Sasol Limited CEO Discusses F4Q 2011 Results - Earnings Call Transcript

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Sasol Limited (NYSE:SSL)

F4Q 2011 Earnings Call

September 12, 2011 10:00 am ET


Giullean Johann Strauss – Senior Group Executive, New Business Development and Technology

David E. Constable – Chief Executive, Executive Director

Andre Marinus De Ruyter – Senior Group Executive

Kandimathie Christine Ramon – Chief Financial Officer, Executive Director


Caroline Learmonth – Absa Capital

Nick Damon – KB Securities

Jarrett Geldenhuys – Deutsche Bank

Campbell Parry – Investec Securities

Alex Comer – JPMorgan


Good afternoon, everybody, and welcome to Sasol’s Results Announcement for 2011. Just before we get started in the interest of safety, I'd like to point out the doors at the rear of the auditorium. In a case of emergency, we’d ask you to exit through those doors in orderly fashion. From where Sasol representatives will further assist you to evacuate the building.

Your presenters for today is Chief Executive Officer, David Constable; and our Chief Financial Officer, Ms. Christine Ramon. Also on the panel for Q&A later on, two familiar faces, our Senior Group Executive, Giullean Strauss and Andre De Ruyter.

Just before we get started, I would like to point your attention to our forward-looking statements. If you can just take a moment to familiarize yourself with that, it's also in your packs.

And with that, I’d like to hand over to David. Thank you.

David E. Constable

Thank you, Karris, appreciate it. Hello, everyone, welcome. Great to be here in Johannesburg, and here, at Sasol here with all of you today. As I said this morning, it was also good to see the Springboks conserving their energy yesterday. You don’t want to peak too early in such a big tournament, but that was a nerve-racking second half that I watched yesterday, but congratulations to the Boks on their win against Wales, and all the best to them as they drive to defend their World Cup Championship in New Zealand.

Also congratulations to the Orlando Pirates. They won the MTN8 soccer championship this weekend, and condolences to Kaizer Chiefs stands out there. Still trying to figure out which of those two teams I'll be cheering for, so, I'll take any advice on that.

And then finally, Sasol sponsored Women’s national soccer team, Banyana Banyana tied with Ethiopia yesterday, and they previously beat them 3-0, so they'll be going through to the Olympics, which is very good news for Sasol and for the team as well.

I've known Sasol since the early days of my career, and I've always had an extremely positive view in admiration of the Company. Now, seeing it from the inside, I can tell you, I’ve not been disappointed, the professionalism, the talented people, the technology leadership position we enjoy, and the strong can-do attitude of the team has made a great impression on me.

Sasol’s values also resonate with those I’ve lived by throughout my career, and so I’m very excited to be a part of the Sasol family.

Before getting started, I'd like to first acknowledge every single Sasol employee at each of our facilities and offices, all the management teams, the Group executives and my predecessor Pat Davies for the outstanding performance delivered this financial year. I’m honored to be communicating our results on their behalf.

Let me start with an overview of what you’re going to hear today. First off, Sasol performed strongly over the financial year, both operationally and financially, and equally important, we’re well positioned to pursue the abundant growth opportunities in front of us. We’re committed to responsible growth that ensures long-term sustainability, and finally the Company remains an extremely compelling investment proposition. So, these are the key messages you’ll be hearing throughout today’s presentation.

For the agenda, I’ll begin with some high level introductory remarks, followed by Christine Ramon, our Chief Financial Officer, who will be reviewing our financial and operational performance for 2011. I'll come back up to review our strategy going forward, and then open it up to the floor for any questions you would like to ask us.

Let’s start with the big picture by looking at GDP forecast, notwithstanding the recent weakening in the external environment over recent months, such as the ongoing and spreading sovereign debt crisis in Europe and the U.S. debt ceiling challenge. Most of the world’s growth is expected to come from emerging and developing economies over the next four years. With respect to energy consumption, as countries develop and populations expand, the demand for energy increases to power additional cars, transportation fleets, electricity generation, and of course, the manufacturing and construction industries.

It also results in demand for products such as plastics, cosmetics and household cleaning supplies, many of which require using Sasol’s chemicals as feedstocks. Sasol is well positioned to benefit from this demand in growth. We’re present in, and already serve many of the large growth markets in Africa, Asia and the Middle East. While we have good exposure to these high growth areas, we also have activity in the developed markets including Canada, the USA and Europe.

Now, our business is not just about international growth, South Africa is our home base and we remain firmly rooted in this country. We’re committed to investing in growth and in making a positive contribution into South Africa over the long-term. We’ve invested a significant amount of money in South Africa, ZAR42 billion over the last three years, and we plan to do much more, another ZAR40 billion committed over the next three to four years.

We’re one of the largest corporate taxpayers in South Africa, with more than ZAR25 billion, contributed annually in direct and in indirect taxes. In total, Sasol contributes about 5% to South Africa’s GDP. Over 82% of our staff complement it’s here at home. That’s around 28,000 jobs for the country, not to mention the thousands of indirect jobs that we create. Very pleased to report that we’ve made progress on transformation as well. Ixia Coal, our BEE partner in Sasol Mining now owns 20% of the mining business. Clearly, we’re committed and continue to make progress on the South African mining charter.

This year we became the very first Company in the country to have a BEE listing on the Johannesburg Stock Exchange. Our stated BEE objective was to achieve Level 4 status by 2012, and we’re pleased that we reached our target earlier than planned. Our focus now is to ensure this achievement is sustainable.

Also at home, we continue to make positive steps on climate change matters. We’ve voluntarily reduced our greenhouse gas emissions significantly since 2004, down from 12% in absolute terms. That equates to 10 million ton per year reduction. We also established Sasol New Energy to look at low and no carbon energy solutions, and we're engaging positively with government to address policy matters and are supporting them in hosting a successful COP 17 in Durban later this year.

Let’s now move on to our performance over the 2011 financial year. Our pursuit of responsible sustainable operations and growth over the year has been successful. Operating performance improved significantly. Overall Group production volumes were up 1.5% supported by strong contributions from offshore businesses in Qatar, Iran, and Mozambique.

This is a significant achievement for the Group, despite Synfuels volumes being down 12%, primarily due to our largest plant maintenance outage ever. The Group’s other businesses more than made up for the shortfall.

