Sasol Ltd (SSL) 2019 Q2 法說會逐字稿

Good morning, good afternoon, ladies and gentlemen, and welcome to the Sasol Interim Results Conference Call. Today's call will be hosted by Bongani Nqwababa, Joint President and Chief Executive Officer; and Paul Victor, Chief Financial Officer. Following the presentation, an interactive Q&A session will take place.

I will now hand the call over to Bongani Nqwababa. Please go ahead.

Thank you, operator. Good day, everyone. This is Bongani Nqwababa speaking. Thank you for joining us on this call today, which Paul and I will discuss Sasol's 2019 interim results. Steve and other members of our management team will support us during the question-and-answer session. We have published a slide presentation of our results, which you can download from the Investor Centre on the Sasol website. In the interest of time, we will not discuss all slides as we would like to make more time available for your questions.

Before we begin, I'd like to refer you to the safe harbor notes on the forward-looking statements contained on Slide 2 of the presentation.

Now we can move on to Slide 4. You'll see a summary of our key messages. The 6 months to end December 2018 was a volatile period with fluctuations in the oil price and the rand-US dollar exchange rate, presenting both headwinds and tailwinds for Sasol. Notwithstanding, we did deliver a satisfactory set of results.

In recent weeks, we provided updated guidance to the market on the status of LCCP. While the scheduled start-up up of various units have moved out by several months and the capital cost was adjusted, the business case for this world-scale chemical facility remains sound. I will provide much more detail on this matter shortly.

Running safe, reliable operations underpinned by our zero-harm aspiration is a cornerstone of our business and an area that will continue to receive focused attention. Although our recordable case rate of 0.26 is an improvement on the comparable period last year, we remain vigilant in improving our safety performance by continuing to implement our high-severity injury program.

In terms of our operational performance, we're starting to reap benefits of improving operational reliability. A key highlight in this regard is the performance of Natref, where a 43% improvement in the run rate was achieved. In addition, mining improved its productivity rate by 8%. Despite a longer-than-planned shut -- total shutdown at our Secunda Synfuels operations, we remained cost competitive. Furthermore, the recent performance of Synfuels supports a run rate of 7.8 million tons per annum. Our track record of cost competitiveness speaks for itself, and we have once again sustained a stellar cost performance for the reporting period.

As indicated at our previous results announcement, we are increasing our focus on sustainability. This is essential to how we run our business to ensure our resilience over the long term. Sasol remains committed to transitioning to a lower carbon footprint. We will provide more information on our climate change management approach through our reporting processes. We are also undertaking scenario analysis to test the robustness of our business strategy. To increase transparency, we have adopted the Task Force on Climate-Related Financial Disclosures' guidelines.

Finally, our value-based strategy remains our north star, guiding our efforts to deliver superior value for our stakeholders. In the near term, we continue to address challenges confronting us, while remaining focused on meeting our strategic objectives.

Paul will, of course, go into more detail on our financial and operational performance for the year. After that, we will open the session for any questions you may have. Paul will -- I now move to Slide 6 and 7. I will now deal with the Slide 6 and 7 as both relate to the LCCP, although I will not strictly follow the bullet point chart. Just to manage your expectation, this might take a bit of time. We are disappointed about the LCCP schedule delay and increase in the cost estimate. This is our project, built on our site, and we take accountability for the outcome, the good and the bad, which I will unpack shortly. Any projects the size of the LCCP must have certain systems to collect the large amount of data and determine progress across all work fronts and all contractors. Given the span of activities and the complexity of collecting, verifying and analyzing the data, there is a 4- to 6-week lag time for data to be processed into usable reports for insights to be gained on project status.

However, we also track leading indicators on a weekly basis and put in place interventions to address issues that have arisen or we believe are likely to arise. It becomes much harder to mitigate any issues that occur near the end of the process because most remaining events directly impact the critical path. Both of these factors played into our recent schedule delay and associated cost increase.

As we progressed through calendar year 2018, we grew increasingly comfortable around our ability to deliver the LCCP within budget and on schedule. There are several reasons for this. The project has maintained an exceptional safety track record with safety recordable case rate to end December 2018 at 0.11. After the impact of Hurricane Harvey, we had managed to get back on track. Construction and productivity in the field was tracking our target. Our decision to follow a modular construction approach held us in good state and there were clear benefits showing. We brought this steel plant online within schedule, reaching a critical milestone and enabling the next phases of the project to be delivered on plan.

Early in the second half, the indications were that the LLDPE plant would have reached beneficial operation before the end of calendar year 2018. As part of our regular internal and external assurance processes, there were some issues raised such as some fabrication issues, but the nature of the issues and our performance to that point gave us sufficient confidence that it would not materially impact cost or schedule. Our internal quarterly review, that was completed in mid-November 2018, did not show any significant deterioration in the field productivity but did show that the commissioning activities on the LLDPE and cracker was struggling to keep in line with expectation.

In addition, problems with some carbon steel forging associated with flanges on the cracker and EO/EG units continued to be reported, but the full extent of the problem was not known.

