America and Southern Africa and include approximately $1.1 billion for the LCCP. Our capital forecasts have been calculated, taking a ZAR 13 exchange rate to the dollar into account. Rand volatility will have a significant impact on these estimates, as most of the capital expenditure over the next 2 years will be dollar-based. Our capital forecast for financial year '19 and '20 is also based on us managing the sustenance capital to ZAR 20 billion or $1.5 billion per year, respectively.

Moving on to Slide 26. Macroeconomic volatility is very much anticipated to continue for financial year '19 and is really within this context that we do expect the following delivery from our global assets. Mining to ramp up to plan and targeted production levels; Performance Chemicals sales volumes, excluding LCCP, to be between 2% and 4% higher; and average U.S. dollar margins to remain resilient for most of the product lines. Base Chemicals sales volumes also excluding our U.S. production volumes to be between 2% at 3% higher, with U.S. dollar basket prices tracking oil prices. The U.S. HDPE plant is forecasted to achieve a utilization rate in excess of 90% for financial year '19. As a result of a planned full shutdown in Secunda in financial year '19, our South African liquid fuel sales volumes will now range between 57 million and 58 million barrels, and that the Secunda Synfuels Operations will achieve an -- production volumes of between 7.6 million and 7.7 million tons. ORYX average utilization rate is expected at about 95%.

Lastly, the EBITDA on the LCCP project to range between $250 million and $300 million for financial year '19. Normalized cash fixed costs, as previously mentioned, I expect it to track our full cost of inflation rate of 6%. We forecast the rand-dollar exchange rate to trade in the range between ZAR 12.50 and ZAR 13.50 to the dollar, and average (inaudible) crude oil price range to remain between $65 and $75 to the barrel.

Our balance sheet gearing is expected to be between 40% and 44% and the net debt to EBITDA to remain below 1.9x.

Lastly, taking these assumptions into account, we do expect a step-up in our earnings for financial year '19.

Moving on to Slide 27. Let's, lastly, focus on Sasol's compelling investment case, which we have shared with you at the Capital Markets Day. Our overall arching objective is to deliver superior and balanced value to our shareholders. Our investment case is deeply rooted and our identity as a chemicals and energy company with diversification of earnings and geography. Investing in Sasol provides you exposure to a robust foundation business, which leverages feedstock advantage operations and integrated value chains to produce high-value products at low oil cash breakeven levels. This competitive position will be further enhanced by the cash inflection of the LCCP, streamlining our portfolio through the very robust and rigorous asset review process and delivering further value on our -- from our continuous improvement drive. Our enhanced strategy and disciplined, refocused capital allocation will allow us with clear, strategic and specific value-driven choices.

We expect that the strategy will translate into the following value drivers and ROIC in EBIT growth rate, which are aligned with shareholder value creation; increased dividend returns, stepping up our dividend return rates from 36% payout to a targeted future 45% payout ratio; a significant improvement in our free cash flow per share over the following couple of years; a balanced and diversified asset portfolio, where we target smaller to medium-sized projects, with partnering as an option for larger projects in an effort to build a robust and diversified asset portfolio for investors at the lowest possible risk. All of this needs to be supported by a fit-for-purpose capital structure, which preserves investment grade and enables access to future capital markets. As we prepare for the first units of LCCP to come online and the expected increasing free cash flow, our balance sheet will start to deleverage from financial year '20 and rather quickly. We are committed to following a disciplined capital allocation framework, which will prioritize dividends for our shareholders as we target maximum sustainable returns and quality growth for our shareholders. We are very well positioned to deliver this competitive value to our shareholders compared to our peers.

That brings me to the end of my section. And on that note, I will hand back to Steve, who'll open the floor for the questions-and-answer section.

Thank you, Paul. Operator, we are ready for the question-and-answer session.

(Operator Instructions) We can now take our first question from Chris Nicholson of RMB Morgan Stanley.

My question relates to your lowering of EBITDA -- sustainable EBITDA guidance for the Lake Charles Chemicals project by around $100 million. I have 3 questions in this regard. The first one is, I understood previously that you'd contracted in the vast majority of your ethane supply in terms of quantity. Maybe could you just elaborate on how the contracting on actual supply impacts the flowing of EBITDA guidance, specifically given your comments in relation to sourcing ethane from the Gulf or outside the Gulf Coast? And the second question in this regard is really you're still guiding EBITDA to quite a tight range of $1.2 billion to $1.3 billion, but you provided quite a wide range of IRR guidance there, just to marry up those two, depending on where you source the ethane from. And then just finally, have you adjusted any of your product price assumptions, not the feedstock costs, but any of the prices of the products you expect to sell?

