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Sasol Limited (NYSE:SSL)

F4Q and Yearend 2013 Results - Earnings Call - Transcript

September 9, 2013 09:00 AM ET

Executives

David Constable - Chief Executive Officer

Christine Ramon - Chief Financial Officer

Nolitha Fakude - Executive Director

Andre De Ruyter - Senior Group Executive

Giullean Strauss - Senior Group Executive

Bernard Klingenberg - Group Executive

Analysts

Operator

Good afternoon, ladies and gentlemen. Thank you for joining us this afternoon for our year-end results presentation. I would also like to welcome those people joining us via teleconference.

Our panel this afternoon, on my left is Chief Executive Officer, David Constable, our Chief Financial Officer and Executive Director Christine Ramon, our Executive Director, Nolitha Fakude; Senior Group Executive, Andre De Ruyter; Senior Group Executive, Giullean Strauss and Group Executive, Bernard Klingenberg.

I'd also like to welcome those other members from our GEC sitting in the front row. Your safety and the safety of our employees and contractors is critical to us. So please take notice of the safety instructions.

Should we need to evacuate the venue, please leave from the two doors at the rear and Sasol safety Marshalls will meet you outside and will direct you at the steps to either exited number one security reception all through the emergency doors behind the bar which will take you out at Baker Street and Bolton Avenue. In any emergency, please do not use the lift, and also do not pause to pack your things, and please exit immediately.

As at all presentations I'd like to remind you about disclaimer and forward-looking statements which you can find on page two of your slide deck, and before I hand over to our CEO.

David Constable

Good day, thanks and good afternoon everyone. Thank you for joining us for Sasol’s audited yearend results presentation today. This past financial year, the group processed another outstanding all around performance against our safety operation and financial targets, while we acknowledge the tailwinds obviously of macroeconomic success in large part it's due to managing the factors within our control.

Our strong results are also testament to the resilience of our strategy where a volatile external environment is going heavily on economic growth, I'd like to acknowledge and thank my Sasol colleagues from around the world, who have again distinguished themselves with their commitment, passion and hard work and I thanks to their resolve as we continue to deliver high level of performance even through often uncertain times.

Now, let me as usual start with an overview of what you're going to hear today, first of all we'll highlight our solid full year earnings and then discuss how we are growing sustainably in South Africa and abroad. Next, I'll provide you with a brief overview of our business performance enhancement program, which is going to be driving cost optimization across the Group.

Christine will then go into more detail on the financial and operational performance of our businesses and I'll come back up to talk you through Sasol’s current project pipeline, the status there and wrap up this afternoon's session by summarizing our strong investment case. We'll then open it up for any questions.

Earlier this year Sasol celebrated 10th anniversary of our listing on the New York Stock Exchange, in 2003 Sasol’s ADR is listed at ZAR10.73 per share on the NYSE, decade later the share prices increased almost five fold to close at ZAR48.41 on this past Friday, over the same period our market capitalization has risen more than fourfold from ZAR7.7 billion to ZAR32.6 billion.

Now, throughout this timeframe we remained as consistent and strong performer with our attributable earnings trending favorably upward as you can see from the graph here on the screen. And despite a sharp dip in 2009, the start of the global recession we bounced back in 2010 and continued our upward trajectory to a new all time high in FY13.

It’s equally important to consider other indicators over this period which speak to our commitment to act responsibly, through our contributions we create value not only for our shareholders but also for all of our other stakeholders.

Looking at the broader contributions we're making, at the end of last year, we announced our ZAR800 million commitment to the Ikusasa public-private partnership. Today, we've already contributed ZAR135 million Govan Mbeki and Metsimaholo municipalities, these contribution served to improve local infrastructure upgrade education resource centers and including public libraries and enhance healthcare supports and recreational facilities.

Through targeted interventions, our global investment in socioeconomic developments was ZAR627 million around this past year of which close to ZAR600 million was invested here in South Africa. In addition we increased the level of investment in our Sasol people across a wide range of initiatives, spending more than ZAR837 million in FY 13 on skills development.

During one of our many environmental initiatives in April 2013 we launched the Water Sense Campaign with the Department of Water. (inaudible) water contribution project 2.1 million cubic meters of water savings through repair of leaks in 60,000 homes that's about half of municipalities' current water usage.

Next, we do remain the largest corporate tax payer in South Africa contributing ZAR30.8 billion in direct and taxes to the national [fiscal] this past financial year.

Importantly, and notwithstanding our international growth aspirations our South African CapEx in 2013 was ZAR19.8 billion which equates to 59% of our group's spend.

Finally, we continue to make great progress in our transformation activities in South Africa, achieving level 3 BBEE status earlier this month. Our unwavering focus at Sasol on equity ownership. Enterprise and socioeconomic development, employment equity skills development and preferential procurements are delivering exceptional results well beyond the targets we had initially set out for ourselves.

In addition to touching many facets of life through our broader contributions, we're also delivering on our key business processes in Southern Africa, our ZAR30.9 billion Secunda growth program is nearing completion, following the commissioning of the [17th] reformer the 16th oxygen train and 4 additional gasifiers, the first pair of gas heated heat exchange reformers were completed in June. And we expect a second set of GHHERs to be installed by the calendar year 2014, which was signaled a successful close out of the entire program.

In Sasolburg, the ZAR1.9 billion ethylene purification unit, EPU5 is currently being commissioned with the official opening scheduled for later this month. EPU5 will be integrated with the existing monomer unit adding the further 48,000 tonnes of volume annually.