Lastly, we experienced a very wet October and early November. As a result, we moved several BO dates by 1 month, the LLDPE to late December and the BO date on the cracker and EO/EG to January and informed the market that the schedule might -- was tight and there was potential for a marginal schedule delay. Given our success in holding a difficult schedule for the steel system, we believed a 1-month delay was realistic and that additional cost could be offset.

In late November and December, we had several critical events take place. First one, the carbon steel forging problem was found to be more extensive than anticipated in the cracker and EO/EG requiring replacement that will result in another 1 or 2 months delay. 8,000 drawings revisions were issued by EPC in the past 6 months, of which approximately 20% had the direct impact on construction and this significantly slowed completion progress across the entire site. Field productivity fell 30% as a result of high absenteeism around public holidays and construction rework that was required. Weather remained unseasonably wet and compounded the above issues.

In parallel, with our quarterly reporting cycle, we did follow WACC on the current schedule and cost as we had increasing concern about the cumulative impact of the trends that we were seeing. This concern was heightened by the complexity of the cracker and the fact that so late in the process it was difficult to mitigate the schedule and cost impact. In addition, we enlisted an external assurance provider to conduct a review. We then updated the market as soon as we had reasonable certainty on the revised cost and schedule. The LLDPE was least affected by the issues noted above due to its date of completion and reached BO on 13 February 2019, approximately 6 weeks later than communicated. The learning from this will be implemented for the remainder of our plant.

In terms of where we are now, we have factored in the cost incurred as at the end of December, preliminary January data indicates that productivity has picked up and that the inclement weather and absenteeism during the holiday season is passed. The spend rate has dropped in line with our expectations as plants move into commissioning phase. The additional cost incurred by the aforementioned events as well as the cost of a time extension as a result of the delays increased the capital cost estimate to USD 11.4 billion. However, we also needed to incorporate the trends over the last quarter of calendar year 2018 as well as lessons learned from the early commissioning WACC, which clearly indicates that a further USD 200 million would be required, taking us to the bottom end of our guided range of USD 11.6 billion.

In addition, we reserved a contingency of USD 200 million for other development, such as further adverse weather conditions, providing the upper end of the range of USD 11.8 billion. We have confidence in meeting the revised cost and schedule guidance as we have taken a number of actions to ensure that we learn the lessons of recent months and complete the project within the revised guidance.

We, therefore, have revised plans in advance to ramp down construction labor as activities end, accelerate participation of the operations team as we approach construction completion. The operations team has permanent Sasol employees, focused on ensuring a well-constructed facility, implement lessons from commissioning activities to improve schedule compliance and move resources to the recent utility construction and [hand over] experience to the WACC units. As the Joint CEO, Steve and I, also take enhanced decisions to further improve management oversight and transparency on the project. The hard lessons learned on LCCP will be rolled out into the organization to aid future project planning.

I realize I've said quite a bit, so let me summarize. The negative impact to schedule and cost was caused by a variety of contributing factors, many of which were unrelated, the aggregate effect of which was, therefore, only seen when collected data across the site was analyzed, which comes through 4 to 6 weeks after impact, in line with project of the steel. These factors escalated at the end of quarter 4 of calendar year 2018 with high absenteeism around the holiday season and ongoing wet weather. Being at the end of the construction phase provides very limited room to absorb impacts. And when learnings from the early commissionings are applied, it resulted in the impact to the cost and schedule. As we said at the offset, we accept accountability for this impact, and we're taking actions to make sure the consequences are felt and the learnings embedded.

However, we also want to ensure the positives are not overlooked here. A number of aspects of the performance have been very positive such as the outstanding safety record. Recent events in Norway undermine the potential for the LCCP, which remain that it would be able to produce a run rate EBITDA of USD 1.3 billion, which is transformational to the Sasol group.

I will now move on to the Slide 11, which is my last slide to cover. To close my part of today's teleconference, let me reiterate that we remain focused on delivering our value-based strategy. 2019 is a defining year for Sasol. We have few near-term challenges, which we have already shared with you. However, we have a clear focus to continue improving our safety performance in pursuit of achieving 0 harm; maintain our low cost and working capital competitiveness through continuous improvement; drive safe, reliable and stable operations; deliver LCCP commissioning, operations and business readiness; and manage our balance sheet, while protecting investment-grade ratings and positioning the company for growth.

Our focus will lead us to deliver sustainable returns for our shareholders, where we have defined growth targets for EBIT, ROIC, free cash flow and delivering increased dividend returns.

Paul will now take you through the detail of our financial and operational performance. We'll then open up the session for questions, which will be led by Steve. I thank you.

Thank you, Bongani, and good afternoon, ladies and gentlemen. It's my pleasure to talk you through the highlights of our 2019 interim financial results. Our drive towards growing shareholder value sustainably is guided by our continuous focus on a safe and sustainable delivery of operational and capital efficiencies, continuously improving our cost competitive position, managing the balance sheet's risk prudently by means of our financial risk mitigation strategy and, at the appropriate time, further growing the value of the business as informed by our focused strategy and disciplined capital allocation approaches.