Our chemical cluster performed well. Along with a 3.6% improvement in chemicals volume, the cluster contributed 29% of the Group’s operating profit. Cash fixed costs on a like-for-like basis is only up 4%, well below inflation. This is due to concerted effort on cost management through business improvement plan and functional excellence in particular.

Next, we’ve made good progress on upstream and technology-driven growth. We’re very pleased with our two Canadian shale gas acquisitions, Farrell Creek and Cypress A. These upstream acquisitions provide us with fixed cost feedstock for a new GTL facility. Of course, the acquisitions provide us with near term cash flow from gas sales and contributed 2.6% increase in Group production of fuels, oil and gas.

We also advanced our U.S. GTL project into feasibility phase. More on that a bit later, and then feasibility study for Uzbekistan GTL has been completed. The decision to pursue at feed has been conditionally approved by our Board and the final decision will be taken in the very near-term, now only dependent upon certain commercial conditions being met. It almost goes with that saying that maintaining business sustainability is critically important to our future.

Sasol’s safety performance during financial year 2011 was mixed. We’re sad to report that ten people tragically died as a result of injuries sustained at Sasol’s site or on public road. In addition, five people also lost their lives in a boating accident last November at an off-site year-end function. These fatal incidents had a profound effect on the Company, and our deepest sympathies have been extended to the families of deceased.

Major safety interventions were put in place midway through 2011, which helped contribute to the zero fatality rate for the remainder of the year. On a positive note, we achieved a record low recordable case rate of 0.42, which was an 18% improvement from the previous year, and is clearly a world-class performance in the safety category.

Moving on, increased gas production from Mozambique was used to generate electricity and reduce our carbon footprint. This self-generated electricity also helped to mitigate significant power price increases. Our open cycle gas turbines in Secunda have served us well in the past financial year, adding 200 megawatts of electricity.

Additional efficiencies by converting to a combined cycle will add another 80 megawatts in the near-term, a 140 megawatt Sasolburg project will eventually increase total gas-fired electricity to 420 megawatts. All these actions that have been mentioned, we believe demonstrate Sasol’s ongoing pursuit of responsible growth.

Turning to the highlights of our results for the year, headline earnings per share and earnings per share were up 27% and 24%, respectively. We’ve already mentioned our strong performance on costs, which are well contained within inflationary levels. In line with our progressive dividend policy, we’ve increased the total dividend for the 2011 financial year by 24% to ZAR13 per share.

I must also highlight a very strong cash generation, up 41% from last year, which supports this dividend and together with the strong balance sheet enables us to fund our growth aspirations. Finally, our international business contribution to Group operating profit is 36% this year, further illustrating our diversified geographic portfolio.

Christine is now going to take us through a review of our financial and operational performance. Christine?

Kandimathie Christine Ramon

Thanks, David. Good afternoon, everyone. It’s certainly my pleasure to take you through a great set of results that we’ve delivered for this year. But before I get into that detail, I’d like to make the following three points.

Firstly, we’ve delivered on our operational and cost control targets. As for the year, we’ve significantly enhanced profitability and ensured sustainable performance. Second, our strong financial performance is underpinned by our strong cash flow, we are now better placed to deal with the potential global recession, global economic position should if materialize, as well as fund our abundant growth opportunities.

And thirdly, our strong final dividend takes the total dividend to ZAR13 per share beating market expectation and equaling, the dividend declared in 2008, which was a year of record high earnings. This certainly confirms our commitment to deliver superior returns to shareholders through increased dividends and through capital investments that deliver long-term value and growth.

In setting the economic scene for the past year, we note that the first three quarters of the past financial year saw very favorable global economic condition, and that was supported by continued resilience and improved activity in emerging economies and growing confidence in developed economies as the financial market showed signs of improvements.

However, the last quarter showed signs of a marked slowdown as risk of a more fragile economic recovery in the U.S. and Europe became apparent. On average, we saw the crude oil price for the past year at 30% higher, and that contributed to the overall performance of our energy businesses and chemical markets certainly benefited from the favorable economic environment, and higher product prices and margins despite the high crude oil price.

We saw the negative impact of an 8% stronger rand, however, that was offset by the higher commodity prices, and on a positive note, the strengthening of the rand is reflected in the lower inflationary trends and cash fixed costs. The strong rand is also beneficial for dollar CapEx.

As you know, we do remain sensitive to the these economic variables, and we put up these estimates for budgeting and forecasting purposes with a health warning. So here they are; for every $1 change in the annual average crude oil price, our Group operating profit is impacted by approximately ZAR600 million; and for $0.10 change in the rand/dollar exchange rate, it impacts our operating profit by ZAR950 million.

The margin expansions and cost containment enhanced our bottom line. We saw the Group operating profit increasing about 25% compared to last year, and despite some large ones-off charges, our Group operating margin improved to a healthy 21%, which is the highest that has been in the last three years, and that was primarily driven by the chemical margin expansion. The large ones-off cost totaled ZAR1.1 billion, and mainly related to the Ixia share-based payment expense, the polymers administrative penalty and impairments.

As David mentioned, we saw an overall increase in Group volumes, and although it’s marginal, it was quite an achievement given the impact on the Group volumes by Synfuels major planned maintenance outage. Certainly, the volume growth that we saw with Oryx, Arya and most of our other businesses more than compensated for those. However, it does demonstrate our strong portfolio of performing assets.

Costs were well contained, and I will speak more about the key initiatives that underpin that shortly. Cash fixed costs were contained, and were reduced in real terms, taking into account that the South African CPI and PPI averaged between 4% and 7% for the past year. Certainly, the main drivers for cash fixed cost in our Group are labor costs, which were 7.5% for the past year, and the abnormal electricity cost inflation, which was 27% for the past year. For financial year ‘12, we’ve concluded the gross wage settlement with the labor unions, and they are at between 8% and 8.5%.

So our cost control strategy is underpinned by the strategic Group initiatives that David also spoke about; operational excellence, functional excellence, business improvement plans and increased electricity generation. Through operational excellence, we continue to focus on maximizing the uptime and operational performance of our plants with the aim of improving productivity and thereby containing the cash fixed cost on a unit basis.

In addition, in our functional excellence initiatives, we aim to further reduce functional costs through standardization and simplification with a drive for Group-wide shared services.

