Sasol : Interim Results Conference Call Transcript

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SASOL INTERIM RESULTS - CONFERENCE CALL 21 FEB 2022

FLEETWOOD GROBLER

Good day and welcome to our financial year 2022 interims results call. Thank you for joining us today. I'm joined here today by Paul Victor, our chief financial officer and members of my group executive committee. Our results for the period ending 31 December 2021 were published on our website earlier this morning. For the purposes of this conference call, I will highlight the salient features only. Sasol delivered a mixed set of results for the six months ended 31 December 2021, benefiting from a favorable macroeconomic environment and increased demand following the easing of COVID-19 lockdown restrictions globally. These benefits were however partly offset by the operational challenges faced at our SA operations, where coal quality and supply were constrained and resulted in lower fuels and chemicals production. We are focused on four key priorities across the business, namely safety, operational excellence, ESG and shareholder value. On safety we are saddened by the five workplace fatalities, which occurred during the reporting period, and have identified additional leadership focus areas, which are receiving our highest priority to augment our existing high severity incident program. On operational excellence, we defined Sasol 2.0, reset our operating model and delivered a strong ramp up in our US specialty chemicals. The lower production from our South African operations during the period has been disappointing. In the short term, we are prioritising the business recovery of our South African operations. Our commitment to manage our cost competitiveness of our SA integrated value chain to a cash breakeven level to between 30 and 35 US dollars per barrel, still stands. Looking at ESG our climate change strategy is in place, both confirmed medium- and long- term targets. We have to defined plans to accelerate the decarbonisation of our business and are progressing several partnerships to realise our ambitions. We continue to progress our balance sheet reset, and refine our capital allocation framework. Our focus here is to restore the dividend, as soon as we are confident that we can do so on a sustainable basis, while completing the few remaining asset divestments. To highlight some of our operational performances, in our 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 the prior period, due to safety incidents, higher than expected rainfall and slower than expected ramp up of the full calendar operations integrated shift system called Fulco.

The consequence of the reduced coal feed together with a delayed shutdown and operational instabilities resulted in lower production volumes at our Secunda operations. We have put in place comprehensive, short, medium and long-term plans to address performance challenges, and we are increasing coal purchases to restore the stockpile to target levels. Furthermore, we are bolstering the executive leadership team with a new appointment of an ex-Sasol executive, as the executive vice president of Mining, effective 9 March 2022. This will help stabilise our mining business and advance the recovery plans. In Mozambique, gas production was 1% higher than our plan. External sales revenue across the chemicals portfolio increased 21% in rand terms. Chemicals Africa sales volumes were 15% lower than the prior period, largely due to lower production at both the Secunda and

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Sasolburg sites. Sales volumes for our specialty chemicals business divisions were approximately 60% higher than the prior period, due to the continued sales ramp up. We remain committed to our Sasol 2.0 transformation program to enable the business to be competitive, highly cash generative and able to deliver attractive returns, even in a low oil price environment. Approximately 1.8 billion rand of cash fixed cost savings, and half a billion rand of gross margin improvement were realised for this reporting period. We are well on track to meet the cash fixed costs target for 2022, of 3 billion rand, however, the gross margin is below the required run rate, mainly as a result of operational challenges impacting our SA value chains. Our capital expenditure will not exceed the range of 20 to 25 billion rand, which we set as an annual target, without any compromise to safety, environmental compliance commitments, and asset integrity. The current underperformance at our Mining and Secunda operations is being managed separately from the Sasol 2.0 program, and, as I shared earlier, a business recovery intervention is underway. This may require that Sasol 2.0 interim targets be phased, and reprioritised, to allow for higher value baseline recovery in 2022 and 2023, however, 2025 targets remain intact.

At our Capital Markets day in September 21, we announced our plans to deliver on Future Sasol. Against these commitments, I'm pleased to report the following progress. We are jointly executing 600 megawatt renewables together with Air Liquide, for Secunda operations, and have completed our request for proposal process. On gas, we have recently approved development funds for the first tranche of the additional gas reforming capacity in Secunda. Furthermore, our PSA project in Mozambique is performing to plan with the gas off-taker CTT, achieving financial close in December 2021. We are also making good progress on the purchasing of 40 to 60 peta joules of LNG with negotiations underway to enable first gas by 2026. We are exploring a number of green hydrogen coastal belt development opportunities, and current leading the pre-feasibility study for the Boegoebaai green hydrogen development project on the west coast of South Africa. Sasol plans to produce the first commercial scale green hydrogen in Sasolburg, using repurposed electrolysers by late 2023 and we are evaluating over 10 active new opportunities for sustainable aviation fuel production with two project partnerships already established. To conclude, let me reiterate that despite our short term challenges, our investment case, which I shared with you at the last year's Capital Markets day, remains intact. Future Sasol is not built on the promise of new business away from our core but builds on the advantaged and differentiated Fisher Tropsch technology, as well as today's strong customer relationships and market positions. I will now head over to Paul to discuss our financial performance for the period in more detail.

