Sasol Limited Q2 FY2022 earnings call

Management Statement and Operational Highlights

• Safety: Saddened by 5 workplace fatalities; identified additional leadership focus areas for High Severity Incident program.
• Operational Excellence: Defined Sasol 2.0, reset operating model, strong ramp-up in U.S. specialty chemicals; prioritizing recovery of SA operations, aiming for SA integrated value chain to cash breakeven between $30-$35 per barrel.
• ESG: Climate change strategy in place, decarbonization plans, partnerships, balance sheet reset, capital allocation.
• Operational Performances: Energy sales up, mining issues, Mozambique gas and chemicals sales, Sasol 2.0 savings of ZAR1.8 billion cash fixed cost savings and ZAR0.5 billion gross improvement margin, capital expenditure range ZAR20-25 billion, business recovery intervention for SA operations.

Segment Performance

• Energy Business: External sales revenue was 47% higher in rand terms due to higher crude oil, refining margins, and demand.
• Mining: Productivity was 16% lower than prior period due to safety incidents, higher rainfall, and slower ramp-up of Fulco.
• Mozambique Gas: Gas production was 1% higher than plan; external sales revenue across chemicals portfolio increased 21% in rand terms.
• Chemicals Africa: Sales volumes were 15% lower due to lower production at Secunda and Sasolburg sites.
• Specialty Chemicals: Sales volumes were approximately 60% higher due to sales ramp-up.

Guidance

• Adjusted EBITDA increased 71% compared to prior year; on track to meet full year guidance of ZAR58-59 billion.
• Focus on delivering to plan, business recovery for SA operations, deleveraging balance sheet, reducing net debt-to-EBITDA to 1.5x, hedging foreign currency, crude oil, and ethane exposures, reducing hedge cover ratios for FY '23 as balance sheet improves.

Risks

• Operational challenges in SA mining and Secunda operations, coal quality and supply constraints, safety incidents, higher rainfall, slower Fulco ramp-up, inflationary pressures, geopolitical risks affecting oil prices.

Q: Is the absolute level of debt Sasol carries as much as an issue as the level of gearing if we are to understand reluctance to pay an interim dividend? Can you explain how your hedging works and why it went against you in this period? And are you there on the $30 to $35 a barrel breakeven?

A: Paul Victor explains about debt levels, gearing, hedging (mostly hedged 90% of Synfuels output for '22, reducing to ~50% for '23), and that while they achieved $30-35 breakeven last year, this year was impacted by lower volumes but expect to return to it.

Q: Could you talk about any plans to forestall maturities in 2024? Do you see any long-term chance to become an IG-rated company?

A: Paul Victor says they want to smooth maturity curve, no immediate risk, and are engaging with rating agencies, hopeful for positive moves based on improving balance sheet metrics.

Q: Have there been suggestions that Sasol splits its business into local and international operations?

A: Fleetwood Grobler states they are focused on delivering Sasol 2.0 value creation and that speculation is unhelpful; timing not conducive for splitting now.

Q: Update on coal quality issue, Fulco implementation, and stock levels.

A: Fleetwood Grobler details levers to address coal quality (better understanding of reserves, better middlings cut, buying better quality coal, increasing stockpile to 1.3-1.5 million tons), Fulco productivity improving towards upper end of guidance.

Q: Are you experiencing geological challenges in all six mines?

A: Fleetwood Grobler says not all mines are equal, with Bosjesspruit having more coal quality challenges, but optimization within long-term plan.

Q: Current drilling program in Mozambique, number of infill wells drilled, and gas pricing.

A: Priscillah Mabelane says Mozambique infill drilling campaign is making good progress, 4 activities started/completed, 1 infill well drilled; on gas pricing, engaging with customers regarding NERSA promulgation, impact in FY '23.

Q: Can you achieve new fuel specification in time in 2023 at Synfuels?

A: Fleetwood Grobler says not concluded with Total, ongoing discussion with government on feasible timeline, working towards 2025 compliance in Secunda.

Q: Color on lower volumes guided for U.S. Chemicals business.

A: Brad Griffith says lower volumes due to outage and JV production, but specialty volumes ramping up.

Q: Expected proceeds from planned disposals? Any more asset disposals planned?

A: Paul Victor says proceeds from REMCO, CTRG, and smaller asset expected $500-700 million, with good progress on disposals.

Q: If cash fixed cost targets for FY '22 are unpacked, why is your gross margins cut? How is it that Sasol has repaid its CapEx outlook to ZAR20 billion to ZAR25 billion until 2025, whereas the industry is increasing CapEx due to higher inflation?

A: Paul Victor says gross margin cut due to SA operational instabilities, but cash fixed costs on track; sticking to 20-25 billion CapEx target, considering inflation but still confident in 2025 target.

Q: Expand on financial contracts for LNG, cost of LNG vs Mozambique gas, and strategy robustness to LNG imports.

A: Fleetwood Grobler and Priscillah Mabelane say in negotiations with partners, competitive LNG pricing, and strategy robust considering long-term contracts post 2026.

Q: Are you now at an optimum headcount level? Quantum of severance payment included in half one that will not recur in the future?

A: Fleetwood Grobler and Marius Brand say headcount managed with Sasol 2.0, digital, and new business opportunities; severance payment ~ZAR200 million in H1, lower remaining in H2.

Q: Will you redo share buybacks rank relative to dividends at the current valuation? Would the Board consider a combination of both?

A: Paul Victor says capital allocation prioritizes Sasol's capital, minimum dividend, then growth capital, evaluating share buybacks vs investments in future projects.

Q: Do you expect Synfuels to return to normal volumes in FY '23? Implications if Natref shuts down?

A: Fleetwood Grobler says premature to give guidance for FY '23, will update in August; plans include supplying volumes from Secunda, not planning to shut down refining in SA.