Our cumulative mid-functional excellence cost savings amounted to ZAR836 million, of which just under half of that was banked in the current year. There were certain one-off costs that we incurred, and that is included in this amount, and that will also enable future sustainable savings to be delivered. We’re certainly expecting more savings to come, but the sustainability effect will be dependant on enabling our key platform.

Overall in the Group, we saw cost reductions about ZAR1.2 billion that were delivered in this year, and in addition to functional excellence, it primarily reflects the benefit of the power purchase agreement after the successful commissioning of the open cycle gas turbines in July 2010. There are also further savings that we realized through supply contractor negotiations, and strategic sourcing.

On the electricity generation side, we certainly remain on track to increase our own electricity generation to 60% by 2013 from the current 50%, and that will certainly help us contain the abnormal electricity price increases in South Africa, and on our aim to reduce carbon emissions, and David will talk more about our drive for energy efficiency and reducing our carbon footprint.

We do have a bucket on the slide, they’re called ones-off, and I think, quite importantly, what’s included in that are gross price. So, what’s quite important is that while we continue to exercise strict cost discipline in the organization, we certainly need to ensure that we develop and grow our talent to support our growth strategy. So, we continue to invest in and grow our skill base as reflected in the higher headcounts in our growth businesses, and we certainly aim to remunerate our employees competitively.

We saw a strong performance across all our business sectors as reflected in the healthy double-digit operating margins. In particular, we’ve spoken about the strong performance from chemicals, but they had a strong volume performance as well, and the margin expansion which sustained the contribution to operating profit at 29%, and this is quite noteworthy taking into account the higher oil-related feedstock costs.

Quite importantly, our geographic and portfolio diversification is evident from the 36% profit contribution from our offshore businesses, both in the chemicals and the energy businesses. This diversification of risk does makes it more resilient as a Group, and it allows for further volume and margin growth both on emerging markets and developed economies.

The South African Energy cluster still remains our primary contributor to Group profits, contributing two-third to the overall profit. And if one looks at the performance of the mining business, what we see is that if you had to exclude the impact of the Ixia BEE share-based payment expense, mining’s profit doubled on the back of higher coal export prices and increased selling prices to Synfuels.

Our gas business delivered 22% higher sales volumes, and an improved margin, and that was supported by the startup of a new compressor in Mozambique. Synfuels remains the largest contributor to Group operating profit, contributing half of the total profit and there are really not too many businesses that can boast a 41% operating margin that was delivered by Synfuels, and that was despite the lower production.

In addition, the cash credit cost increase were well contained in Synfuels on a unit basis at 4%, and reflecting the benefits of the PPA, as well as other efficiency and cost savings in that business unit.

Despite the higher wholesale margins, oil operating profit declined due to the stronger rand/dollar exchange rate and weaker refining margin, and the 9% increase in production volumes from Natref enabled higher retail and commercial volume in that business. Certainly, the outlook for 2012 is positive, but it will be challenging given the volatility in prices and currency.

Our investment in growth is delivering value as reflected in the international energy businesses, our profitability which has tripled from last year and that’s despite further growth in expiration expenditure. Oryx contributed 6% to Group operating profit and continued to perform well within the target of average utilization rate of 80% to 90%. That certainly endorses the commercial viability of our proprietary technology.

At SPI, our upstream business, we are expanding our onshore gas production facility in Mozambique to increase the annual production capacity from 120 million gigajoules to 183 million gigajoules. What we also note is that there has been higher expiration expenditure, and this does reflect increased expiration activities by SPI, and it includes the drywell write-off during the year of ZAR441 million relating to PNG and Mozambique.

Production from our Canadian assets, although small, the contribution has been small in the last four months of the financial year, we’re certainly expecting improved volumes in 2012, and I'm certainly excited about the significant value add of the Canadian gas acquisitions to our long-term production growth profile, and David will expand more on this later.

Moving on, we spoke about the favorable market conditions that favored the chemical cluster’s performance. But I think that the important step it has been, the favorable conditions were combined with successful cost management and improvements in margin optimization activities by the business.

Polymers remained resilient largely due to the positive contribution of Arya Sasol, the production volumes increased by 20%, and an average utilization rate of 80% has been achieved in the past year. The local polymers business margins remained tight, and the business is engaged in initiative to improve sales and marketing, and operational performance as well as optimizing the C3 value chain.

Capital projects such is EPU-5 and C3 stabilization projects to come on stream in 2012 and ‘13, respectively, are expected to improve the profitability on a sustainable basis in this business. Let me note that Solvents margins grew on the back of strong demand through continued focus on cost containment and the business improvement plan.

The O&S business was once again a star performer contributing almost half of the chemical cluster’s operating profit, and delivered a 13% operating margin. And certainly, O&S benefited from favorable market conditions, and the successful turnaround of this business supported the ones-off impairment reversal of Sasol Italy amounting to ZAR491 million.

As we see it, strong cash flow generation underpins our strong financial position giving us the flexibility required in uncertain credit markets where the cost of funding has increased. In the current environment, we also continue to focus on strengthening working capital management, and that's reflected in our improved balance sheet ratio as well as managing counterparty credit risks.

Our gearing remains low, and so we have sufficient headroom in our balance sheet to fund certain selected growth opportunities, grow dividend and to provide a buffer against volatility.

Our capital investment estimates for 2012 and 2013 are ZAR31 billion and ZAR32 billion respectively, and that includes the Canadian shale gas acquisitions and related capital development costs. So importantly, the question we get asked, when do we expect to return to within our targeted gearing range? The answer is, in the medium-term, and what that takes into account is our large capital-intensive growth plans, and it includes our intention to pursue further gas acquisition.

So as the graph reflects, certainly on the left hand side, we see the ROIC graph, we do have a strong track record of delivering superior shareholder return and our hurdle rate is 16.8% in rand terms that we've delivered on through this cycle. I think importantly, a strategic initiative is capital excellence and that aims to enhance project IRRs and it’s already delivered benefit in the past year.

Looking to the right hand side of the slide, we see the progressive dividend growth. Importantly is that, the Board considered the strength of our balance sheet and our capital investment plans, and approved the 24% increase in the total dividend aligned to earnings growth, and at today’s value, I think it gives us an excess of 4% dividend yield.

