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Integrated chemicals and energy company, Sasol, posted a 27% drop in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to R19,6 billion for the six months to 31 December 2019. The decline was largely driven by weaker product pricing. However, the company delivered a generally solid operating performance, as well as the fact that the Lake Charles Chemical Project (LCCP) is still very early in the ramp up phase.
“The first half of our financial year was again characterised by volatile macroeconomic factors as well as an uncertain global political environment, both impacting product supply and demand. To a greater extent, it was the weak global macro economy that affected our business. Our foundation business delivered satisfactory operational results,” said Fleetwood Grobler, President and Chief Executive Officer, Sasol Limited.
“Although we faced a 9% decrease in the rand per barrel price of Brent crude oil, softer global chemical prices and lower refining margins, I’m pleased to report that volumes, cost containment and working capital levels tracked our internal targets,” said Paul Victor, Chief Financial Officer, Sasol Limited.
Sasol’s gearing increased to 64,5% from 56,3% at 30 June 2019, which is at the upper end of its initial guidance of 55% to 65%. This is largely as a result of adopting new accounting standards under International Financial Reporting Standards (IFRS), and the net earnings impact of the LCCP being in a ramp-up phase.
Cash generated by operating activities decreased by 21% to R19.6bn compared to R24.8bn in the prior period. This was largely due to the softer macroeconomic environment and losses attributable to the LCCP. However, strong working capital management and cost performance from Sasol’s foundation businesses buoyed the decline in cash generated.
The weaker average Rand dollar exchange rate positively impacted operating profit by 7%, while the combined movement in crude oil and product prices reduced operating profit by 40%.
Total costs affected operating profit by 19%, largely as result of the depreciation charges and operational costs of LCCP. On a normalised basis, cash fixed costs increased by 5,4% which is below the company’s 6% inflation target.
At the end of December 2019, engineering and procurement activities at LCCP were substantially complete and construction progress was at 98%, with overall project completion at 99%, while the cost estimate is tracking $12.8bn within the $12.6bn to $12.9bn range.
“We are well on track for completion of the project, with the acetylene catalyst replacement and ethoxylates unit start-up both serving as important and encouraging events for us. We are rapidly nearing the end of our capital spend and about 80% of the project’s total installed output is now online,” said Grobler.
The investigation into the low-density polyethylene unit (LDPE) unit incident in January 2020 is complete, revealing a piping support structure within the unit’s emergency vent system, failed during commissioning. No major equipment was damaged, and the incident was isolated. The cost of the restoration project will mostly be recovered under the company’s insurance, with some owners and investigation costs for Sasol’s account. These costs will not compromise the previous overall project cost guidance. Beneficial operation is expected in the second half of calendar year 2020.
Capital expenditure for the interim period was R21.4bn of which R10bn or $647m related to the LCCP. “We have achieved the peak gearing and will now commence with the transitory phase of deleveraging the balance sheet as the LCCP construction is coming to an end and the commensurate cash flows from the LCCP start to positively impact earnings and the balance sheet,” add Victor.
Its foundation businesses have good operational stability and are core to the company’s success, as it seeks to position itself for a sustainable future. The company expects to deliver its sustainability roadmap and updated business strategy at its Capital Markets Day at the end of 2020.
“We have had a tough half year, and the external environment remains volatile. We know what we need to do, we are energised and focused, and we are making good progress in delivering against our priorities,” concluded Grobler.
Meanwhile, Sasol is making changes to improve its culture. This includes the organisation focusing on ensuring and advancing leadership readiness, at management level and also across the organisation.
“I have introduced changes to deliver the key behaviour shifts to progress our improved culture, and I personally commit to setting the right tone from the top,” said Grobler.
He acknowledged that changing the culture of the organisation will take time. However, efforts are being made to ramp up the transformation.
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