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Sasol stands by decision not to pursue rights issue

Debt has been reduced from $190bn to $126bn, with further reductions expected in the coming months, says Sasol president and CEO Fleetwood Grobler.

NOMPU SIZIBA: JSE-listed energy and chemicals company Sasol released half-year results today, February 22, 2021. For the six months ended December 2020, the company reported robust results. Adjusted earnings before interest, tax, depreciation and amortisation – also known as Ebitda – declined by 6% to R18.6 billion, while headline earnings shot up to R11.8 billion, compared with R3.7 billion in the same period in 2019. A key development in the Sasol story is that it now has confirmed that it won’t be looking to pursue a rights issue from shareholders following its having paid off a third of its bulging debt, whittling that debt down by R63.4 billion in the period.

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Read: Sasol is making headway against its challenges

Well, to discuss these results further, I’m joined on the line by Fleetwood Grobler, the president and CEO at Sasol. Thanks very much for joining us, Mr Grobler. Now the metrics are pointing in the right direction, what are the major factors to which you’d attribute this?

FLEETWOOD GROBLER: Well, I think it’s the delivery of what we indicated to the market in March last year, to say this is the plan that we need to turn the ship around. We delivered on all of that. So let me just to refresh our memories; what we said we would deliver was to do some cash conservation or savings to the amount of US$1 billion. We said need to do asset-divestments of at least US$2 billion.

And then we moved to the rights issue. Now, if we look back and say, okay, what has really transpired is that we have delivered US$3.3 billion of asset divestments so far, and we are looking to increase that to $3.8 billion by the end of this calendar year. We have also delivered on all the crisis response plan cost-conservation measures, so we are tracking well to deliver more than the $1 billion.

And then we also mentioned that we need to get our non-sustainable savings into a sustainable matter, and that has been dealt with through our transformation programme of Sasol 2.0. That has now been implemented. We gave the market an update in December last year of what our targets are and how we are going to achieve them.

I think all these things really delivered in the end, [so] that we could reduce debt from $190 billion to the $126 billion currently, and that we are on a trajectory to reduce that further through the next months. And so I think that is really underpinning the huge delivery that we promised and which we’ve now delivered.

NOMPU SIZIBA: So at an operations level, how have your various divisions performed, and has the chemical side of the business surprised you – given that it’s not that long ago that you were predicting a couple of years of gloom in the sector?

FLEETWOOD GROBLER: We know that the commodity markets are very cyclical, and so you can argue that we have seen the bottom of the chemical cycle, specifically the polyethylenes and the polypropylenes, and that from [this] year on there is going to be a recovery cycle.

So yes, on our foundation business in the chemicals that we have from South Africa specifically now, excluding the US polymers business, we’ve seen a resilient recovery. And some of our products that go into and hand sanitisers and applications like that, into construction and packaging – they have really performed very resiliently and increased quite a bit in margin, and demand is looking up. That is the case.

I think if I look at some of the other business units, we know that our energy business was under quite some duress with all prices falling with demand falling away. But notwithstanding that, we posted quite a handsome Ebitda. Remember, our energy business also comprises our gas business, which was exceptionally strong through the period. And we’ve now seen that products in terms of diesel and petrol have almost recovered fully to pre-Covid levels. The only remaining bit that we believe will take some time is aviation jet fuel, which will only recover once we’ve got full international travel again to South Africa and out. So that will take some months to settle and recover.

NOMPU SIZIBA: So what sort of challenges have been posed to you during the pandemic?

FLEETWOOD GROBLER: Well, I think, if we look at the unknown pathway on how the pandemic will play out, how you don’t have control on how the demand will play out in terms of the pandemic, what we’ve learned is really that you need to look at the items that you can control as management. And for us that was the learning and that’s why we announced those measures decisively at the onset of the pandemic. We stuck to our announcements in terms of what we were going to set out to do that we could control. I must say that’s the thing that underscored, in the end, the turning of the ship – in that you need to have a decisive plan and you need to execute on that, that you can control what is under your control. You can’t control the oil price, you can’t control how long the pandemic is going to be around, but you can control your costs. You can control your capex, as well as you divestment strategy in line with our strategic intent.

NOMPU SIZIBA: I know of course that at the executive level there’s been some sort of pay sacrifice. How long is that going to go on for , and at what point do you go back to “normal”?

FLEETWOOD GROBLER: So when I reflect on last year, we did not have any pay increases in the normal cycle. Usually in the September/October cycle we would see some increases. We didn’t do that. We didn’t pay out any bonuses in terms of your annual bonus that was due last year.