With this in mind, I will now turn to our financial -- 2018 (sic) [2019] interim financial results and how that contributed towards delivering on our value-based strategy.

I will be now turning to Slide 13 for the key messages. First, the improving rand oil price had significant positive impact on our results. While the macroeconomic environment is volatile and uncontrollable, we will need to and will continue to focus on the factors within and under management's control. We are very pleased by a stellar cost performance during the period, resulting in us delivering a normalized cash fixed cost increase that was once again below inflation. We've also seen a marked improvement in our working capital levels. The weaker rand did add a positive impact on our profitability, but it did add 2% negative impact on our gearing due to the translation of dollar-denominated debt. This combined with higher capital levels on the LCCP as well as the decision early in the year to refinancing Inzalo debt resulted in slightly elevated gearing levels. We continue to proactively engage with rating agencies to ensure that we protect our investment-grade ratings.

I'm also very pleased to report that we were successful in placing $2.25 billion worth of corporate bonds late last calendar year. This was a very important milestone for us in spreading our debt maturity profile more effectively and also allow us to position the balance sheet to enable our value-based strategy going forward. Despite the recent challenges faced at LCCP, we do remain confident, as Bongani mentioned, that this project, combined with the performance of our foundation business, will result in the free cash flow inflection point, now occurring by mid-Financial year '20.

Finally, I'll also share with you briefly what our outlook is for the remainder of financial year '19. Let's turn our attention to Slide 15. We delivered an increase of 10% in EBITDA over the comparable period. And the core HEPS, which is headline earnings per share, adjusted for remeasurement and period-end reevaluations, amounted ZAR 21.45 per share which is 18% higher compared to the comparable period. Very important to note is that although the rand per barrel increased by 33%, our EBITDA only increased by 10%. And this is really as a result of the impact of inflation, the lower-than-planned production volumes as a result of the extended shutdown of Secunda as well as operational costs that are starting to incur on LCCP.

Operating profit of ZAR 20.8 billion increased by 76%, benefiting from a higher dollar-based oil and chemical prices, a weaker rand as well as low remeasurements and once-off items.

As mentioned earlier, our gearing has now increased to 48.9% as at the December 31, 2018, which is above our targeted level of 44%. This 4.9% increase above the target mainly relates to around about just over 2% as a result of the elevated LCCP capital cash flows and 2% remaining as a result of the translation impact of the higher closing exchange rate on our balance sheet debt.

Despite the elevated gearings, we are so very pleased to declare an interim dividend of ZAR 5.90 per share, which is very much in line with the company's cover dividend-based policy.

Everyone, move on to Slide 16, I want to take you through the items impacting the changing operating profit compared to the previous year, and let me just step you down through the slide from top to bottom. The weaker average rand-dollar exchange rate, net of inflation, positively impacted our operating profit by 18%. Higher dollar-based crude oil and chemical product prices significantly boosted our operating profit by 43%. Remeasurement items were much lower compared to the prior period. Very important to note that during this period under review, we have recorded ZAR 949 million partial impairment reversal of the previous year's ZAR 5.7 billion impairment of the South African Chlor Vinyls business. Now over the past 18 to 20 months, we have studied the integration impact of Secunda Synfuels to Sasolburg and it was quite evident that there is lot of assets that fundamentally integrated to Secunda Synfuels, and for that reason, we then reset the useful life of the Sasolburg assets to 2050, that is in fact aligned and integrated to Secunda Synfuels. The remaining assets of Sasolburg site that's not integrated, such as the WACC's assets, as mostly still sit at 2034.

Normalized cash fixed cost increased by 4.3%, which is below our 6% inflation guidance given previously, and I will also unpack this on the following slide.

Sales volumes were even negative, but didn't actually quite disappointing, as a result of the production interruptions which we experienced during the first quarter of financial year '19 and which we reported on in terms of our quarterly results. And this was really as a result of two reasons. The extended shutdown at Secunda Synfuels as well as the external ethylene supply constraints, which impacted our European operations. We have even seen a very much improved increase in our run rates from our global assets since quarter 2 financial year '19, and we do expect that these run rates will continue for the remainder of the financial year.

Please move on to Slide 17. As I said, we are very proud of the cost performance that resulted in the normalized cash fixed costs to be contained to approximately 2% below inflation. We have normalized, however, for following items in cash fixed cost, and allow me, again, to step you through it from top to bottom.

First, our growth cost increased our cash fixed cost by 5.1% and really mainly relate to cost associated with our projects in the U.S., predominantly the LCCP as well as the normalizing impact of HDPE plant. These growth projects will, however, significantly increase our future earnings from financial year '20, and then we'll see better match between cost and revenues.

Business establishment costs and once-off items decreased our cash fixed cost by 0.5% as we now start to see the energy benefit and lower electricity charges since we started at -- after 2017 in Secunda, both of these items being realized in a normalized cash fixed cost to be contained to well below inflation. As mentioned by Bongani, quite important that our cost targets will remain a key business priority for us going forward.