So our total shareholder returns over the past five years certainly at 52% compares well with our peer group, and competitively positions Sasol as a large and mid-cap peer company endorsing our commitment to maximizing shareholder return.

So ending off on the outlook, it is cautiously optimistic. Why? Because of the uncertain volatile macroeconomic environment. The high oil prices continue to be supported by turmoil in the Middle East, and loss of Libyan production. However, we have seen healthy demand particularly from Asia. We believe that oil supply remains constrained and the marginal cost of production has increased to near $100 a barrel with the new wave of Saudi Arabian spending, and we believe that this is the new oil pass flow.

Although, commodity price fundamentals remain intact, there are some signs of softening, polymers margins above oil are not in a good space, but the price level currently being around $200 per ton below the long-term industry trend. And although polymers consumption has recovered since the 2008 economic crisis, the new capacity additions in the Middle East, Middle and Far East has depressed global margins.

In addition, the strengthening of the rand certainly remains the single biggest external factor exerting pressure on our profitability, and this certainty remains a challenge going forward. So our focus remains on the controllable factors, which are improved operational performance, and the containment of cost inflation.

On the production side, we’re targeting overall improvement in production in the Group. For the year, Synfuels is targeting a range of 7.2 million tons to 7.3 million tons, taking into account the impact of the recent industrial actions and production incidents, and capital projects, i.e., the 17th reformer and the four additional gasifiers due for commissioning during the second half of financial year ‘12 will increase our production base line to 7.4 million tons.

We are expecting to maintain Oryx at 80% to 90% utilization rate for the full year, and Arya, which is still ramping up to design capacity, is expected to exceed the current 80% utilization rate for the full year.

We’re also expecting improved volume for Mozambique and Canada, and on the Canada production, we’re expecting to achieve the previously guided production ramp-up by the end of financial year '12. And David will be fishing out more on SPI’s upstream activity.

So in summary, we remain firm in our commitment to grow profitability and ensure sustainable performance in our Group and we are well positioned to deal with another potential global economic recession, as well as the few growth opportunities.

Over to you, David.

David E. Constable

Thank you, Christine. Let me start my closing remarks with a familiar slide, We’ve all seen the Group's strategic agenda. We are building on a solid foundation and we have to some extent here mentioned progress that the Group has already made, not only on the Group imperatives, which you see on the left hand side of the screen, but also on our foundation and growth aspirations.

The foundation businesses remain important as do the people and technology that drive these businesses. It's important to continue to improve on the development of our people, as well as on the operations and maintenance of our existing asset base.

Sustainable growth is obviously important. In a moment, I'll give you an update on our major growth projects that support our strategic thrust into upstream, GTL, focused CTL, chemicals, and new energy. And when you talk about growth projects, our capital excellence Group imperatives is a key enabler here, it must ensure that capital is employed effectively from the translation of our strategy into a portfolio of successfully delivered project. Basically, this is all about ensuring that we achieve healthy and robust internal rates of returns on every project and it's something I'm quite passionate about, obviously, and intend to focus heavily on going forward.

You will see two new Group imperatives on this slide; sales and marketing excellence is aligned with our Sasol shared value of customer focus. Many of our efforts in the past have focused on the buy and make part of the Sasol value chain. This new program is designed to improve our performance on the sell side, allowing us to improve customer relationships, customer value propositions, and Sasol margins.

Extracting value across Sasol's integrated operations through planning and optimization is the other new and important Group imperative. Improved optimization across the business unit boundaries has been identified as a major opportunity. This program will improve the way we allocate our feedstock, utilize our factory capacity, and place our various liquid fuels and chemical products into the market. The number one objective here is to deliver significant bottom-line improvements to the Group.

Here are the top priorities for the current financial year, which are aligned and in support of the strategic agenda slide you've just seen. Despite our record low recordable case rate for the year, we not only aim to further improve on this, but also to prevent fatalities. We're implementing a focus safety improvement plan, which includes the measurement of leading indicators, and we've already seen promising results from this area.

Improving plant availability and stability, establishing and rolling out sales and marketing excellence, and driving a Group-wide carbon dioxide mitigation program, including energy efficiency, are all part of our efforts on further improving operational performance. The functional excellence focus will remain on cost optimization. We continue to implement process and organizational changes and will bank the associated cost savings as Christine mentioned. We're on a good trajectory to do more gas acquisitions when the timing and price make sense, and we're focusing on progressing various GTL projects.

As I said, capital excellence is key here to pursuing growth and maximizing IRR. And with respect to our values-driven behavior, we continue to focus on strengthening compliance and governance at all levels of the organization, through training and role modeling. We're also focused on building our high performance culture that is centered on meritocracy, empowerment, and accountability. Developing leadership capacity with the focus on diversity and inclusion is key to successful growth for a global company and is another area that I am extremely passionate about.

Here is our updated project pipeline to demonstrate how we continue to optimize our portfolio. Let's look at the first row, accelerating GTL and focused CTL growth. We are validating a number of GTL prospects and with new widespread interest in GTL; we're being approached with new opportunities on a regular basis.

A massive growth opportunity was realized with the acquisition of two material shale gas interests in Canada from Talisman Energy. During the year, we started a feasibility study to determine the technical and commercial viability of a GTL plant in Western Canada prior to those acquisitions. The study is progressing well and we're on track to complete the feasibility phase by the end of calendar year 2012.

And again, the feasibility study for Uzbekistan GTL is complete, and a decision to proceed to the FEED phase conditionally approved by the Board will be taken in the very near-term.

In India, together with our joint venture partners Tata, our CTL pre-feasibility study and the drilling program to verify coal quality assumptions continues to make progress. We expect the pre-feasibility to be completed in the first half of calendar year 2012, and as previously guided commissioning of the Escravos GTL facility is expected in 2013.

You will notice that the China CTL project is no longer in the pipeline. In December 2009 Sasol and its partner Shenhua Coal submitted a project application report to the Chinese Government for a coal-to-liquids project. At the present time, neither Sasol nor its partner, have received response from the Chinese Government.

Given the long delay in the approval process, we’re developing other investment strategies both in South Africa and abroad. We’ve reallocated planned project funding for the China CTL plant and have redeployed all staff to other projects. We do, however, remain very interested in committed to growing our other businesses in China.