In Mozambique, we advanced our 140 megawatt gasifier power plants in Rosanna Garcia construction is commenced and beneficial operation is on track for the first half of next year. Also in Mozambique, we are commissioning a few billion rand 26 inch loop line to increase the capacity of the existing gas pipeline. Gas sales agreement have already been concluded for the additional capacity and beneficial operations are expected at the end of June 2014.

Now turning back to South Africa in a key project to ensure sustainable Synfuels operations is the development of the Impumelelo and Shondoni collieries, these collieries are part of Sasol Mining's ZAR14 billion Mine Replacement Program. While the issuing of water licenses by the relevant authorities has cause some delay both collieries are expected to be completed on time and within budget.

Looking further I feel that our U.S mega projects, we are taking significant strides forward, specifically at our world-scale ethane cracker. We've appointed key contractors and have placed orders for crucial long-lead items. In addition, we've submitted our environmental permit applications and have received the requisite approvals for key projects incentives.

Turning to U.S. GTL project, we will be commencing the FEED phase later this year; a final investment decision is expected within 18 to 24 months after that of the cracker. Following detailed assessments and discussions with our partners, we took the decisions to reduce our participation in Uzbekistan GTL joint venture from 44.5% to 25.5% at the end of the FEED phase. This notwithstanding, the Uzbekistan GTL project remains an important development in Sasol’s GTL growth portfolio and the business case of proposed facility remains very robust.

Turning to our operation highlights; this year's success were coupled with the best annual safety performance result in the Group’s 63 year history. That’s an incredible achievement by all of our colleagues and service providers, who collectively were 245.7 million exposure hours in FY’13. So you can think that is over 120,000 people day in and day out at our facilities working safely.

At our Synfuels’ facilities decisive management action and improved client efficiencies resulted in a production performance of 7.443 million tons. That’s the highest volume output since our 2006 financial year. Our ORYX GTL plant continues to achieve new production records, coupled with an impressive safety, recordable case rate of zero over the past 18 months.

Now (inaudible) maintained an average utilization rate of 80% of design capacity over the financial year, despite an extended statutory shutdown. And in May and June in Qatar, the average run rate equaled a 106% of design capacity, proof that our GTL technology is fully commercialized and ready to rollout elsewhere in the world.

With regard to our energy efficiency improvements to date we’ve spend R5.1 billion of low carbon electricity. Today we can generate up to 69% of our South African electricity requirements thereby reducing our carbon footprint dramatically and mitigating our exposure to rising energy costs.

In terms of our overall FY ‘13 results, you’ve see them. Sasol Synfuels production is up 4%, our operating profit excluding once-offs was up 26% to R40.6 billion, Headline earnings per share were up 25% to R52, 62 it’s a new record high, and cash flow from operations were up 24% to R59.3 billion, enabling a total dividend of R19 per share, another record, which remains aligned with their progressive dividend policy.

Of course, a strong operation financial performance does not mean that we can afford to be complacent. In fact the best time for an organization to make improvements is when things are going well.

Our strategy both in raising to enhancing our existing asset base and delivering our [growth] price is an ambitious one, and to achieve our strategic objective we are looking closely at having to become some more effective and at the level of organizational change required to ensure our ongoing success.

During 2013, our focus on operational performance resulted in improved plant stability and more reliable production volumes. Looking ahead to our business performance enhancement program, we will continue to improve our operational productivity, while implementing an effective, simplified and tailor-made operating model. Our aim is to drive initiatives which will address both cost creep and organizational complexity making Sasol much more fit for the future.

Through our program we expect to generate sustainable annual savings of at least few billion rands. This will be achieved to a large extent by resting our cash fixed cost increases over the next two to three years. The drivers for the savings [side] will be combination of efficiency, benefits coming from our new operating model, productivity improvements in our operations, establishing fit for purpose functions in the company and driving procurement cost reductions.

Now we will be able to share more details on the Group’s new operating models as well as the source of these savings and the related charges during our interim results announcement in March of next year. Before I hand over to Christine and as you know this will be Christine’s last results announcement as Sasol after more than seven years with the Group.

Christine announced her resignation in order to pursue new opportunities. This comes at a time when year-end results have been finalized and we have concluded key deliverables including the divestiture of our stake in the area of Polymer’s joint venture in Iran. As we enter new financial year we agree that this presents an opportune juncture for Christine to move on from Sasol.

Under her financial stewardship, Sasol maintained a prudent balance sheet and sound financial risk management processes. Christine has developed a strong and talented team of people within the finance division, which has left us exceptionally well placed in our appointment of an Acting CFO Paul Victor. Paul is in the front here, who as currently our Group Finance Executive has been working closely with Christine to ensure a seamless handover.

Paul has the ability to think both strategically as well as the same time interrogating detailed financial and operational data. Paul’s tenure at Sasol Synfuels along with his hands on detailed knowledge at the Group level made him an obvious choice to assume this new role, and I am pleased to have an Acting CFO of his caliber working alongside me and the GEC.

Let me now handover to Christine as she unpacks our results in a little more detail, Christine.

Christine Ramon

Thank you, David and good afternoon everyone. I am certainly pleased to present (inaudible) excellent results to you today. We’ve delivered record earnings for financial year ‘13 and our reported earnings are at the midpoint of the guided range provided in our recent trading statement and the [heat] of consensus for cost. Before I discussed the results in detail, I would like to note the following three comments.

Firstly, our continued focus on operational performance has results in improved plant stability, with Synfuels production performance delivering ahead of our stated target. Secondly, although the operation profit was significantly impacted [financial] charges, a further production performance together with the favorable impact of the average weaker rent on exchange rates has enabled us to deliver record operating profits.