So let's move on to Slide 21. We have incurred actual capital expenditure for the 6 months, including accruals of ZAR 30 billion, and this includes ZAR 16 billion or $1.1 billion relating to the LCCP. We had to also revise our full year guidance from ZAR 38 billion to ZAR 52 billion, largely as a result of the increased spend on the LCCP as well as a ZAR 5 billion translation impact as a result of the weaker average rand-dollar exchange rate as a lot of our capital, actually most of it, is dollar-denominated.

Our capital expenditure forecast of ZAR 30 billion for financial year '20, we believe, is sufficient to sustain our foundation businesses as well as support the final execution of the LCCP. Again, quite important to remind in basis of we said our capital forecasts have been calculated over ZAR 14.10 exchange rate -- rand exchange to the dollar. Rand volatility will, however, have an impact on these estimates as, again, as I've stated, a majority of the position of our capital expenditure is dollar-denominated.

Please move on to the second last slide, Slide 22. And as I've said several times, our gearing has been elevated to 48.9%, which is ahead of our pregearing target of 44%. Looking ahead, I think it's quite important that we do share with you how we plan to respond in managing our gearing levels going forward.

Firstly, we still have access to liquidity of around about $2 billion equivalent to fund the remaining capital of LCCP. So we are, therefore, very comfortable from a liquidity perspective that we will and can complete the LCCP.

Secondly, in the next 12 months, we expect to manage our gearing to between 45% and 49%. And although much higher than anticipated, we still hold the view that this doesn't compromise our investment-grade credit ratings. Our commitment to protect investment-grade credit metrics still remains quite solid. I should also reiterate that our successful hedging program, which we plan to continue within financial year '20, will continue to underpin balance sheet protection.

We're also of the view that based on our current assumptions that the loan covenants are not at risk. Just, again, as a reminder, our loan covenants are set at 2.5x net debt to EBITDA, and we are currently at 2.17x, which leaves us with sufficient liquidity headroom going forward.

I'm also very pleased that we were still able to declare our interim dividend for the half year, reiterating our commitment to shareholders to maximize shareholders' return whilst still managing the balance sheet within investment grade. Our previous guidance to increase our dividend payout ratio to 45% over time, as communicated at our Capital Markets Day, remains intact. However, it may be slightly deferred as a result of the increase in gearing levels.

To close off on the balance sheet, we are still actively growing the balance sheet as demonstrated by the increase in invested capital over time. You will note from the composition of the balance sheet is that we expect it to be more equity-biased as we delever the balance sheet post the LCCP start-up.

Finally, I should also remind investors that our strategic objectives and value creation remain intact. We do, however, foresee a deferral in the execution of our value-based strategy by 12 months in order to allow the balance sheet the opportunity to delever appropriately. Our commitment to a disciplined capital allocation approach continues to guide our thinking as we move forward.

Let me end by the outlook for financial '19 that's contained on Slide 23. Safe to say that macroeconomic volatility is really for us the new normal. And thus within this context, we expect that our assets to deliver the following results in the second 6 -- half of financial '19: Firstly, Mining to ramp up to targeted productivity levels; Performance Chemicals' average U.S. dollar margins to remain resilient for most of the product lines; Base Chemicals sales volumes on the earning, excluding the U.S.-produced volumes, to be 1% lower on a year-by-year comparative basis; the U.S. HDPE plant is forecast to achieve a utilization rate of about 80% for financial year '19. As a result of the longer-than-expected Secunda shutdown in the first half, we still expect our South African liquid fuel sales volumes to range between 57 million and 58 million barrels, and with Secunda Synfuels' operations, forecasted production to be between 7.5 million and 7.6 million tons.

The ORYX average utilization rate has unfortunately been adjusted downwards to 90% as a result of maintenance required during the second half of the financial year. Normalized cash fixed costs are expected to track our forecasted inflation rate of 6%.

On the macroeconomic front, we forecast the rand-dollar exchange rate to trade in the range of between ZAR 13.85 and ZAR 14.50 and the average Brent crude oil price to remain between $60 and $65 to the barrel; our balance sheet gearing to range between 45% and 49%; net debt to equity and our net debt to EBITDA to be in the range between 2 and 2.3x.

Thank you very much for listening me out. And on that note, I will hand back to Steve, who'll open the floor for the questions-and-answer section. Thank you.

Thank you, Paul. Operator, I think, we're ready for questions, so you can open the line.

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

I understand your comment that you believe that despite the lowest-level balance sheet, you even won't compromise your investment-grade rating. Could you just maybe detail any conversations or interactions you've had with the specific ratings agencies and their view that kind of gives you assurance on that, that's number one. And then number two, could you just also just run us through the implications if Moody's were to downgrade South Africa's investment-grade credit rating later this year for Sasol?

Paul, would you like to respond?