Looking at Chemicals in the second row, implementation of our tetramerization facility at our Lake Charles site in Louisiana, progressing as planned, and our R&D teams are already looking at opportunities to commercialize this unique technology in other locations. During 2011, a prefeasibility study into an integrated GTL and chemicals facility in the United States was completed. Recently, the Sasol Board approved that that project proceed to full feasibility.

The FT Wax expansion in Sasolburg is a complex brownfield project. While there is pressure on schedule, we still plan for the Phase 1 to come on line by the end of calendar year 2012. Growth in demand for hard wax remains robust. So, the current outlook for Phase 2 is to come on line, about two years after Phase 1.

Onto the third row, Sasol new energy has undertaken various studies related to clean and low carbon energy options. Progress has been made on concentrated solar power and underground coal gasification concepts. We’re currently executing a 140 megawatt natural gas-fired power project in Sasolburg and the implementation is on schedule. That plan is expected to be operational in 2013.

In the fourth row, which is the improvement in growth of our existing asset base, we’re investing in several energy-efficiency projects at our various sites, and both the C3 Stabilisation project as well as the ethylene purification unit, EPU 5 are progressing well. C3 Stabilisation is currently in feasibility phase, but the final investment decision expected by the end of this year. EPU 5 is on track for beneficial operation by the end of calendar year 2012.

The Secunda growth program is also making good progress. New projects due for commissioning in second half 2012 will increase our production baseline to 7.4 million tons. We remain on track to increase steel volumes by 3% in the second half of 2013.

In Mining, mine replacements to ensure security of coal supply to Synfuels are on track. And at Oryx, we're expanding the facility by about 10% with expected completion date in the 2014 calendar year.

Looking at the bottom block, our upstream business SPI is also very busy as they continue to evaluate opportunities to acquire further natural gas assets. SPI is also looking at acquiring three coal-bed methane prospecting licenses in Southern Africa. That covers an area of approximately 3,000 square kilometers.

In Canada, 10 drilling rigs and two fracing crews are mobilized at Farrell Creek. As Christine discussed, previous guided production ramp-up will now be achieved by first half 2012. We should state this is early days. We've only drilled about 3% of the envisaged wells, and at this time, there are no changes in resource estimations and gas rates from completed wells are as per the original plan.

And in Mozambique, work on the expanded onshore gas production facilities in Pande and Temane is nearing completion and will increase annual production capacity from 120 million up to 183 million gigajoules. Gas production marketing initiatives are underway and beneficial operation there is imminent. So, with low-priced North American shale gas and high value alternative fuels conversion technology playing right into Sasol's sweet spot, I'd like to highlight these dynamics in a little more detail.

Here you can see the phenomenal growth in natural gas supplies from unconventional wells. In the U.S., shale gas supply is expected to grow from 14% in 2009 to around 45% in 2035. As the supply of natural gas increases of course, gas prices remain low relative to oil. You know Sasol uses natural gas as feedstock in its GTL plants, and makes the high quality diesel, which is sold in line with oil prices. The wider the gap between natural gas and oil prices, obviously the more attractive our already strong GTL value proposition becomes.

In addition, we're seeing a rise in shale gas activity across the globe. In North America, production continues to grow and new shale plays are being proven. Associated with this is an increase in M&A activity.

In Europe, early test wells are being drilled, and the industry collaboration has begun. Initial steps to assess shale gas plays in China have been taken, while Indonesia has announced shale gas finds there.

In Australia, shale gas exploration is to begin soon. And of course, the possibility of shale gas in many other regions should not be ruled out, specifically in South America, the Middle East, North Africa, and here in Southern Africa.

As we said at the outset, these are all regions with increasing energy consumption needs, where Sasol can bring its proven alternative fuels and chemicals value proposition to the party.

Taking a look at the impact of our Canadian shale gas acquisitions, volumes from our two assets will significantly increase the Group's production profile over the long-term. By around 2020, we expect an approximately fivefold increase over existing production from our upstream business, SPI. Just to put this into perspective, the additional gas in these assets can add more than 30% to our current total Group production in the next 10 years.

Now, some of you may argue that selling into a depressed North American gas market limits the upside of these volumes, but I want to reiterate that we have the technology to convert this gas into higher value fuels and chemicals. If the gas prices open up, we also have the option to monetize the gas via the industrial gas market.

We believe this demonstrates that we are well positioned to deliver on our growth aspirations. We're also driving energy efficiency and reducing greenhouse gas emissions. Sasol New Energy is delivering on its mandate to develop and implement opportunities for Sasol in a carbon constrained world.

Focusing on low and no-carbon electricity by 2013, Sasol's self-generated power capacity will be up to 60%, and carbon emissions will be reduced by another million tons of CO2 per year. New Energy is also progressing a similar gas-to-power opportunity in Mozambique, and is investigating other low carbon and renewable opportunity, such as concentrated solar power. In parallel, Sasol has engaged constructively and positively with government on the matter of climate change and on the carbon tax proposal.

Sasol supports the transition to a lower carbon economy in a way that does not undermine the competitiveness of businesses and does not result in reduced investment, lower income for the country or a reduction in jobs.

Onto my last slide; clearly Sasol remains a compelling investment proposition. We have a solid foundation of assets, which are performing well. We have proven over 60 years that we can operate and continuously improve large scale synfuels facilities. As you have seen, our business is a highly cash generative, supported by our focused delivery on cost containment.

Our growth strategy is compelling; there's a growing need for countries to secure supply of energy. For many countries, particularly of those with stranded coal and gas reserves and even those with low grades of coal, in-country conversion of these resources into liquid fuels not only improves energy security, but also improves the country's economy.

Sasol CTL and GTL technology can monetize these hydrocarbon resources, producing liquid fuels and chemicals projects, which stimulates further downstream manufacturing. We’ve demonstrated our ability to develop, commercialize, and improve our technology. Oryx GTL is a perfect example of this.

I have already mentioned the attractive arbitrage between gas and oil prices, which are currently very favorable due to shale gas in North America, and we are well-positioned in emerging markets, which is where a global growth and demand for liquid fuels will come from.

Finally, we delivered superior returns. Our strong and current deleveraged balance sheet underpins our ability to fund our growth strategy, through our capital excellence program we plan to further improve our IRR, and we are targeting top quartile returns as we execute our growth projects.