And finally our balance sheet remained strong on the back of very strong cash flow generation across our businesses which continuous to position Sasol well to fund our attractive growth projects, to fund our [pervasive] different policy, as well as to provide a buffer for volatility.

The past year continued to be characterized by predominantly favorable but volatile macroeconomic environment. Oil and product classes were softer throughout most of the 2013 financial year, although the average rand-dollar exchange rate was about 14% weaker than the prior year.

Although the weaker rand-dollar exchange rate was overall positive from an operating profit perspective, it certain contributed to an already challenging cost environment. The chemicals market remained challenging impacted by volatility in global markets. Chemical process continued to soften on the back of weaker demand in downstream markets, coupled with higher feedstock process, the industry wide margins squeeze prevailed.

We also see that the average [rand] we have gas prices were higher which is positive for our Canadian shale gas operations, and the oil to gas differential remains at levels that remain attractive to pursue our GTL value proposition. As you know we remain sensitive to oil process and the rand-dollar exchange rate and we remind you of our sensitivity to each of these variables which we issued with a health warning We estimate that for every [$0.10] change in the annual average rand-dollar exchange rate, it will impact our operating profit by approximately [R914 million].

Furthermore we estimate that for every $1 per barrel change in the annual average crude oil price, it will impact our operating profit by approximately R610 million. The Group recorded a record operating profit for the 2013 financial year of R40.6 billion. Operating profit was impacted by net one-off charges of R8.5 billion, which I will elaborate on in the next slide.

If one had to exclude the impacts of these one-off charges, our increase in operating profit would have been enhanced by 15% to an increase of 26% and our operating margin would be enhanced by 5% predicting a margin of 27%. Importantly, despite the impact or shall I say the positive impact of the weak rand-dollar exchange rates, our overall underlying operating performance competes favorably when we compare ourselves to the performance of our global peers over the same period in US dollar terms.

Our South African businesses delivered another strong performance driven by improved Synfuels volumes and a favorable macro environment. The International Energy Cluster was however negatively impacted by lower ORYX volumes mainly as a result of the extended shutdown. Our chemical businesses, as alluded to earlier, remained under pressure, experiencing lower demand and continued margin squeeze. Despite a negative impact of a partial impairment as well as the translation losses, our chemical businesses contributed R1.9 billion or 4% to group operating profit.

Cash flows generated from the chemicals operations were stronger, contributing R11.1 billion or 18% to group cash flows generated from operations. Other income includes foreign exchange gains on the Canadian Forward Exchange contracts amounting to R1.3 billion, of which R439 million is unrealized.

Overall, our international businesses, including the Mozambique and value chain brings good balance to our portfolio, contributing to just under 15% to group operating profit with Europe and North America being the main contributors.

Moving on to the impacts of the once-off charges, we can see that overall (inaudible) operating profit was boosted to the larger extent by the positive impact of the weaker rand-dollar exchange rate. That was the spot impact of flattish Brent crude oil and product prices.

On the sectors under our control, on the right hand side of the slide, it's encouraging to note the positive impact of sales volumes across the Group. However, we see the large impact of once-off items of R8.5 billion and this relates primarily to the partial impairment of Arya and FTWEP expansion project of R3.6 billion and R2 billion respectively as well as R2 billion of translation losses also primarily relating to Arya and that was mainly due to the depreciation of Iranian rial against the U.S. dollar.

They will further negative impacts to operating profits, which include higher depreciation charges on our Canadian shale gas assets as well as higher growth and study costs.

Moving on to cash fixed costs, we see that the increase has been compounded by the challenging South African environment. Normalized cash fixed costs, which exclude once-off and growth costs as well as the impact of the weaker rand-dollar exchange rate increased by 7% in real terms primarily due to the challenging cost environment in South Africa in respect of labor maintenance and energy costs. The impact of a weaker rand added a further 3% to total cash fixed costs.

Uncontrollable factors, as we can see the [back FEED] contributed 10% to the total increase in cash fixed costs and that includes inflation exchange rate effects and at normal electricity price increases.

Moving to the right, we see the growth and study costs added a further 1% while plant maintenance, increased labor headcount costs and other once-off costs added a further 7% to total cash fixed costs increase.

As we know labor and energy costs are the main drivers of our cost base, with labor comprising almost 60% of cash fixed costs. Labor cost per head increased ahead of PPI inflation which is indicative at about 6% for the past year and that was driven by an increase in share based payment expenses and that’s given the recent strong share price performance as well as new grants.

We have concluded wage settlements with the trade unions in the chemicals and the petroleum sectors so far for the current year at increases averaging between 7.5% and 7.9% before adding any growth related costs. Energy costs inflation for the past year averaged at about 13.4% for the year in line with previous guidance given. We expect energy cost inflation for the coming year to be approximately 7.5%.

As David has said we continue with our strategy to contain energy cost and that has seen a successfully ramped up our electricity generation capacity in South Africa to approximately 69% of our own requirements. Our investment in plant maintenance has successfully delivered plant stability and improved volumes. However, we do remain concerned about the rate of cost inflation in South Africa and our focus on procurement and maintenance cost reduction strategies.

Through our business performance enhancement program that David actually spoke to earlier, we are looking to significantly reduce our cost base on a sustainable basis. They will however be cost relating to this initiative in order to deliver annual sustainable savings which will be realized over the next few years. More color on this will be given at interim results announcement in March next year.

Moving on to the South African energy cluster, we see it continues to underpin the Group’s profit and cash flow generation now contributing over 90% to Group profitability. The SA Energy operating profit increased by 28% and mostly expanded operating margins. Despite increased production volumes and higher sales volumes and prices to Synfuels, mining suffered a 3% decline in operating profits and an operating margin contraction and that was primarily due to increased mining costs, external account purchases and increased transport cost.