I'll take the first part. And Paul, can you take the second two?

Yes.

Thanks, Chris, for the question. As you correctly stated, we have contracted the vast majority of the ethane volume that we'll need, which is 100,000 barrels a day. We have a number of different contracts with different suppliers. Those were generally 4- to 5-year contracts on volume, each company having a different volume amount that we've contracted and a different range of volumes that we'll pull from them. All of the contracts are tied to a marker, be it natural gas or an ethane marker in the Gulf. So the price will float on what the contract marker or price marker is. So what you've done -- and this is how it's done in the industry for Gulf Coast supply as you lock up security of supply, but the pricing will be determined basis the pricing of the month, either the month previous or some sort of average that you have in your contract on the price marker.

Chris, to answer your -- the second part of your question and underlying and what I take is -- what caused the $100 million in EBITDA to reduce. Let me address that quickly. Most of -- when we're looking in terms of the price assumptions or underlying price assumptions that drove the $400 million versus the $250 million to $300 million, the biggest change is really the spread between LLDPE and ethane. So we did see, in terms of the price marker for LLDPE, that there was some contraction in margin since the half year until year-end. It's not significant, but it does make that impact on the EBITDA. And also in addition to that, we did see some higher ethane prices compared to what we've taken into account from half year to year-end. It's not significant changes in terms of ethane, I will say, it's pretty much more kind of the split between ethane and LLDPE that really caused this shift. If I'm looking in terms of financial year '20, '21 and '22, as I said, it's not a significant shift. We do see those spreads to normalize at and still supporting our $1.2 billion to $1.3 billion run rate, ultimately, in terms of EBITDA. To your second point is, how do you marry effectively these different views to the $1.2 billion to $1.3 billion EBITDA? And the long and short of it is to say your assumption on ethane pricing. What we've seen thus far is that in the panel base or price base from these various economists, IHS and Wood Mac per se, that there is quite a divergent view in terms of where ethane will be sourced, and that's really the key difference between the lower IRR and the higher IRR. Our view is that mostly that ethane will be sourced from the Gulf, especially in the next 10 to 15 years and that supports a $1.2 billion to $1.3 billion per annum run rate, which is very much aligned to the IHS view. Wood Mac is actually more of the view that the Marcellus and other more expensive place will come into play and that gives rise to the IRR. If it translates a run rate IRR of the 5.5% Wood Mac case, then ultimately, the $1.2 billion to $1.3 billion will on average be $200 million per year lower, so effectively, $1.1 billion. So it's not a significant difference compared to what you see in the IRR but that's really causing it. The last part of your question, are there any changes to any other product prices in terms of our modeling? And the answer is, no. On the contrary, we actually see and some of the product lines specifically on the Performance Chemicals business that there's some slight upticks in terms of our dollar base and pricing.

We can now take our next question from Johann Steyn of Citi.

I guess that's me, it's Johann Steyn. You also mentioned in the presentation that the $1.3 billion might actually be achieved in FY '21, if I heard you correctly. So first of all, is that correct? Did I hear that correctly, Steve?

Johann, that's correct. Basis our modeling, we show that in FY '21 we should achieve about $1.26 million, $1.27 million. And in FY '22, $1.3 million, $1.31 million. So depending upon the ramp-up rate, depending upon what happens, it's going to be either FY '21 or FY '22.

Okay. So that's a little bit better and quicker than I think everyone would've expected previously. And is that mainly the volume profile or pricing expectations?

Johann, we haven't really changed this profile since we adjusted it a couple of years ago. But Paul, let me turn over to you.

Yes, Johann, so ultimately, our anticipation is that not so much the volume pricing but more in terms of the margin uplift in terms of some of our assumptions. Again, I think, it's quite important to say that there are very moving parts. If your view is that China will overbuild, there will be some pressure maybe in the next couple of years. If your view is that the U.S. will grow quicker into its derivatization of merchant ethylene, then ultimately, it also will kind of support these assumptions. So we have taken kind of a mid-route approach when it comes to merchant ethylene derivatization in the U.S. as well also some mid-route approach with regards to the risk of overbuild in China. We don't believe it's going to be either too strong or too weak on either side, and hence that is the only difference compared to our previous assumptions and supporting this $1.27 million that Steve referred to in 2021.