Yes, I will. Thank you, Chris. Chris, the engagement with the rating agencies is on a continuous basis for us. We have engaged with them over the past 2 to 3 years on a quarterly basis. So they're very familiar with how our ratings in terms of their metrics play out. And although we have increased our estimate on the project and we did share it with them, I've had conversations with Moody's and S&P post the LCCP announcement. At this stage, the rating agencies do take note of the update and also the impact that it has on our rating metrics. And basically, there's no significant change in the metrics and how we will recover our metrics over the next 12 to 24 months to get back to where they believe is sufficient. It doesn't take away that they will still do a fundamental review of our results that we've published today. But where we are now based on our assumptions, we don't anticipate a downgrade to sub-investment grade and this was what important when we took our dividend decision to have a view in terms of where they position themselves in terms of our debt metrics. I think leading up to year-end, it will be quite important that we do deliver our balance sheet metrics within the guided ranges as we've kind of communicated. And hence for that reason, we do believe that we can do it and it doesn't create issue for us. From the Moody's perspective, I guess, Moody's definitely is quite critically looking at South Africa. I think the early indication in the market is that they will not downgrade South Africa. But let's go with your question and say they do. They have also articulated to us as a result of the stage of completion of the LCCP and also how we will transform our global flows of revenues from the different assets that they are willing to allow us to be coupled from the sovereign allowing us to trade 2 notches above the sovereign. So ultimately, there's no reason to believe why they will not act on that. So even if the sovereign goes to sub-investment grade, from a Moody's perspective, given where we are now, we don't anticipate that to pull us to sub-investment grade.

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

Couple of questions. Three, in fact. Firstly, with the delay and the higher CapEx at the LCCP, what is your expected IRR now on the project? And do you see any risk of any impairment of any -- every asset at the LCCP? Secondly, you've spoken in the past about achieving contract prices for your polyethylene in the U.S. What gives you the confidence that in the seemingly oversupplied market that you can achieve these contract prices? And would you think that the contract premium might erode as a result of the excess volumes? And then lastly, you've changed the accounting standard on capitalized interest. Can we expect around ZAR 7 billion of increased interest capitalized this year? And how much may be in the following 2 years?

Thank you, Gerhard. Paul, let's talk about the capitalized interest. Do you want to talk about that first and then IRR calculation? Fleetwood, would you respond for us on the polyethylene, please?

Yes. Thanks, Steve. So let me deal with the IRR. So Gerhard, as you would recall, when we do the project economics, we do it over a 25-year period to be consistent with the IRRs that we've issued originally when we took FID. So I think that's quite important. So from that perspective, the IRR on the project after this updated capital is trading around about 7.5%, so it's below the weighted average cost of capital of 8%. And just to put that into context. So we basically use IHS' assumptions, which is very much the Gulf-biased economics. So it's a 40 -- $0.30 to $0.40 ethane scenario with an oil price of $60 to $65 to the barrel. That's where kind of really we -- the underlying assumptions play out for the 7.5%. However, what we have seen is, if the ethylene prices stay lower for longer in terms of what the current indications are that the project still has a reasonable expectation to actually go above weighted average cost of capital, but only time will tell in terms of where ethylene prices do play out. From impairment perspective, when we do the impairment risk analysis, we do it over the useful life of the asset, which is obviously 50 years and not 25 years. So there is a significant headroom on that asset on the LCCP. So for the immediate future, unless something further changes in terms of macroeconomics or capital, we don't anticipate any impairment risk on the LCCP. To the second part of your question, in terms of IAS 23 or the interest borrowing, I must say we did articulate even to the ISB that we are not comfortable with this change of capitalizing specific borrowings to capital. But unfortunately, that is how the ruling went in terms of applying IFRS now going forward. So what we will do is -- I do acknowledge that there is lot more interest that ultimately will find its way on the balance sheet and not through the income statement, and we will provide you more guidance towards year-end in terms of what the flows of interest will be in terms of the income statement and in terms of the balance sheet. So also allow us a little bit of time to work on that. However, for half year, the impact was close to ZAR 1 billion of interest that should have flown through the income statement, but didn't, as a result of this change in terms of the convention on the accounting standard. But towards year-end, we'll provide you more -- with more detail.

Gerhard, it's Fleetwood Grobler here. So with respect to your question regarding pressure on contract prices, I think we need to see the context that about 2/3 of the new polyethylene capacity has come online in the last year or 2 and that we generally see a bit of upbeat outlook in the polyethylene market as supply-demand balance come back into, I would say, a better situation. So with respect to that -- having said that, we are seeing that there is pressure on contract prices. But as I say, it is almost at this low point. So we're positive that going forward there would be more positive industry outlook in terms of these prices. However, our view on the price differential between contract and just spot export, we have taken a conservative view in our project economics by assuming a very small premium to that product of what is generally published.

Sorry, Fleetwood, just the first part of the question. Yes, sorry. What gives you confidence that you can actually enter this contract market to start off with?