Our gas business benefited from a 5% increase in sales volumes mainly on the back of gas consumed by the newly (electricity) generation plant in Sasolburg. These factors supported a 36% increase in operating profits and operating margin expansion to 49%.

Synfuels delivered a sterling performance with the 30% increase in operating profit and 4% expansion in operating margins to improve to 49%. Performance was driven by the higher production volumes, the 4% higher production volumes as well as favorable product prices and margins due to weaker average rand-dollar exchange rates.

Synfuels cash unit costs however increased by 13% due to higher feedstock costs which are largely internal to the Group as well as increased labor and energy costs. Management in this business remains focused on optimizing maintenance and renewal costs over the longer term. Sasol wells operating profit increased by 30% and the operating margin expanded to 3% and that was despite lower sales and production volumes mainly due to the extended plant maintenance shutdown at Natref which was also coupled with lower demand experienced.

The international energy cluster remains our growth engine and we do continue to invest in former feasibility studies FEED and exploration expenditure. Sasol Synfuels international operating profit declined for the first time by 15% and that was primarily on the back of lower volumes from ORYX GTL due to extended statutory shutdown as well as higher US GTL feasibility study cost.

Despite the plant shutdown, ORYX achieved a full year average utilization rate of 80% of no impact capacity, which was well within the guided range reinforcing our GTL value proposition. Operational benefits since the startup of the plant shutdown have already been achieved with the average throughputs during May and June 2013 above 106% of design capacity on an instantaneous basis.

Now both that the U.S. and Uzbekistan GTL projects are in the FEED space, the FEED relative costs are largely capitalized and no longer impact the income statement.

Sasol Petroleum International recorded another operating loss for the period, although improved from the prior year on higher gross margins and improved volumes. Our Canadian shale gas assets remain cash positive. However, the Canadian shale gas assets do remain under pressure due to low gas market prices and high depreciation contributing to the loss for the year.

We are stabilizing our Canadian production and actively derisking this effort to optimize the ramp up of development activities once gas prices increase. It's also positive to note the downward trend in drilling cost has been maintained in this business.

Moving on to the chemicals business, the global chemicals landscape does remain challenging, with low product prices and high feedstock process prevail. Several global companies have announced cost cutting measures including the focus on operational efficiencies in order to reverse the decline of profits.

Our chemical businesses remain under severe pressure. Although sales volumes have improved in some of our underlying business and the weaker rand-dollar exchange rate has positively impacted profits, the higher feedstock costs coupled with low product prices continued to squeeze margins. Chemicals reported a 70% decline in operating profits and operating margins contracted and that was exacerbated by the partial impairment as well as the translation losses.

If one had to exclude the impact of these once-off items, chemicals delivered ZAR9.5 billion rand operating profit reflecting an increase of 32% compared to the prior year.

We continue to optimize our European chemical businesses production to match lower demand and optimize margin in light of a continuing weak European market conditions. Polymers recorded an operating loss of ZAR2.8 billion rand compared to an operating profit in the prior year.

The South African polymers business suffered a loss of about ZAR1.8 billion rand as feedstock prices increases continue to outweigh increases in selling prices. Although the business did achieve a 5% increase in sales volumes despite the slow recovery in the polymers market. We also saw sales prices in the second half improve on the back of a weaker rand/dollar exchange rate.

Arya achieved an average capacity utilization rate of 80% within the previously guided range however due to logistical disruptions at Arya, sales volumes of our international operations were 19% lower than the prior year. We're also pleased to announce that we entered in to a definitive sale and key purchase agreement to dispose a 5% interest in Arya Sasol Polymer company, for a purchase consideration of $365 million of which US$35 million is still outstanding to-date. As a result of this transaction, Sasol has no investment in Iran.

As demonstrated by the figures, we see that Solvents continued to experience a challenging environment as well. Olefins & Surfactants however remained the largest contributor to the chemical clusters' operating profit.

The business grew operating profit by 12% and expanded operating margins to just under 9%, which is relevant in the guided range previously for guided to the market of 7% to 11% operating margin through the cycle, while our US operations continued to benefit from low U.S. ethane process, our European businesses was full profitable remain under pressure on softer demand coupled with higher feedstock prices.

Our growth strategy continues to gain momentum as demonstrated by the increase in capital investments to ZAR32 billion for the past year. Our capital investment estimate for 2014 has been increased to R42 billion as a result of the impact of a weaker rand/dollar exchange rates on our capital expenditure program.

As well as progress made on our growth strategy with particular reference to the Lake Charles ethane cracker as well as the increased spend in respect of the FT Wax project, we estimate CapEx for 2015 of approximately ZAR50 billion.

Approximately, half of these capital investment over the next two years will be spent in South Africa and a large portion of future growth capital investments will be allocated to growth projects in the international imaging and chemicals businesses, which is in line with our growth strategy.

Our continued strong cash generation ability particularly from our foundation businesses remained strong. As demonstrated by a 24% increase in cash generated by operations to ZAR59.3 billion. However, given the challenging environment and about 1% increase in working capital we do continue to focus on strengthening our working capital management across the Group and monitoring credit exposure and counter party risks.

Our balance sheet remains strong and is deleveraged, we expect gearing to remain low under short-term and are comfortable that it can be managed within our targeted gearing range of 20% to 40% in the medium to longer term.

This together with our capacity to raise funding in global markets as demonstrated by successful billion dollar bond issuance in November last year position Sasol well to fund our international, or attractive growth projects rather, fund our progressive dividend policy and provide a buffer for volatility.