Sasol is unique and that it is both a value stock and a growth stock. Our highly cash generative set of foundation businesses allows us to pay attractive, progressive dividend, at the same time, we have a full pipeline of projects. And again, note that our Canadian shale gas acquisitions alone can increase Group volume by 30% in the next decade, with more of our growth projects delivering in the future.

My main objective as CEO is to maximize long-term shareholder value as measured by total shareholder returns. I believe that Sasol is a company that offers unique value proposition and has over the years delivered results. Together with my management team, I look forward to engaging with our stakeholders in taking Sasol to its next level of performance.

Thank you for your attention. I think we now like to open the floor up to any questions you may have.

Question-and-Answer Session


(Operator Instructions)

Unidentified Analyst

(Inaudible) integrating back into feedstock, and what kind of chemicals are you targeting, petrochemicals, ammonia, methanol, that's the first one. Secondly, given the LNG prices in Japan at the moment, what in your mind is the base economic use of gas in Canada? Is it LNG into Japan or does GTL trump that? And I think may be lastly, if you look at chemical and oil company multiples, and Sasol’s multiple, it doesn't appear as if the market is giving Sasol the benefit of the chemical diversification. Isn't now the time to divest from chemical assets and unlock shareholder value?

David E. Constable

U.S. GTL I will start and Lean will support on this one, very exciting opportunity for us, next to our existing facility in Lake Charles Louisiana. It's a favorable state and a great opportunity for us to drive value through GTL, and associated in Innovative Chemicals. No partner, we would like to do this on our own, that's the first point. Gas feedstock right now, we are looking at both options. Hopefully, we will integrate upstream, that’s probably the preferred or at least partially the preferred route and SPI is helping us with that. Chemicals, I will turn it over to Lean and we want to talk a little bit about the associated chemicals and what those are. I know we don't want to get in too much detail, but Lean and Andre could probably help me with that.

Giullean Johann Strauss

At this stage we only look at wax extraction, also some paraffin extraction, that’s [approximately] the two chemicals we are looking at in the United States.

David E. Constable

Then onto LNG, and whether to ship it out of Canada to Japan versus the GTL production. We've got two camps on that, so we've got other companies looking at that as well, right around our reserves, though as a possibility it's very difficult to get that pipeline across the Canadian Rockies. That's a big, big cost.

So, right now, we're very comfortable with what we're doing with those reserves and in driving that into GTL. This isn't to say that LNG is not in Sasol's future at some point, but for that specific opportunity in Canada, that's a, economically that's the way we're headed at GTL, and we think that makes more sense. On multiples and diversification unlocking shareholder value, we're always looking at that obviously for our shareholders, and at this point, we are comfortable we've done some consolidation in chemicals and getting our cost structure to where we need to be. Anyone on the panel like to add to that?

Kandimathie Christine Ramon

The only comment I could make is that chemicals contributed quite significantly. And [day wise], if you look at the portfolio diversification, both geographically and from a portfolio perspective, it adds to resilience of Sasol. So, what I'd like to say is we're focusing on further extracting value from that business. I think you're referring to the non-integrated chemicals business, and we've no plans at this stage to unlock or unbundle chemicals.

David E. Constable


Andre Marinus De Ruyter

Yeah, I just wanted to say, however I agree completely with you, and I would like to give you the opportunity to guide the market to rewrite.

Unidentified Analyst

I also enjoyed the letter (inaudible) David. Interesting reading.

David E. Constable


Caroline Learmonth – Absa Capital

Caroline Learmonth from Absa Capital. Can you comment, now that you're in place of CEO, is it business as usual or are you going to revisit strategy, revisit operations in any way, and over what timeframe? And then question number two, on China CTL, can you remind us how much has been spent from that project over the years in terms of pre-feasibility, feasibility? And do you have any indication roughly of how many man-hours would have been spent on that project? And are you going to be limiting that going forward? Obviously, you talked about India CTL, but just an indication of where priorities are on that part of the growth versus GTL? And then just on – an add-on question to the previous question, so on Olefins & Surfactants, if that is a continuing core part of operations, what sort of operating margins do you think are sustainable for that business in the longer term over the cycle? Thanks very much.

David E. Constable

Thank you. I'm going to ask Andre to answer the O&S operating margin question, and then have Lean talk about China CTL pre-feasibility and feasibility costs and man-hours, and also that we're very positive on India CTL I can say that, and that probably continues to come along nicely. So, let's go with O&S to Andre, and then China CTL to Lean, and I'll take of course the strategy and the question you've asked at the start.

Andre Marinus De Ruyter

Thanks, David. The O&S business historically performed at about negative operating margins, but on the whole between 3% and 5% operating margins. We feel reasonably confident that we will be able to maintain operating margins of between 7% and 11% throughout this cycle.

David E. Constable

Lean, China CTL?

Giullean Johann Strauss

The cost of the feasibility study was just over our share of the cost (inaudible) $20 million. The pre-feasibility study was not costly at all we’ve done it mostly out of South Africa. So, I think we’ll probably spend over the years in total between $130 million and $140 million in China. All of that has been chartered into the income statement, so there is no more cost coming through. Unfortunately, I don’t know the man hours, I could probably do calculation, but I guess I’ll be off-target, so can I come back to you on that one. We, at the top of the cycle, probably have about 30 South African expatriates in the office, but also we have supporting offices all over the world. So, I will have to come back to you with the man hour calculation.

David E. Constable

Okay and then a final one about the business as usual and strategy, transitions there trying to capitalize on opportunities and challenges and take stock and look at some low-hanging fruits, some early wins, so that’s what we’re doing. But the team and I have discussed it as you see with these results; this ship is going in a pretty good direction. So, we’re coming together as a team to get it going in a better direction by optimizing cost and operational performance, and all the things you heard about under our top priorities. So that’s what we’re doing right now. So it’s not a major shift because the strategy we’re working off right now is working. The GTL strategy was started back in the late 90s and early 2000s when the company took their GTL technology to the market to take on the stranded gas issue, all that stranded gas in the Middle East.