Okay. On that side, we have really had a very strong glide path with our HDPE since we started up. We have really -- the majority of that product we placed in the U.S., surprisingly, we thought it's going to be more of 50-50 play. But we have really made inroads. There was a very robust demand on HD polyethylene over the past year. Year-on-year, the demand has grown also substantially as you can see it reported in the numbers. So with that glide path, we also have relationships with these customers that will also take LL and LD. And similarly, we've seen in the export markets where we're present on polypropylene in Europe, in Asia and in the rest of the world that those customers are also keen to work with us having had this long relationships over many years with them, and they're also keen to receive new LL and LD products for their needs.

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

It's Alex from JPMorgan here. I just have one quick question. I noticed that your sensitivities -- the sensitivity to move in the refining crack has come down from ZAR 576 a barrel 6 months ago to ZAR 340. I just -- is there any particular change in the refining business for the sensitivity to reduce by that much?

So Alex, no, there is nothing fundamental that we see that is driving the drop. Of course, it's always seasonal in terms of the supply-demand and what the balances are in terms of the inventories. But the only big fundamental change that we see on the horizon is the IMO spec and it actually should drive it in the other direction. So I'm going to tell you, no, we don't really see anything that's moving it fundamentally such that it would stay at the -- at this lower level.

Okay. As I said, I mean, just your oil sensitivity hasn't changed but your refining sensitivity has. So just sort of it was bit of odd, but some maybe we'll catch up later and talk about that.

No, we have not.

Yes.

We will now take our next question from Henri Patricot of UBS.

A couple of questions on LCCP. The first one, just want to follow up on comments you made in the opening, saying that you had improved the management oversight of the project. I don't know if you can expand on what has changed exactly since you've identified these issues late last year? And what makes you more confident about the revised schedule? And related to that, my second question is around just the overall cost of the project. You've left a range of $200 million, at what point do you think you'd be able to narrow that down? Do we have to wait until your same cracker is restarted up?

So Henri, thank you very much. So we've tested ourselves in terms of what other leading indicators. Obviously, we already have leading indicators, but they weren't as good as what we wanted. So the 2 -- I'd say the 2 financial ones that we're looking at is just trying to get earlier, more accurate view on the productivity in the field. All that's really left to a large extent is the manpower that it will take to finish out the project and the manpower that is needed -- contracted manpower that's needed in the early part of commissioning. So just trying to get better indications on that -- on the numbers, craft numbers, productivity numbers. And as we said, the FTI system is really built more for bulk construction. And to get the data from that takes about 6 weeks for it to come out. And we've seen that, that's longer than what we really need. So we're trying to do that. The other is just some indications on expenditure rates, and can we get earlier indication on expenditure rates so we can see what the burn rate is. And is that matching with what we think the demobilization curve should be. So those are the 2 things, I'd say, that we're putting in place to try to get better sight earlier.

Is there any residual question, Henri, anything else you're thinking about?

No, I think that addresses the first question. I mean just on the second question around the overall cost of the project and lowering down this range?

Okay. So ultimately, Henri, we had to update, obviously, with what we believe is a plausible range in terms of the project's cost, giving rise to the $11.6 billion with the contingency of $200 million. And what's being -- our practice is on the quarterly basis is to update you in terms of progress that we're making, in terms of this regard. I think the critical milestone for us will be, as we move through 30 June -- 31 July, as kind of we get to completion on specifically the cracker, which is probably the biggest draw on capital in terms of outflow. And as Steve says, we'll monitor these KPIs. I think we really have good clarity in terms of whether cost of the project will play out towards our final results in June. But we will use the quarterly updates to provide you with some more color in terms of what the progress is that we are making.

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

It's Johann Steyn from Citi. Just a quick question regarding your net debt to EBITDA. You're currently at 2.2x and covenants, obviously, 2.5x. There's still a little bit of headroom, but it is pretty close. As you -- have you thought about negotiating with your banks some form of a debt or a net-debt-to-EBITDA covenant wave? Some of your peers in the mining industry have done that before. That might just put some fears to bed about the balance sheet. Have you considered that?

Thank you, Johann. I think that's a very fundamental question that you raise. So ultimately, on the first principle, you need to be comfortable that your plans for the next 6 months will support your managing of your cash flows to within this range. So from a modeling perspective, obviously, we have modeled the $11.6 billion, $11.8 billion capital scenario because that's really the biggest draw if [we give you on your date] side as well as low oil prices and stronger rand-dollar scenarios. And we do feel comfortable that the 2.3x range is still for us -- that being quite sufficient. We have also introduced a couple of management actions, I will say, to ensure that we do kind of manage the ship quite tightly in the next couple of months. To your point in terms of -- so what -- that's plan A. So if plan A doesn't work, are you ready for plan B where you have potential of being confronted with a covenant breach. And I will say, definitely, we have to have a plan B. Ultimately, we are in the process of also considering the refinancing of our bank-term facility over the LCCPs remaining covenant update, the $1.75 billion. And as part of that process, we will see how we can actually kind of reset our covenant levels, just in the eventuality that you do go closer to 2.5x, which we don't anticipate. But your point is quite valid, rather be ready than not. So it's definitely part of our reference to consider that. And we'll probably also be able to update you in -- closer to June in terms of how successful we were as part of that process.