PAUL VICTOR

Thank you Fleetwood and good day ladies and gentlemen. Despite the operational challenges we faced, I'm very pleased to say that we still managed to convert a supportive macroeconomic environment into improved profitability. We achieved that with firm cost control, together with gains from the Sasol 2.0 transformation program, and ongoing capital and cash discipline. At the same time, we have good, early traction on the repositioning of the business for the transition to a lower carbon world. We believe that we have a strong foundation in place to deliver against the strategy that we announced at the Capital Markets day last year. We reported an increase in adjusted EBITDA of 71% compared to the prior financial year. Our normalised real cash fixed cost increase of 2% compared to the prior year, is mainly as a result of higher maintenance and labor cost. We still remain on track to meet our

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guidance for the full year of approximately 58 to 59 billion rand. Earnings were enhanced by the impact of re-measurement items, which include a profit on the disposal of our Canadian shale gas asset, and the reversal of the impairment relating to the Chemicals Workup and Heavy Alcohols value chain in South Africa. This was partly offset by unrealised losses on the translation of monetary assets and liabilities, as well as our hedging activities. Capital expenditure increased by 38% as a result of planned Secunda Operations phase shutdown in the current period, as well as the planned US East ethylene cracker turnaround. Full year capital expenditure is still expected to be in line with the market guidance of 20 to 25 billion rand for the annum.

Core headline earnings per share of R22.52 per share was more than 100% higher compared to the previous period, mainly as a result of the impact of the macros on our business. A critical part of establishing a strong foundation pillar is us managing our balance sheet very prudently. We've been very successful in transforming this in the past 18 months, with significant deleveraging results from asset divestments as well as improvements from our operating cash flows. Our asset divestment program is now near to the close, with the remaining transactions in the final stages of being concluded, and we can share some details a little bit later on, in terms of the progress that we make with those. Our gearing has also decreased to 59.1% compared to 61.5% as at the 30th of June 2021. And the net debt to EBITDA is now down to 1.3 times with a net bank debt at 5.6 billion US dollars. Although the balance sheet is in a much stronger position, we still have some work to do, and want to take our absolute net debt level to below $4 billion, while keeping the net debt to EBITDA levels to below 1.5 times. We now have line of sight to achieve these metrics, and this will leave us well positioned to ultimately deliver on our strategy and absorb future macroeconomic volatility. Again, just to re- emphasise that our dividend decision is based on a $5 billion net debt level. It is on that basis, and particularly with substantial macroeconomic volatility, very much still at play that the board has decided not to declare an interim dividend at this stage. We will push hard to deliver the business results that fulfill our capital allocation principles, to pay a dividend at our earliest convenient opportunity. In summary, our Energy business benefited from the higher export coal prices, gas sales prices, crude oil prices leading to higher refining margins, coupled with the increase in demand for products. This was partly offset by the slower ramp up of Fulco at Mining, higher coal purchases, and additional cash fixed costs resulting from the Mozambique drilling campaign. In Chemicals a combination of high sales volumes in Eurasia and high sale prices across all regions resulted in a strong performance for this segment, despite lower volumes in Africa, resulting from the South African value chains operational challenges, which we experienced. It still makes much more economic sense to upgrade a molecule of coal to a high margin of fuels and chemical products rather than to turn down the product facility.

Turning to the outlook for financial 2022, we are focusing all our efforts on delivering to plan and meeting our market guidance provided. The business recovery plan for South African operations will be prioritised to ensure that we restore the energy and chemical volumes as communicated. We will continue to prioritise the deleveraging of our balance sheet and to reduce the net debt levels, sustaining a net debt to EBITDA below 1.5 times, and net debt levels of below $5 billion by the end of financial year 2022. We continue to make good progress with our hedging of our foreign currency crude oil and ethane exposures. This increases the certainty of future cash flows and mitigated downside risks to enable our future Sasol strategy execution. We are reducing our hedge cover ratios for financial year

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23, as our balance sheet starts to delever, and we can share more details on that. So, I just want to say thank you very much for listening to us and I will now ask Tiffany to open the floor for the question and answer section. Thank you very much.

TIFFANY SYDOW

Thank you very much Paul. Good afternoon to all participants on this call. My name is Tiffany Sydow and I'll be facilitating the questions today. Thank you for the questions already submitted, we've captured them, we will continue to capture your questions as they come in, and to make this call more efficient I will screen the questions and cover two to three questions at a time.

The first set of questions pertains to our balance sheet, and I'll direct those at Paul, there are three questions in one from Giulietta Talevi at Financial Mail, so I'll first cover this in one go. The first question is, 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 the third and last question from her, you've committed to a 30 to $45 a barrel breakeven, are you there, and if not, what do you have to do to get there. How sustainable is that oil price in your view.