It was a great opportunity to demonstrate that Sasol's GTL technology could play a part and that's played very well for us, the international growth, the low cost of standard gas that makes those projects very viable and of great returns. So that's – and then this gets turbocharged. This strategy is getting turbocharged with all the low-cost shale gas. So it's the – the strategy we're working of right now is playing out very nicely, it will take us into the next decade obviously, but we do need to come together as a team and look at scenario planning on what's next, right? What's post-GTL? What Sasol's going to look like so that it's a viable and growing company well actually we retired here, so that's also on the book sort of early next to take a look at a longer term scenario planning analysis about, which way transportation and mobility is headed and what the world's going to do with CO2 and what they decided COP17 here in Durban around Kyoto 2, all these things they are going to play a part in the scenario as we look at as we again, happy with our current strategic agenda for a several more years, but we're going to look at a middle state and a long-term state that keeps the company very healthy well into the future. Thank you.

Nick Damon - KB Securities

Can I just give you the questions one by one?

David E. Constable

Your name?

Nick Damon - KB Securities

My name is [Nick Damon] from KB Securities. Just, right next door, Mozambique, there is a very large of coal deposit at Moatize and the early announcements that have come out them, that's attracted the attention of a variety of big major companies, and one of them is Vale, and Vale is talking about CTL plant. Are you involved, and if not, why not?

David E. Constable

Certainly, we all know Vale, very huge organization and I have not heard from them specifically. We're getting lots of calls on GTL and our CTL technology. I know in Poland has been looking at our technology, but from Vale and Mozambique's perspective, I'd have to see if Lean's been talking to them.

Giullean Johann Strauss

The short answer is we're not involved, but I think speaking to the market some time ago that we’re limiting our CTL projects to China and India and we're accelerating GTL. So we're not involved in Mozambique.

Nick Damon - KB Securities

Okay. The next question is really about these liquid hydrocarbons you found in Mozambique. What are liquid hydrocarbons? Is that what I call oil?

David E. Constable


Giullean Johann Strauss

It's a good description, it's a light product.

Nick Damon - KB Securities

The follow-on question is, how much of that oil, if any, is embedded in the resources that you published?

Giullean Johann Strauss

Nothing of those resources has been included as yet because we still have a lot of work to do to firm up those resources.

Nick Damon - KB Securities

Last question, the question is about the capacity of Synfuels. So, we now have the baseline of 7.3 million and we're working to 3% improvement on the 7.3 million and there has been a temporary delay. Now, the emphasis that's been placed in this presentation is the accident that happened down there and that's why we only gained 7.2 million to 7.3 million for this year, which is a bit lower than what you had previously guided. Was that accident so severe or are we looking at other impacts and other effects on Synfuels, which you’re not making quite so explicitly clear? It had numerous downgrades in a relatively short period of time on the capacity or production and forecasts?

David E. Constable

Yeah, I can tell you that we have guided downwards to 7.2 million to 7.3 million baseline. As Christine said, the industrial action, it took out three weeks during July, where we were working with the trade unions to get everyone back to work, and it did affect production. It was a larger strike than normal and it affected people operating the facility through one of the unions that we work with.

The process incident on August 24 was in the west plant in the gasifier section, and it's a unique situation. It's not systemic in the plant whatsoever. So, it’s a once-off issue that’s been taken care of. We're working hard to bring it back online with a lot of steel and pipe and utilities that need to be put back in place, but the plant is coming back nicely, but it’s going to take a bit more time to get those last couple of gasifiers back online. So that’s why we're having the guidance down to 7.2 million tons to 7.3 million tons, there's no other issues. I think we’re comfortable that the guidance to get to 3% by the end of second half 2013 is a good statement. Our projects are coming along out there, and so that’s where we are right now.

Unidentified Company Representative

All right, shall I take one from the floor and let me take one from the conference director.

Jarrett Geldenhuys – Deutsche Bank

Hello, it's Jarrett Geldenhuys from Deutsche Securities. Just three quick questions, the first one is on sustainability or sustainable CapEx. It looks like in 2013, it takes quite a big jump, I don't know if you can just check through that? And then second of all, you mentioned several GTL opportunities, potentially if you could just give us an indication of what percentages of those sits in North America and I suppose the rest is probably somewhere in Central Asia, can you just give us some kind of a breakdown of that? And then thirdly, if I understand the accounts correctly, it looks like there is a small provision raised against catalyst performance at Oryx. I don’t know if you can comment about that, or maybe I just misread that completely?

David E. Constable

Okay. Thanks. Go ahead, Christine.

Kandimathie Christine Ramon

Yeah, on CapEx. The sustained CapEx comes out at for 2013 about ZAR7.3 billion and what that relates to primarily are the replacement mines for Impumelelo and Shondoni. And then we’ve certainly got some other environmental CapEx and one has to also bear in mind that shutdown CapEx was also included in that.

David E. Constable

On GTL opportunities I mentioned that statement within the, that they are in the idea and concept stage, so I would rather not, I think want to go there to signal anything to any competition. So I think we will just let you know that as you see from the graph, shale gas is large and growing, and that we have a lot of opportunities to take a look at and priorities. On catalyst performance at Oryx, Lean.

Giullean Johann Strauss

There is no additional provision. There have been provisions that we've made since startup, but in terms of certain transactions we have done with them, so there is nothing that we have added that's new.

David E. Constable

Lets get back to conference operator and then we will get back to our (inaudible)


Thank you. Our first question comes from Campbell Parry from Investec Securities. Please go ahead with your question.

Campbell Parry – Investec Securities

Thanks very much. Good afternoon, everyone. Just David, well in your time there as the new CEO, what has impressed you most about the businesses as you've stood back from a strategic level and had a look at it? And then when you’ve taken a look at the programs underway or in prefeasibility, feasibility study or even at the idea phase, when you look at that list of projects, do you think that there is any way to accelerate any of them? One of the common criticisms of the business is that GTL is all wonderful, but could you perhaps kind of then very quickly over the next couple of years? It’s a bit of a silly remark, but it certainly is something that you’ve spoken about around the world quite frequently. So, when you take a look at projects like U.S. GTL and anywhere in Europe, perhaps anywhere in Australia, and when you talk about some of the shale gas programs, is there any way of getting in there more aggressively and quicker than has normally been the case with Sasol?

David E. Constable

Great, thanks, Campbell. So, let me just replay that for you. What have I been most impressed with at the Company and then how do we think we can get through FID faster, is that what I heard?