Okay. And then regarding the dividend, in a worst-case scenario over the next 6 months and 6 to 12 months, is there any chance of this dividend -- is it more likely to increase waivers on your debt covenants or you'll cut down on the dividend payments, if you look forward over 6 to 12 months, in a worst-case scenario that would be?

It's Bongani here, if I can respond to that. Certainly, the view of management, which we have shared with the Board, is that as management we need to exhaust all the reasonable actions to make sure that the business has sweated off any excesses which might be there, but at the same time, not compromising the business. So it's not a decision we would take very easily because we would need to make sure that we have exhausted all internal alternatives. But if it is a residual case, which needs to be done for the sustainability of the business, we'll obviously do that because we'll risk the business being downgraded or things like that. But I can assure you it's not a decision we'll take easily.

We will now take our next question from Adrian Hammond of Standard Bank.

Yes, I've three questions, please. Just firstly on the schedule, the revised schedule. Have you guys built any effect into that schedule? And how confident are you in the new schedule, given that you don't really know what's happening after 46 weeks? And then secondly, what is the revised working capital requirements on LCCP? And lastly, regarding your credit rating, which you say is that crescent, are there any others levers you can pull to ensure that? You've spoken about hedging. Obviously, the dividend is questionable, but what about costs and CapEx?

Paul, do you want to start?

Yes. So let me take your last two questions first, and then Steve and Bongani can comment whether they believe that this is affecting the schedule. So ultimately, from an investment credit ratings perspective, I want to really touch on to what Bongani said just now is that we need to make sure that all management actions of reducing excess in the company are identified and are being executed on. So ultimately, as we did revise the estimate of the LCCP higher, we were also equally focusing on finding cash savings in the company that will not only fund the interim dividend but also will make sure and ensure that we manage the gearing as well as the net debt to EBITDA within the ranges that we provided. So effectively, we looked at further working capital optimization without putting the sustainability of the business at risk. We have trimmed down our capital portfolio in terms of remaining spend for the year and obviously, looked at the line of certain capital projects that haven't started yet or we can actually delay. So we actually went into that. And also identified further gross margin and volume increase opportunities, which we believe is plausible and achievable. So the combination of all of that -- they provided us with a management action plan to provide to the Board and gave them comfort that this plan was -- has a high probability of being achieved. Second to that, we've also identified further actions, such as stepping up our asset disposal process. We have really just completed all the reviews of the assets, but we've got a good sense of what assets are noncore or where we want to potentially sell equity stake at value with some of our assets. We have certainly been approached by many parties for access or kind of access to certain assets, either the assets in itself or equity thereto. So, hence, we will also step up and beef up our efforts in the next 6 to 12 months with regards to slimming and also simplifying the asset portfolio. There are then also a lot of actions that are least preferred, such as a cut to the final dividend or even considering salary freezes. And so hopefully, this gives you the extent of the suite of actions that we've identified in order to manage our investment grades going forward and manage the balance sheet's risk. And that obviously comes into addition to our hedging program. We do -- we have started to execute on the Board-approved mandate for financial [year 2's] hedging and half of our currency exposure mandate have already been completed and most of the ethane hedging has also been completed. So I think we're in a good shape in terms of protecting the balance sheet at those investment-grade ratings. From a working capital perspective in terms of LCCP, what's important [is that we still envisage] at stable run rate a working capital to turnover percentage of between 12% to 13% working capital to turnover. So we are very much still in that line along those lines, really, I think fundamentally has changed in terms of what we've messaged before. Steve, Bongani on affecting the schedule?

On the schedule, the schedule that we put out to the market is our schedule that we developed with our internal team, given the data that we have on-site as of January. And obviously, we still have some time to go. So looking at what could additionally be in front of us that are still uncontrollable is where we came up with a range on the cost. But in terms of the confidence on the schedule, I would say, we had 2 recent external reviews to interrogate our schedule. One, we did before we went to market. And one that has been done after we went to market. And both are aligned that our schedule is realistic and achievable. We feel very confident in it. And we don't have any question that we should be able to deliver it as planned.

We will now take our next question from Wade Napier of Avior Capital Markets.

Quick one on these scope changes at LCCP, specifically regarding the steel forgings. As I understand it, a lot of this sort of steelwork was done sort of off-site in a modular fashion. So why was the integrity of the steel forgings only sort of inspected in situ once at LCCP and everything was put together, why wasn't the inspections done at site where the manufacture was taking place? And then my second question is regarding the 12-month deferral of your value-based strategy. I mean I understand the degearing now only occurs in sort of 2020, but is there a risk that the sort of 40% dividend payout target moves from 2022 to 2023 now?

Thank you, Wade. So the forgings -- yes, the modules were done off-site. The problem that was identified was identified on 2 of the units. And it was limited primarily to the flanges. Testing was done, adequate testing was done. We actually discovered this. The -- we had QC on-site at all of the mod yards, but the fabricator did not bring forward the data that was necessary, that we actually discovered. And like we said, we've started digging on this, it took us several months to track down if we did or did not have a problem. And finally, when we convinced ourselves that we did have a problem that would be a process safety risk and unacceptable to go forward if we did not address it then we had to order new flanges and basically, cut out the ones that had already been installed and reinstalled them. So it wasn't that we didn't have QC. But basically, we, the Sasol team, did extra investigation. And we found the problem. And we're glad that we did find the problem because it would have been a serious process safety concern if we hadn't addressed it.