PAUL VICTOR

Hi Giulietta, I haven't spoken to you in a very, very long time, I hope you're keeping exceptionally well. Thank you for those three questions. Giulietta, when we went to Capital Markets day of last year, we said that it's not only the gearing level, but also reducing the absolute debt level, that's quite critical for us. And we did define as the first immediate step that we want to achieve, is net debt level of 1.5 times and below, as that was also kind of the reduced levels that our peer group identified. But in addition to that, we also wanted our absolute debt to firstly start to reduce below $5 billion dollars, although in my speech just now, I did indicate that our ultimate target is to reduce our absolute debt level to $4 billion, because we do believe in a $55 oil price and a $4 billion debt level that ultimately the business can execute its strategy, and also remain quite robust in those lower oil priced environments. So for us, it's always the combination of two. You might argue that the 1.5 times net debt to EBITDA level is sufficient, but unfortunately, in volatile periods, with a high debt level or elevated debt level, that's not good enough. So we will definitely look at those two measures to be achieved firstly, obviously at 1.5 times, and a less than $5 billion debt level, that will trigger the board to consider the dividend. Ultimately, the board must decide whether the dividend is sustainable or can be paid out sustainably, before it finally makes that decision. So for the board not to make the interim dividend decision was not so much on the gearing level, but the fact that the absolute debt level of below 5 billion wasn't achieved. Now we do know that we still have two rather significant, or large, transactions on the asset disposals that's in the back end of being completed. And if we successful in delivering those two assets, which is Romco and CTRG, we see no reason why the balance sheet at these current oil prices cannot delever below $5 billion, and of course, the 1.5 times will be achieved, for the board to start considering making a decision in terms of the final dividend. I have a firm reason to believe that we are definitely moving towards that direction. And if the macros hold up the pace of that will be quite speedily. So the dividend decision we believe is not too far in the distant future. In terms of your second

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question on the hedging, just remember, I think we always have to be quite careful when we look at hedging, hedging is out of the money. It just means that the rest of your products slate was very much in the money, that's the first point. The second issue on hedging is, we have to protect the downside, and we are quite comfortable that our hedging program, although it's out of the money, it's still, if oil prices move below that 68 level on average, we would have had sufficient cover to manage our balance sheet quite effectively and efficiently. So hence, we do believe that the hedging strategy is to prevent the Black Swan, and to protect the balance sheet for downside risk, it's the intention that it has. I will say looking forward in terms of hedging, and as your absolute debt levels decrease, we will also decrease our hedging cover ratio as we've said, and to give you a sense of, we mostly hedged 90%, of our Synfuels output for this year. And for financial year 23 we are reducing those coverage ratios to around about 50% on the strength of the balance sheet improving. So, we are you know have a dynamic mechanism that models these things and kind of depicts and informs our thinking about what is the optimal level to effectively hedge.

The last question is your 30 to $35 to the barrel, last year we already achieved it. Unfortunately this year although our cost, you know, mostly hold, due to the fact that we didn't have the benefit of a higher volumes, our cash break even did increase above the $35 level, we do believe, you know, as we restore the baseline back to its historical levels, and we must still confirm that, when that's gonna happen, that, that will help us with the Sasol 2.0 initiatives to start moving back to that 30 to 35 level, and there's no reason why we cannot achieve that going forward. So hopefully that answers your questions, I don't want to endeavor on where the oil price is going, you know, there, it's quite volatile. There's lots of geopolitical risk, that still weighing in on the oil price, but in terms of our forecast, you know, we did provide those ranges, that we'd still see a 70 to 80 oil price environment as potentially playing out in the next couple of months. But where it's going to be next year, I guess your guess is as good as mine, we probably need to wait and see. I think when we look at our business, we are quite robust to manage our business in a $55 to $60 oil price environment, and I think that's what really matters. Thank you.

TIFFANY SYDOW

Thank you Paul. Next two questions, also on the theme of the balance sheet. From Stella Cridge at Barclays. You discussed today your intention to pay down short-term debt, could you talk about any plans to address the peak in maturities in 2024. And the second question from Denis Grigoriev from Fosun Eurasia. Hello, could you please tell if you're in touch with rating agencies for potential ratings upgrade, which is very likely taking account lower leverage. Do you see any long-term chance to become an IG rated company?

PAUL VICTOR

Thank you very much. I think it's very, two very important questions. So first of all, mostly Stella, we always want to, and have the objective, to smooth our maturity curve over the next 10 years, to ensure that we do remove this Manhattan, kind of, maturity curve that we currently have. Over the past four, five years, we've actually been quite successful in starting to spread the debt, and in our analyst book, you can actually see what the effects of those are. We still have for financial year 23 and 24, to two big