Okay, Paul. And then in terms of the previous dividend profile, if I remember correctly, you said that by 2022 thereabouts, you'd like to be at 45% payout and I think that 2020 thereabout 35% -- sorry, 40% payout. At current pricing levels where we are today with oil and rand, do you see that, that profile coming sooner effectively allowing you to ramp-up the dividend payout rates quicker than previously expected or not?

Yes, Johann, I think the first big moving part for us was to gauge finality on the Sasol Inzalo refinancing. So ultimately one thing that we do know for financial year '19, even at these higher rand per barrel oil prices, and let's assume for now, the ZAR 1,000 a barrel will continue, we don't really envisage based on the board's approval kind of a step-up, meaning an improvement of the 36% payout ratio for financially '19. However, I think you're quite just in your assumption that in financial year '19, we haven't really built in a significant uptake of growth capital and hence the balance sheet deleveraging is a key priority. Assuming that the balance sheet does leverage -- deleverage according to our anticipation and these macroeconomic assumptions do prevail going forward, there's a more than high probable chance -- or let's say, a high probable chance that we will have the opportunity to step-up our dividends as the first priority, which is consistent to what is messaged at the Capital Markets Day. What follows the 40% then in -- so let's say, assuming that happens in financial year '20, will then be to say what will be the balanced approach towards stepping it further up to 45%? Or what are the different capital investments available at that point in time? So we need to weigh those 2 things up post-2020, but still with the objective of stepping up the dividend to 45%. I think just as a matter of sensitivity, stepping your dividend up on this year's numbers from 2.8 to 2.5x means ZAR 1 billion of additional cash, and there from 2.5 to 2.2, another billion. So these actually ZAR 2 billion in this bottom- to high-end range, which I think on the balance sheet can be quite manageable going forward.

We can now take our next question from Gerhard Engelbrecht of Macquarie.

I've got three questions as well. Considering that the cracker will be -- when the cracker starts up in Lake Charles that it will be long of ethylene for quite a while, what price assumptions do you have for ethylene and EBITDA -- ethylene and ethane baked into your EBITDA guidance of $200 million to $300 million for F '19? That's the first question. Secondly, how does the Supreme Court appeal ruling against NERSA against on gas prices affect your view on the Mozambique and PSA? If I remember correctly, you were looking at growing local gas markets with the gas in Mozambique. Does that ruling change it at all? Will you appeal this ruling to the higher court? How do you view that? And then lastly, just maybe a question on procurement, referring to the IT contract that you put in place with IO technologies, can you give us an idea of the scope of that contract and your due diligence on IO? Have they dealt with -- have they done any similar type of contracts? Do they have any experience of contracts of this size?

Thank you, Gerhard. Paul, can you take the price assumptions on ethylene and ethane?

Yes, Gerhard, I know there's a need for more detail on this. I will say it's safe to say that ultimately we see ethane prices for the next 12 months, if you want to really look at the forward curves, to be between anything from $0.27 to $0.35 per gallon. That's what the forward curve says. We will -- we are in that range on ethane. When it comes to ethylene, I guess, one has the forward spot pricing in terms of what's available in the market, the spot and the contract prices. And hence, we are mostly kind of using those assumptions. I think we also don't need to bind ourselves in the corner to provide too specific -- too much specifics on our price assumptions. We do provide you with ethane, not over the merchant ethylene and product speed range for year 1 in terms of EBITDA interpretation. But as I said, the most significant change in the economics and EBITDA is our ethane. And you can work off this ethane range which I have provided.

Thank you. Bongani, can you take the NERSA and the IO?

Yes. Thanks, Gerhard. If I could respond to the question on the gas prices. We have indeed appealed, we have the -- we are the second respondent, the primary respondent is NERSA in this ruling. So the next what it's going to is the constitutional court. We strongly believe that the fundamental issues were missed by the SCA, which is the Supreme Court of Appeal. So that's where we are on that matter, so it's (inaudible) so to say. Except to say that aside, our strategy remains as it was. And then in terms of the question on IO, there's been a lot of noise on this. But for those who might be less familiar about it, IO is a -- the company which is in the IT space. They've been secured our -- basically it's our networking contract which we had with BT and it's back-to-back with the British Telecom, in case all goes south. But given all the noise which was around, we then put specific clauses in the contract, some of the clauses we put was, if there was a clause of a misrepresentation or fronting, it's an exit clause to the contract. So it obviously goes back to BT and although (inaudible) has been there for over 10 years. In addition to that, the BT people have been moved to IO and for -- as far as we're concerned, there's some people who are providing services to us and BT providing services to us and IO. And the key test is what does it mean for our operations. We have hardly noticed the difference except that the big invoices are going to a different company. But detailed due diligence was the -- was done. And we then put some bits and pieces in the contracts just in case.