As shown in the return on invested capital slide, we remain committed to delivering on our stated targeted returns, when advancing our growth strategies and allocating capital in a way that delivers on our stated return on invested capital targets of 30% above our weighted average cost of capital.

We remain committed to our progressive dividend policy, taking into account the ongoing speed of our financial position and our current investment plans we are in a position to continue the upward trajectory of our dividend to ZAR19 per share which is a new underpin reflecting an increase of 9% on the prior year. Notwithstanding, sorry I just need to move the slide and it’s not moving, okay, there we are.

Notwithstanding our recent strong share price performance this translates into a dividend yield of 4.4%, coupled with a total shareholder return of 14% in rand terms over the past five years and 32% in rand terms over the past year to June 2013 this positions competitively, with our peer group, reinforcing our commitment to June 2013, this positions us competitively with our peer group reinforcing our commitment to consistently return sustainable value to our shareholders.

Moving onto the last slide, on the FY14 profit outlook, with respect to the macro environment we're expecting global economic growth to remain modest particularly given the uncertainties in both the European and U.S. markets. This does impact our assumptions in terms of economic variables.

[And fact is] under our control we do continue to focus on volume growth margin improvement and cost reduction. In terms of volumes, we expect Synfuels to deliver between 7.3 million to 7.5 million tons of product taking to the account that financial year '14 (Inaudible) full shutdown year. Internationally RX GTL is expected to maintain an average utilization rate of above 85%.

And in Canada, we expect production volumes will increase marginally as new wells come on-stream. However, the south African cost environment does remain challenging, we do expect normalized cash fixed costs to exceed South African PPI inflation and as discussed by David earlier cost reduction is a key focus area for management however additional costs will be incurred to achieve future sustainable savings.

Lastly, in the chemicals division we expect continued pressure in the polymer south African business, however we do expect some improvement from current levels and that I think due account to improved market conditions as well as the commissioning of EPU5 under C3 stabilization projects during financial year 14.

(Inaudible) the sale of our interesting Arya during the first half of 2014, we are currently estimating the impact of the change in the official Iranian real exchange rate applicable from the 2014 financial year and this change could result in a loss on disposal of less than ZAR100 million.

In conclusion, management's strong focus on operational performance has delivered on improved profitability and a record operating profit. And our balance sheet and healthy cash flows continue to position Sasol well to fund our attractive growth projects, sustain our progressive dividend policy as well as provided a buffer for volatility allowing us to consistently return value to shareholders.

Before I hand back to David, I would just like to say a few words following the recent announcement of my resignation. I feel incredibly honored and privileged to have been inspired by and to have worked with great people and a strong team at Sasol for more than seven years in building a successful company. However, the time has come for me to seek out challenges and opportunities as I embark on a new journey, I will continue to follow Sasol with much interest in the future, Sasol is a great company and I wish you all well in the exciting future that lies ahead for the group.

On that note, I will now hand back to David.

David Constable

Thanks, Christine. And behalf of the management team on the Sasol Ltd Board, I want to wish you and [Richie] on the girls all the very best going forward.

Okay, just a few more slides here to conclude. Despite persistent turbulence within the global context Sasol's ability to match it in many instances better the performance in the past, demonstrating the resilience has become the company's hallmark. And it's clear that our U.S. growth projects aren't very large and we are fully aware of the importance and the focusing on their successful completion. This being the case the management team embarked upon a thorough review of our entire product portfolio and commence to carefully considered prioritization process. The purpose of this exercise was a simple one to ensure that we advance the right projects that can unlock maximum value for our shareholders over the long-term.

Based on our review and particularly the financial and human capital requirements of our various projects as well as our near to longer-term strategic direction, we are being unanimous as the management team as well as the Board to proceed with the FEED work on our U.S. project, thereby prioritizing them over our proposed Canada GTL venture. As part of our capital allocation determination, we give due consideration creating a right balance between investing in the company’s capital for a longer-term benefit and returning cash to the company’s shareholders.

Today our strategies are very closely aligned to our product pipeline, as you can see from the side on the screen. To the left, we highlight the five key drivers that comprise our high level strategies, looking for first line accelerate GTL growth; two, we are moving forward on several fronts in Escravos Nigeria, where our third GTL plant is closed to commissioning, in Uzbekistan, where we are concluding the FEED phase and our U.S. GTL project in Louisiana, which will be, as I said, progressing to the FEED phase later this year.

Next, in the second line, grow value chain based on FEED stock market and/or technology. Here we achieved several key milestones on a range of chemical projects in South Africa and in the U.S. Later this month, we will be opening the FT Wax Expansion Catalyst plant and next month, we will be inaugurating the tetramerization plant in Lake Charles.

In tandem and most significant, as I said earlier we are progressing well with the FEED phase of our U.S. ethane cracker. Looking at the next row development grow low carbon power generation, we expect beneficial operations of our Mozambique gas engine power plant in the first half of calendar year 2014.

In the fourth row, improving growth of existing assets base, this relates largely to the initiatives which are critical to the success of our project 2050, which aims to extend the lifespan of our Southern African value chain to the middle of century.

Finally looking at our upstream activities and as part of our prioritization efforts, we rationalized our exploration portfolio this past year and relinquished various licenses in Mozambique, Papua New Guinea and Australia, and so doing we graded our portfolio which contains a number of promising assets in other parts of Mozambique, Australia and in South Africa and Botswana.

From the slide it’s evident that our product pipeline is full yet manageable and that with our focus on delivery several projects have advanced well down the track. In closing, clearly Sasol continues to write a strong investment case; the reason for this can be summarized in the three columns you can see on the screen. First, looking at our existing asset base, our foundation businesses, these remain solid.