Campbell Parry – Investec Securities

Correct, yeah.

David E. Constable

Well, it’s a long list, as far as what I’ve been impressed with and certainly, the first thing is the people and all the hard work in the company that has got us to this point. And I think this focus on going after the right opportunities and leveraging our technologies is really something to be proud of and I just think that the company has done a great job of that and positioned us so well. Like I said earlier, our current strategic agenda has us going in a very good direction and we’ve got the right platform in place to really take off on this opportunity we have in front of us. If you think about that Canadian acquisitions, I mean that was a great, great move strategically and it’s going to change the whole face of the company for the better. So, just the way, all the employees and the management teams are focused on growing the company, both domestically and internationally is something that has been great to see, and start to be a part of for me.

On getting to the final investment decisions sooner, also what I have been impressed with is the gated process that the company uses. It is best-in-class. The gated process we used to move from idea phase to prefeasibility to feasibility, and onto FEED and implementation on the EPC and startup and commissioning of our projects, and so that the magnitude of these megaprojects we're talking about, you do need that type of a gate process in place to ensure that your business development and implementation is done correctly.

Clearly, we have some great opportunities in front of us that we'd all like to move along a little faster, but if you do that and you accelerate too quickly, you can have a real train wreck on the backend, whether it's an estimate that hasn't been done with the right scope or some issues with not getting all the commercial arrangements set up properly at the outset.

So, we are focused on moving them along as quickly as possible. Hopefully, you've seen today that we've taken some off the list, and we're moving some along quite nicely, and we are very excited about Uzbekistan and Lake Charles as well as others in the pipeline. So, that's where we're at on pipeline. Thanks Campbell.

Campbell Parry - Investec Securities

David, just on Uzbekistan, you mentioned, commercial conditions necessary to move that into FID stage. Could you be more specific on those conditions?

David E. Constable

Yeah, we’re very positive on that. I'm actually going into the country on the 19th to meet with the President and along with our partner from Petronas and things look very positive. We do have most of our documents in place. It's probably we've heard best-in-class and these are from third parties now, best-in-class in what we've done as far as getting all of our agreements in place. There are just a few, I would say, minor commercial conditions that we just need to make sure that we're all buttoned up and then hopefully, we can make a positive decision in the very near-term.

Campbell Parry - Investec Securities

Okay. Thanks.



Alex Comer – JPMorgan

Yeah, I’m Alex Comer from JPMorgan. Couple of questions, just on cost. It's far likely that your costs were up, cash costs were up 15% in the second half. Just wondered how confident you are on costing maintained within inflation next year? Also, just on last year a lot was said with regard to voluntary redundancy program and taking people out, if I just look at the breakdown, it looks to me like you've taken about 200 out of energy and about 200 out of chemicals and added close to a 1,000 to other, I think you said this one way, but what do those people in other actually do, what are you going to get out of that extra thousand people?

On the GTL projects, I just wonder whether or not you could give an indication of what you think the CapEx cost difference would be in a GTL plant in Western Canada and one in Louisiana and David, maybe your background in that part of the business you may be able to just tell typically what we should you use as a discount?

And then in terms of the stock, you mentioned that it was both the value stock and the growth stock and it clearly, I think you all agree it's not being valued as a growth stock and yeah, the history is being one of disappointment on volumes and yet when you look at the reserves in place in Canada, the stock should have materially higher volume growth and we would expect materially higher valuation with the like. What are you going to do to convince the market that this time, this is actually going to happen, given what's happened historically?

David E. Constable

Okay. Let's talk about cost first, up 15% in the second half, Christine, can you talk about keeping us within inflation this year?

Kandimathie Christine Ramon

Yes, I think that is our target, and it's certainly looking like we're on track to achieving that. I haven't done the half cost comparison, but I did make the point that really was ZAR1.1 billion worth of once-off cost in the current year. And so, I think that would have certainly contributed to the 15% that you're referring to up in the second half, part of it, but I am quite comfortable that with the initiatives that we've undertaken that we will actually achieve our targets for the full year.

David E. Constable

Do you want to add on to that with the headcount, I know that we've been up till now because of growth as well…

Kandimathie Christine Ramon

Yeah, the point that I made in the presentation is that in our international energy businesses in particular, our headcount numbers are actually up and that's certainly tied into investment for growth and certainly if you look at the other businesses the headcount numbers are down. So, I think when we also do the cost comparison, we look at it on a normalized basis, so we take after once-off related costs, which is safe.

David E. Constable

I could understand on the Sasol New Energy, but it's just the extra size in other, so I'm somewhat surprised at that?

Kandimathie Christine Ramon

I think certainly on the functional excellence side, we've moved, we've transferred people from the businesses into ship services, so that would have been the move, that's actually come through. But maybe we can get back to you with more detail offline, it's a bit difficult to answer the exact details.

David E. Constable

GTL CapEx cost difference in Canada and the U.S., well, certainly there are some differences like Gulf Coast, Louisiana is open shop, productivity better and in Canada, you will be dealing with unions and you also have a slightly decreased productivity because of weather.

So, I think that's all I need to say on that. There will be a difference, but we'll be looking at marginalization is critical to keep that as much as possible in the fab shops and moving that much of the plants into the location in either Alberta or British Columbia, keeping productivity up when you are inside a fab shop. So, yes, there is a difference in Canada, it will be slightly more expensive, definitely.

On growth versus value stock, I think it's a great story. It's when you look at those curves up there, I think we should be valued for what we've been able to valued as a growth stock based on what we've been able to put in place and I believe we're going to deliver on that. We're going to start getting some of these projects over the goal line in North America and in Eastern Europe and construct them successfully and that's going to drive just like Oryx, GTL has drives to the major bottom-line growth through the medium term. So, I'm very positive and hopefully the markets will see that.

Alex Comer – JPMorgan

Okay. Thanks.

Unidentified Company Representative

I think we've run out of time. Certainly, I know there's lot more questions, but we're already 15 minutes over our time. Please join us for a drink next door, and our management will be available, so, you'll have opportunity to ask further questions.

David E. Constable

Thanks very much, everyone. Thank you.


Thank you. This does conclude the Sasol year-end financial result conference call. Thank you for your participation. You may now disconnect.

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