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

Few questions. Firstly, the sort of $250 million to $300 million this year for LCCP in terms of EBITDA, does that -- is that after all start-up costs? Are there any start-up costs that you've not included, are going to be capitalized for instance? Also perhaps I think you at one point said you would give us the likely depreciation and interest charges this year on the product, I'm particularly interested in interest and how much of that is going to go through the P&L going forward? And then you've entered the market with a sort of toe in terms of hedging your ethane requirement. Obviously as Paul said, the forward curve for ethane is fairly attractive still. Aren't you going to attempt to hedge out more of your ethane going forward or not? And then just one confirmation, the free cash flow target for 2022 of $6 a share, is that including all CapEx or just sustenance CapEx?

Okay, Alex. I will deal with your questions. And ultimately to your point on the $250 million to $300 million, we have a very specific process that we follow to assess when a plant is being brought into beneficial operations. Now in terms of our convention, once a plant has completed its -- the sort of beneficial operations, then all cost gets expensed. So ultimately, when you look in terms of our income statement all start-up cost as part of beneficial operations have reached that point to expose commissioning and startup, effectively forms part of operational costs. We have just recently completed our work again on the review of that. So I can confirm that's all included in the $250 million to $300 million. In terms of your second question in terms of interest gap, I did promise that. And I do want to refer you to our fact sheet. And you'll see on the fact sheet for the LCCP, we do list the interest capitalization for the respective years. I think it's quite important. I will -- in more detail, maybe tomorrow, on the Analyst Call, share with you, how we're going to treat interest after we've actually completed construction specifically on the bank term loan, or the $4 billion. IFRS requires us not to extend and rather capitalize it to other projects in the grip, but I'll talk more about that. The -- our exposure to with regards to ethane and the impact of ethane on the future cash flows of the company really becomes quite elevated going forward. So as part of our hedging strategy, you're 100% right that hedging a part of ethane, not only on the current cracker but also in terms of the Lake Charles new cracker ultimately will be within scope. Our current focus is only to hedge roundabout 70% to 80% of the volumes of the current cracker, and we're building the process of doing that at these levels that the forward curve indicating 100%, right, it's still kind of very flat. So it makes sense to hedge that, but we will only start considering hedging the ethane volumes on the Lake Charles cracker once the plant starts up. We need to underline and we cannot take that risk at this stage to start the hedging before the plant is really started to produce the volumes. Once they produce, we've got to underline and hence hedging on the new volumes will also be considered. What those hedging labels will be? It will certainly be not 70% to 80%. So once we've confirmed those numbers later on and obtained a mandate from our board, we will come back to the market and give you a sense. In terms of the free cash flow per share, what we shared at the Capital Markets Day, that's the free cash flow. So effectively cash repayments from the business less sustenance capital. So it doesn't include any growth capital because what we did say is, all free cash flow needs to be allocated where the most value will be for the company following a balanced approach. The free cash flow [deducting] sustenance capital of $1.5 billion per year into account.

Can I just -- with regard to the interest charges going to the P&L, you're actually saying that you won't be able to offset those through more capitalization elsewhere. And therefore, there'll be a -- maybe a higher interest charge than was anticipated when you...

No. So basically what I'm saying is, until the point that you achieve beneficial operations or you've finished construction, so to say, all interest specifically on the $4 billion bank facility on that asset-based finance over the Lake Charles project will be capitalized against the Lake Charles plants. Once -- thereafter that interest charge will be reallocated to other projects in the group if such projects are available and capitalized against those, else they will be expensed.

Okay. So no change really from the previous expectations?

Yes.

We can now take the next question from Adrian Hammond of SBG Securities.

Two or three questions for me, please. Two on the cracker and one on your fuels business. Firstly, assuming that LCCP is commissioned, when do you expect beneficial operation? And how would you define that in terms of percentage utilization? And secondly, have you secured any buyers for your polymer product from the LCCP? And where are these buyers located? And how do they compare to the envisaged guidance you put out some time ago? And then lastly, just on the fuels business in South Africa, have you realized any gains -- or efficiency gains on the margins from the fuels distribution business? And if so, is this -- are there more to be made?

Adrian, can I just ask on that last question. I wasn't really clear what the question was. Can you explain it to us as to what you're looking for?