Here our proven technologies and flagship plants in South Africa and Qatar continue to achieve impressive gains in throughput and efficiencies. As you’ve heard today from Christine, our businesses remain highly cash generative, delivering consistent and strong cash flows.

Our foundation businesses worldwide provide us with a solid platform from which we can springboard our international expansion aspirations. Next our growth opportunities remain exciting and attractive. Here our ambitious are based on harnessing a mix of key criteria including our scale and monetizing hydrocarbon resources, utilizing our competitive technologies and manufacturing know-how. Our ability to capitalize on low cost feed stock over the long term, our access to markets where the demand for high quality fuels and chemicals continues to grow and a strong focused project pipeline.

And finally we continue to create value, a solid balance sheet, healthy cash flow generation continuously support our progressive dividend policy and the funding of our growth aspirations. Sasol continues to achieve leading long-term shareholder value through our share price performance and we are proud of the South African company and our commitment to the region remains firm.

So to conclude we have no doubt that Sasol represents a strong investment case and management and I have every confidence that the future for Sasol is indeed very bright. Before I open it up for any questions you may have today, as previously announced it is also Lean Strauss last results announcement with Sasol. Although Lean will continue to support me as an industry adviser after over three decades of dedicated service; he is setting his site on a lifestyle change and a very well deserved retirement.

This past Friday the Sasol Limited Board approved the appointment of Lean’s successor, Ernst Oberholster. Ernst is here with us today. Ernst is currently the Managing Director of Sasol New Business Development. Ernst has been with Sasol for more than 23 years now and has been working very closely with Lean in the international energy and business development arenas. Ernts is a seasoned deal maker and an astute business man and has been the driving force behind the initiation of many of our largest projects including our U.S. mega projects, the Canadian gas acquisitions and Uzbekistan GTL.

And on behalf of Sasol Limited Board and the management team, I’d like to wish Ernst all the very best as he assumes his new role on the Group Executive. Also on Friday our Chairman, Hixonia Nyasulu indicated that she will step down at our AGM on November 22nd. It’s been a great pleasure working with Hixonia and her wise and constructive and frank approach is a testament to her sound and engaging leadership style.

The Sasol Board appointed Dr. Mandla Gantsho as our new Chariman. Mandla is no stranger to Sasol, having served as a Non-Executive Broad member for 10 years now. I am looking forward to working with Mandla in his new role, his expertise and also his knowledge of the company will most certainly prove beneficial to Sasol and our stakeholders.

So with that’s and those updates, we’d now be happy to open it up for any questions that you might have for us, thank you.

Question-and-Answer Session

Unidentified Company Representative

And if I continue and just ask that the quicker to ones two questions as there are quite of few people that would like to ask questions, and if you could also just introduce yourself, thank you.

Gerhard Engelbrecht - Macquarie

Gerhard Engelbrecht from Macquarie, thanks for the opportunity. There were just a couple of questions, one, maybe can you give us a little bit more [random] thinking on the Uzbekistan decision. I see also now you say that for the project you got (inaudible) 51.1% non-government interest and do you have a buyer and a buyer that can contribute to the capital spending rates; that is the first question.

On ORYX you often talk about instantaneous production being higher than 100% yet your production guidance for this year is actually very similar for what you achieve in 2012. So all the improvements that you’ve made ORYX doesn’t really seem to come through introduction. Is it still stop start at ORYX or what exactly is the situation there.

And maybe just lastly a financial question; last year you said on provisions that you lowered the discount rate and in Sasol Synfuels there was quite a big increase in provision and now you are talking about the discount rate changing and a release of provisions. Is that something that we can expect every year as interest rates change, and will the earnings be more volatile as a result?

David Constable

Great, thanks for the questions. And we'll start at Uzbekistan GTL and then move to ORYX and the provisions Christine maybe you can handle. Uzbekistan obviously is as I said, remains a great projects, very robust returns there. As we prioritize our portfolio and look at the requirements across the Group from a capital perspective and project execution perspective, and risk perspective obviously, we found it appropriate to take a reduced shareholding there. It's encouraging truly from financing perspective, initial indications are positive, feedback from the lenders is strong and we have a process in place right now, where we are talking to potential new partners, who have quite a bit of interests, it's quite a long list from a number of different countries and to answer your question, yes they will be able to bring CapEx support to the project. Lean anything to add to that?

Giullean Strauss

No, David I think you have covered it well.

David Constable

Okay. ORYX, you can stay on the mic now because as I walked up here today you said 85 is very conservative with ORYX for a guidance, and I think it was at least 85% that we are talking about. In the month of August, we had a run rate of 108%. So barring any challenging shutdown issues at ORYX, I think that 85% is a very conservative number and maybe Lean just there maybe you can comment as well.

Giullean Strauss

As I see, we’ve used the worth exceed 85 (inaudible) given the range, and I think there is upside, significant upside. We are comfortable that we cannot maintain continues operations.

Gerhard Engelbrecht - Macquarie

Are you running continuous (inaudible) than the stop start.

Giullean Strauss

No, no we are in continues

David Constable

So, the last question to answer for [Alex] Christine on the provisions and the discount rates.

Christine Ramon

Yes, so also R1.6 billion positive impact on the release of the provision and that related to 0.5% reduction in the discount rate, but clearly I think one can expect that as interest rates change, one has to within accounting requirement that you actually have to look at the impact on the discount rate and flow through the necessary impact. So I think it's something that you better watch going forward and clearly the rehabilitation provisions relate primarily to Synfuels but there is also the mining business that has some rehabilitation provisions in it as well.