You can argue that you can’t do that for ever and a day, so you need to start recognising that people are due for bonuses, and that increases need to start being re-instituted again. So I believe that when we factor in this year, we’ve got quite a KPI scorecard that we have to deliver on to get consideration for bonuses to be paid out again. Of course, it’s a board decision whether we can afford it or not. But I do believe that that in the normal course of business we will consider both those items towards the end of the year, subject to the review of the position and what the performance of the business is at that stage.

NOMPU SIZIBA: So it’s notable that, despite the good numbers performance, there is no interim dividend. What other work needs to be done? I know you said a lot of stuff at the top of our conversation, but what other work needs to be done for you to fine-tune the balance sheet to a point where you’ll start intimating to shareholders that something may be coming their way?

FLEETWOOD GROBLER: That’s a very good question. A lot of investors and many people have posed the question to us in recent days. So let me position how we think around that one.

I don’t think we set a date for the resumption of the dividend. We don’t set a particular debt level. What we want to use as the trigger event to reconsider instituting a dividend is really our net-debt-to-Ebitda ratio. So we would like to, to consider the introduction of dividends again when we go below two times net-debt-to-Ebitda, and the trajectory is downward from that 2.2  times, and for that we would also see that our gearing gets back to much more manageable levels so  that we can continue to pay down our debt. Our dollar debt needs to be in the region of $4-6 billion. We need to make further progress on that. But that will be the trigger point.

Now, whether that trigger point can happen in the next six months, 12 months, 24 months, we don’t know exactly. But what we did say today is that it’s within our grasp in the period up to 2023. And when the trigger happens, it could be even shorter than that, and then we will announce that we are good to start considering paying dividends again. So it’s more a trigger than an absolute date in time.

NOMPU SIZIBA: I hear you. So a higher oil price and a weaker rand-exchange rate tend to bode well in your favour. But, apart from that combination, which is a bit of a fluke, what are you doing to ensure that – at the risk of you having to repeat yourself – what are you doing to ensure that Sasol is able to deliver decent returns for shareholders, no matter what happens with those variables? And what’s the outlook for 2021?

FLEETWOOD GROBLER: What can we said is that we need to reposition the business to be sustainably profitable at an oil price of $45/barrel. We know today that the oil price is higher than that. We also know that the market is very volatile. Opec can come to lose it, it seems shale oil can be coming back in abundance, and that would put pressure on oil pricing again. So we are not guided by current prices and some of the market analysts who say the oil price can go even higher. We are preparing ourselves for very robust operations, and to be profitable at a $45 oil-price level.

That is where Sasol 2.0 comes in, which is the transformation programme that we announced last year. That will bring a definite cost reduction based on our 2020 baseline of R8-10 billion. It also increases our gross margin to R6-8 billion. And it sets to manage our sustenance capital within a range of R20-25 billion. Now, if you take all of those three things together, we will use those as the main leaders to be sustainably profitable, and not only the windfall if all prices do go up a bit. That is not what we bank on. We bank on doing these measures so that we can manage in a volatile macro environment

NOMPU SIZIBA: And just tapping onto what you said about “sustainably profitable, you did come out a few months ago with your climate-mitigation plan. How is that coming along? And just give us a quick reminder about what the long-term plan is. And have you hit the ground running yet in beginning the measures to begin to do your part?

FLEETWOOD GROBLER: Yes, exactly. We communicated our 2030 roadmap and our targets. So we are well under way on all of the measures that we have to start delivering. So let me remind everyone that we indicated that we would do a 10% reduction absolute from our 2017 baseline. It comprises energy efficiencies, it comprises introducing renewable energy to our operations. And in the announcement today we have, as part of that plan, indicated last year that we will introduce 600 megawatts of renewable energy into our operations in South Africa. We have upped that target now to 900 megawatts in collaboration with our partner …… in Secunda. That is a tangible increase in our ambitions for renewable energy.

So in all the areas that we indicated last year we have started with plans. We are taking the first steps. We have gone to market to gauge interest in renewable energy and we were overwhelmed with the response. We are about to award two 10-megawatt tranches in Sasolburg and Secunda. That adjudication of the bidders is ongoing, and we hope to get to an announcement in the next month after that adjudication, and to let those first two tranches be implemented.

And so all of these points are steady steps towards our committed targets. And, on top of that, we are busy developing our 2050 ambition and key points of the roadmap to get to that. That of course we will announce at our capital markets day towards the end of the year, or still within this year, and hopefully that can give further granularity about how we think and the steps we plan to take to reduce our footprint.

NOMPU SIZIBA: That was Fleetwood Grobler, the president and CEO at Sasol.

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