Wade, to the second part of your question in terms of how quickly can the dividend payout ratio be stepped up and how much of deferral do we anticipate, so yes, [I think it's] agreed that our previous set of assumptions prior to the update of the LCCP was that the deleveraging of the balance sheet would start to take place as soon as we complete the LCCP's last unit debt to EBITDAs. And then ultimately, from financial year '20, not really commit to significant growth capital until such time that we actually achieved a gearing level which we feel is commensurate to actually stepping up the dividend. And that fundamental process and it's a mental-model alignment, is still intact. I will say that at the elevated gearing levels that we currently are, how quick we can deliver is ultimately based on assumption, how quick can we deliver the LCCP debt to EBITDAs and ultimately also what will the macroeconomics be as well as how strong will cash flows be from our foundation businesses. And we do foresee if oil prices stay between that $60 and $70 world and the rand between ZAR 13.50 and ZAR 14.50 in that range, then ultimately that deferral is probably 12 months at base. But you know there are many moving parts here. And I think you have to allow us to deliver the balance sheet to that 30%, 40% range and being presented to the Board. And if that happens sooner than later, of course, the Board will have a look at that and support the capital allocation approach. But if it's going to be slower due to more kind of diverse or severe macroeconomic situations, the Board will not put the investment-grade ratings under risk for the sake of stepping up the dividend. So there are many balls to manage, but I think we've been quite clear in the way and the manner that we wanted to step up the dividend and that hasn't changed. So there's no reason why growth capital all of the sudden for projects will be put in front of dividend. It will be deleveraging dividend and then growth capital.

We will now take our last question from Alex Ayoub of Waha.

Just a question on the rating, please. You mentioned you have different strategies in case the performance is a bit tougher this year. Can you quantify a little bit in terms of asset disposals? I mean, what's the magnitude of this asset -- this potential asset disposal, would be like couple of hundred million dollars? Can you give us some -- a feel around that. And then, secondly and sorry if I missed it, would you have some guidance around if you have, call it, $1 move on the oil price or on the FX U.S. dollar-rand side, how much impact that would have on your EBITDA?

So basically in terms of the sensitivities, we -- I'm going to give it to you in terms of operating profit. $1 change in the operating profit is round about ZAR 860 million. So let's say, $60 million to $65 million. And if do things change in the currency, it's around about ZAR 790 million or, let's say, around about $60 million. That's just on an annual average basis.

Your question in terms of asset disposal. The process that we've used in terms of asset disposals, we've broken up the company into what we believe are logical bite-sized pieces of the business that can stand alone in terms of operations or financial reporting. And we had about 100 different of those units. And we've gone through, over the last 12 months or so, about 80% of them. And as you said, the majority of them, we believe, we can retain, and to some certainly improve. But in terms of identification of disposal, I'd say the magnitude of what we believe we could ultimately achieve would be up to USD 1 billion. We've already done a couple of disposals and we have put those into our financials. And there are others that we're currently investigating and proceeding with, but that will take some time. But over the next, probably 24 months, we would hope to try to achieve something approaching that kind of level.

Fantastic. And so just the last question on the covenants. How regularly are they tested? Are they semiannual covenants? And look, I mean, from our perspective, I mean, we know that like even if you are in slight breach of the 2.5x, it's really fine, especially given you have a lot of deleveraging coming in the next few years and the banks should not have any issues around that. But It's always a bit better to have some buffer or having you had these discussions earlier on with the banks. And also 2.5x, I think, for a company such as yours is going through this project is extremely tight. So just wonder if -- how regularly are they tested? And if you had any discussions already on that front?

Yes, I think there was earlier question, don't know whether you got it that Johann Steyn asked. We have already replied in terms of how we plan to manage it as well as potentially increasing the covenant levels. So I'm not going to repeat that. However, having said that, we are...

It's really fine. Sorry about that.

No, no, no. No worries. So ultimately, we do revise and monitor our covenants twice a year, as you've mentioned and that we'll continue. There's no reason why that we'll not continue in that fashion going forward.

I would now like to hand the conference back to Mr. Bongani Nqwababa. Please go ahead.

Thank you, operator. I'd like to take this opportunity to thank you all for participating in Sasol's half-year results call. Your concerns on the LCCP delivery are well founded as it looms large in our life and the delivery is not an option for us. We're well aware of the impact it has, not only on our profitability going forward but also on our valuation, which is important for all of us. So we'll continue to focus on that, but our strategy remains firm and committed, and we'll deliver on our strategy. We'll continue to report to all of you on a quarterly basis. And we'll also see some of you on the road shows. Thank you very much for your participation, and have a better day.

Thank you for your participation. You may now disconnect.