Unidentified Analyst

Couple of questions. Just on your labor costs, they were up I think 21%. I just wondered how much of that was currency, how much of it was organic? And then if you look at your share based payments, (inaudible) some 800%, EPS was up 11%, bps 25 and the share price 26%, how do we model what that number is going to be going forward?

And then just on the polymers business, I ask this question a lot, but we are looking at what you said in terms of your polymer selling prices, what happened to the Synfuels selling prices and oil prices? There should have been a gap opening up not going either way. So (inaudible) in the ongoing profitability shortfall there and just on that, maybe is there a bit of turnaround in polymer pricing in the last few months. Are you close to breaking even there?

David Constable

Thanks, [Alex]. Let’s start with labor costs and the effect of increased manpower and share based payments, Christine if you could comment?

Christine Ramon

Okay. So you could read that the labor increase in total was about 20.6%. If you want, if one had to look at the impacts of that, clearly inflation was the biggest impact, and you can probably say about 7.5% related to inflation. The next biggest impact is about 7% relating share based payments. And I think followed being by the exchange rate to fixed and up about 3.5%. And then we saw headcount increased, headcount of this coming through of about 1.6% and that mainly related to the acquisition of the outside shareholders interest in Merisol. We did see some smaller increases coming doing businesses like (inaudible), but your biggest increase in the headcount really come through in Merisol business.

And obviously, when one increases the headcount, one has to look at the flow through of the increase in headcount and that does relate to employee benefit costs that one has to take into account and there were some growth costs across our businesses as well.

In terms of modeling share based payments, I think it is quite a difficult modeling because one can’t anticipate in advance as to what the increase in the share prices actually going to be, but clearly one sees this impact is coming through every six months and I think for me too to give you guidance on modeling, I think it’s a difficult maybe because we have an offline discussion on you got to study all these statements and the accountants and experts executive involved in the full valuation, but we could maybe have an offline discussion on that.

Unidentified Analyst

Okay, thanks. And then polymers, sales volumes up Andre, (inaudible) impairments and the translation losses but maybe you can comment on the profitability of polymers? Thanks.

Andre De Ruyter

As you know and this is becoming a repeat dialogue, I think I have seen this movie before. Fuel products, which is a basis for the transfer pricing out of Synfuels into the Polymer business went up by 11% in rand terms and polymer prices also in rand terms went up by 11%. So you can see there that in spite of polymer prices going up, feedstock prices going up as well and therefore the margins remained very tight.

Are we close to breakeven? Our gross margin on Polymer South Africa is still under a lot of pressure. We are addressing those issues that are within our control and that’s as David has referenced why we are implementing a cash fixed cost reduction exercise and that should play out in improving our cash cost position in the polymer business as well as the other businesses. But until such time as we are in a position to reconsider how we allocate profit in the different parts of the value chain, polymer margins will remain depressed unless of course there is an increase in global ethylene utilization rates.

Unidentified Analyst

(Question Inaudible).

Andre De Ruyter

No, I think you need to look -- let’s take it offline, but I don’t think that you can extrapolate quite as linearly as that.

Unidentified Company Representative

Next question.

Unidentified Analyst

Just couple of questions. Firstly numbers that were the idea that you will do high density polyethylene plant in joint venture with INEOS. Is that, it wasn’t clear to me with the cost of that would be incorporated in the ethane cracker, so if you could explain that perhaps and any other further possibilities?

The second thing comes to the end, again it’s probably a big question, but kind of this show I guess is costing a lot of money in headline earnings per share and you are spending money on capital and you are still short of your total carry that you set so far [to 2]. What is your proposed scenario, when you can just stop for field development plant, and if and when, what are you going to do after that given that we hear that your joint venture partners in particular keen on one thing? That’s the second question.

The third question relates to, the question that my colleague here has thought the utilization rate, just the record, (inaudible) utilization forecast from yourselves ever, a reflection of your uncertainty about the detailed plant at ORYX? Thank you.

David Constable

Yes, as everyone is aware, we signed an MOU with INEOS on the high density polyethylene units in the U.S. It is not part of the ethane crack profit, it’s the separate product that will be taken on and run by INEOS. They are taking the project and executing. It’s a 470,000 ton per year plant of HDPE, of course 235,000 tons to Sasol and that will be starting up in the second half of calendar year '15, so some more volumes for us to talk about Sasol before the cracker comes online. So I think that is very good. I think, Andre anything else, that is okay. Shale gas, field development plant, Giullean can you take that one?

Giullean Strauss

Thank you. Maybe just to say that, I think if you follow our partners’ announcement, that they have withdrawal Montney from their sales to the market, they are going to continue to develop with us, there is other assets they are selling in Canada, but they are not selling Montney anymore. But they will be challenge with at least with low gas price, I mean that doesn't make sense for us to develop gas prices (inaudible) range.

I think we are going to long way with the risking, I think we satisfied that we now understand the field, we drilled just about 130 wells now. And I think from next year our approach would be more to drill economic wells, to drill those wells that we can drill on the economic basis rather than just to some derisking, although we haven't done derisking on site per say and that’s starting this part of the year and also next year, we're going to do exploration work in Montney, our inside per say.

Our prognosis is that long term gas prices will continue to increase and that will be very economical for us to develop the field. We are still confident that we will achieve overall rights that we will in terms of the investment that we expect. What is very encouraging is decreasing in drilling cost, the drilling cost is now well below what we have expected in our recent scenarios. We have now drilled wells that are less than a $1 million, a $1 million less than we anticipated. So I think the economies are going to improve significantly.