So in your distribution of fuels both in the commercial and retail sectors in South Africa, have you made any efficiency gains on the margins that are available to you in the regulated pricing on those fuels and in the distribution of those fuels? And I'm speaking more to broader retail strategy.

Okay. Adrian, I'll start on the first one and I may need some help from Stephan or from Bernard, but let me give it a go. Then Fleetwood, could you take the one on the chemicals products? And Paul, can you take the one on the energy? I may need some assistance. So I think your question is,- what determines beneficial operation, is that kind of the question?

That then went (inaudible).

Each unit will -- so the dates that we have been putting out are beneficial operations dates. So all the dates that we talk to you about are beneficial operation. So before that, we have finished the mechanical works or what we call mechanical completion. Then we have commissioning and ramp-up. And we finally get to beneficial operation where we're at a point of which the operations are steady, we're on product, we're confident that the unit can maintain -- without unforeseen incidents happen, but maintain the kind of levels of performance. And we have a very detailed process we go through to say we have now achieved beneficial operation. And it will be the operations guys who basically tell us that they have done so. So the dates that we've given is that we expect to reach beneficial operation on the first polymer unit before the end of this calendar year on the polyethylene unit, the LLDPE, we expect to reach beneficial operation on the cracker and we hope to reach beneficial operation on the ethylene oxide, EG, before the end of the year. Again, we've said that might push out over into the next calendar year into January. But all the dates we talk to you about are beneficial operation dates. Fleetwood, you want to talk about products?

Yes, thank you. So Adrian, the whole approach with polymers in our global sales network hasn't changed. One impact that we did consider now recently was with the tariff announcements in China and in the counter position from the Chinese. We have appointed all our distributor channel partners globally. We've got a very moderate placement in each region of the globe. And in essence, those have not changed. What we have in the contracts included was to give us flexibility to [scull] in each region. So our distributing partners will have the flexibility, should we increase allocation to that specific region or take away and reallocate to other regions, we've got really flexibility in those type of agreements. And therefore, the impact even now with the tariffs from between U.S. and China, we feel that we can mitigate that because there is also a very low percentage of exposure that we have into China as direct placement of our polymers. Just to give you a flavor, it's less than 5% on the HDPE and it's less than 10% of our annual LL volumes that we will be placing them on. Note also that the LD volumes have been taken off the tariff list, so there is no exposure that we have there. So it remains in the low double digits the exposure that we've got in terms of the total impact in China, we have not any mitigation plans, but we believe we can redirect some of that product and therefore would mitigate the impact...

And then to your last comment in terms of our retail strategy, we believe that we've been quite successful over the past number of years to increase the volume pump side of our focus, which talks about not only promoting our brand but also the offering to customers. You will also notice that we sold 10 stations during the year and as part of our organic strategy is not only to grow new sites but also to redeem or sell the ones that's really not adding the value according to our strategy. We do believe that ultimately through building our brand and promoting and enhancing the offering to customers, we do see a higher uptake of customers actually visiting our site. Very important that the GDP in South Africa is unfortunately a stumbling block, because most liquid fuel manufacturers and marketers find it difficult to grow at pace as a result of that inherent limitation. However, we do believe going forward as part of our digital transformation that using technology specifically in our [focus] will significantly increase further value enhancement and efficiencies for us, not only in terms of the customer experience but reducing working capital, wider stock and ultimately how much fuel inventory to carry. So we are busy with those processes, and we do believe digital will be a significant value enhancer for us in our retail strategy going forward.

Operator, I think we have time for one more question.

We can now take our last question from Herbert Kharivhe of Investec.

I've got two questions. And the first question is -- the first one is, what is the plant utilization rate that end up (inaudible)? And the second one is, is the (inaudible) debottlenecking for the (inaudible)? And I say this given that I noticed that the summation of the different product groups exceeds 1,755 kilotons per annum?

Thank you for the questions. Let me take the second one first. So our current focus obviously is on completing the existing project, getting it up and running and getting the cash flows. That being said, we will be putting about 200,000 tons annually of ethylene onto the merchant market. And so, there exists the opportunity to either debottleneck some of the downstream units or build something in the future, all of that will be determined as we go forward. But we're currently not active in really trying to address future expansion, we're currently looking at trying to get the existing plant up and running. In terms of the utilization that we have in our numbers, we look at about a 95% overall utilization on the site. Yes, when we get up running, steady state. Okay, let me just close in saying thanks to you all for participating. We really appreciate your interest. And we will talk to you again soon. Thank you, operator. You can close it now.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.