As far as ORYX is concerned, yeah, I think we've used the [word] that exceeds and I think we will exceed this by a significant margin, but we would like to prove that, we haven't run for 12 consecutive months. I think also the shutdown the operations have been very stable. We have exceeded design significantly and watch this space, I think we will give you a nice number come March next year.

Unidentified Analyst

Questions? A couple of more minutes.

Unidentified Analyst

The next question is from Investec. Just a couple of questions I will keep it brief. Just in terms of your sustaining capital or CapEx, sorry should I say, it's got up from $12 billion to $17 billion this year, and if I look in your projections on that slide, looks like the inflation rate you are using to 2015 is around 5%. Not a lot [outside] risk given your 2015 policy and also I just like to know if there is any capital allowance and therefore (inaudible) which I should say will be coming soon. Then one last question, this for Christine. You mentioned, you are starting to capitalize some of the SSI funding cost. How could we model that going forward? It’s around about a billion, last year it was a billion as well, somewhere around there. Can we see that going to zero or is it just kind of stay around those kind of level. Thank you.

David Constable

Thanks. Sasol’s CapEx, Bernard, are you okay with that one and also talk about 2015, when that starts to come in to play on our CapEx gross?

Bernard Klingenberg

Thanks, David. Joe, I think, let me start with the clean fuels. We have the clean fuels in our earning capital plant. I think R11.6 billion or R11.7 billion over the next few years. So that certainly features. In terms of the rest of the sustainability capital, we have made provisions for some of the cost coming through in the environmental space. Not everything that’s envisioned, because we do think that our strategy was governed around the [air] quality space will be successful. And then with respect to 2050, we are still doing the work to confirm the numbers that will be required, but we are quite confident that the capital spend levels that we’ve got in our rolling capital plan will be sufficient going forward but they are still somewhere beneath going in that area.

Unidentified Analyst

Thanks, Barnard and then on the cracker and the growth cost getting capitalized Christine, can you give us the timeframe.

Christine Ramon

So from what I see it was that the FEED cost in future will actually be capitalized. So within the past year you’ve actually seen that for US GTL we’ve actually had two expense cost. In future you can expect to see lower growth costs coming through in SSI and so in future the FEED cost will actually be capitalized and that’s been regarded as part of the total capital investment program than for was Uzbekistan and US GTL.

So we’ve put our previous guidance with respect to numbers there. I think probably just to clarify on the [sustenance] related capital because we’ve only given two year forecast even though Bernard has spoken to the total clean fields number. For the next two years and for financial ‘14, we’ve included about a R1 billion and for financial ‘15 it is about R2 billion for [clean fuels] too. Our [continued] debt impacted the weaker rand-dollar exchange rate, but as you know on imported components, (inaudible) so we have to actually factor in the weakening of the rand and the rand is currently both a lot weaker than what we even factored in the impact on these numbers and so clearly we will have to review that and type out appropriate [hedging] ones [recent] decisions are made.

Unidentified Analyst

Okay thanks Christine.

Operator

If we can take the last question on the telephone, there’s one on the telephone.

Unidentified Speaker

(inaudible) Deutsche Bank, please go ahead.

Unidentified Analyst

Good morning thanks guys. Just my question on (inaudible) in Nigeria, as the (inaudible) start to commission. What are I guess the right set of applications with Sasol and where are we seeing the impact of your income is coming through and they still have six months period or 12 months period, what should we hear or not hear from you guys in regards to that ramping?

David Constable

Okay, easy to you Lean December 2013.

Giullean Strauss

Yes, we are still on track to commission the plant and to have beneficial operation in December. Obviously the first couple of cargoes, we still have to get the product on spec, but everything is on track beneficial operation the first product to market in December. I think full operations at around the second quarter of next year, but everything is on track, things are going actually very well at this time.

Unidentified Analyst

Are there any I guess operational hurdles that Sasol undertake and is responsible for?

David Constable

Yes, we have been major party in commissioning the plant. We currently have about 70 Sasol colleagues at the plant and is quite integral part of the commissioning of the plant.

Unidentified Company Representative

Should we take one last question?

Unidentified Company Representative

Okay. One from the floor and then we will close up.

Unidentified Analyst

(Inaudible) Barclays Africa. Can you comment on the process and timing in terms of finding your next CFO? And also just on the dividend, you explained your dividend policy going forward, but when you look at (inaudible) check of how covered and dividends are by earnings, do you look at it on a headline basis or basic basis?

David Constable

Next CFO, like I said, we have got because of our challenge in the finance division, we have been able to name an acting CFO with great experience institutional knowledge from one of our most complex business in Synfuels and spent some good amount of time here corporate now with the numbers. So very comfortable that gives us a lot of flexibility and we don’t need to rush in, in any decision making, but we will be looking for candidates both internally and externally, looking in South Africa and outside South Africa and taking good look and find best candidate for Sasol and put someone into again is in the best interest of the company timing wise. It’s going to be some time next year is in the near to medium term. And then on dividend policy and the cover and (inaudible)?

Christine Ramon

Yeah, so the progressive dividend policy is determined on the earnings per share number and we do either take full cost into account as well as how to pick final numbers. We purposefully moved away from the dividend cover. So I think quite importantly is the progressive dividend is to maintain growth dividends into the future (inaudible) rent and it’s been in the dividend and we certainly seek to remain competitive with our peer group as we increase our dividends going forward. I think clearly as we stated in the past should the earnings decline, they even underpin the dividend.

David Constable

Great. Thanks, everyone. Look forward to see you on the road shows and answering more detailed questions in our one-on-ones and our lunches and till the next time please stay safe. Thanks very much.

Operator

Ladies and gentlemen, that concludes today’s Sasol yearend financial results conference call. Thank you for your participation.

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