Sasol’s Discovery Offers Promise for Emission Reductions

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JIMMY MOYAHA: Our initial announcement today comes from Sasol, which has provided an update on their performance for the first half of this financial year.

I’m on the line with Walt Bruns, the company’s relatively new chief financial officer. Walt, good evening, and thank you for joining me. This marks our first official conversation, and I believe it’s your first financial roadshow since stepping into this role late last year. Congratulations on your new position.

What are your thoughts on the business’s performance? You’ve been with Sasol for nearly two decades.

WALT BRUNS: Thank you, Jimmy, and good evening to you and your audience. It’s a pleasure to be here. Yes, I’ve spent 15 years at Sasol, starting in Germany for five years before returning to South Africa, where I’ve been for the past ten years.

In addressing the results, I recognize that the drop in earnings will be a focal point in the media, but as CFO, my emphasis is on the free cash flow figure, which, as you pointed out, experienced a substantial increase of 84% compared to the prior period, though it remains in the negative.

Our efforts to reduce cash fixed costs resulted in a 1% decrease, and our capital expenditure was down 6%, contributing to the improvement in free cash flow.

This metric is paramount for me as we aim to revitalize this business and reduce our leverage to maximize shareholder value.

JIMMY MOYAHA: Walt, let’s remain on the topic of free cash flow for a moment. While it’s increasing, it’s still negative. This likely influenced your decision not to declare an interim dividend this time around, given that your policy requires a positive free cash flow for dividend payouts.

WALT BRUNS: Absolutely. I’d like to make two points here.

Firstly, if we examine our historical performance, we see that we have almost a tale of two halves.

The free cash flow performance in the first half is typically weaker due to seasonal shutdowns and elevated capital expenditures.

However, we anticipate improvement in the second half of the year, as we won’t face as many shutdowns as in the previous period.

Last year, in June, my predecessor, Hanré [Rossouw], modified the dividend policy to link it to free cash flow percentages instead of earnings.

Our earnings and free cash flow have diverged over time due to our increasing capex obligations.

Consequently, we believe it is fiscally responsible to align dividend distributions more closely with free cash flow metrics.

Moreover, dividends are also tied to our net debt levels; if it exceeds US$4 billion, no dividends are paid. Thus, managing our debt alongside free cash flow is crucial in determining our dividend strategy.

JIMMY MOYAHA: Walt, let’s shift focus to the business operations, especially the Lake Charles project within the chemicals segment in the US. What’s the current status there? Previously, it was highlighted that the project was facing challenges due to less favorable market conditions. What is your strategic outlook on the chemicals business at this point?

WALT BRUNS: That’s an important question, given our significant investments in Lake Charles.

We assess our international chemical operations as a whole, including those in America and Eurasia. You may have noticed that earnings have nearly doubled, which is partially attributed to management interventions aimed at reducing costs and refining our market strategies.

We’ve also seen an uptick in some margins, particularly the US ethylene margins.

Doubling the profit from this division is a promising sign, but we believe there’s more potential to be realized, which is where we are concentrating our efforts.

The chemical cycle has experienced prolonged weaknesses, largely due to oversupply from China. These are aspects external to our control.

What we can manage effectively is our cost structure, and that’s our focus. We have set a goal to elevate the EBITDA margin percentage above 10%.

We are making headway in that area and plan to outline more details at our capital markets day in May regarding our vision for the full potential of that business.

After doing so, we will evaluate whether to maintain full ownership or consider other avenues, including possibly listing that business separately at the appropriate time.

JIMMY MOYAHA: Walt, let’s discuss some other notable figures from the recent financial disclosures. Earnings before interest and tax have decreased approximately 40%, and net debt has increased by about 11%. Can you provide insight into the current situation within the company? Although capex has slightly declined by 6%, there remain many complexities in a business of Sasol’s scale.

WALT BRUNS: Certainly. The primary factors contributing to the lower earnings are a 13% decrease in the rand oil price and a 5% decline in our sales volumes, which primarily resulted from reduced production at our Secunda site and a fire at our east ethane cracker in the US last March. The cracker only resumed operations in November.

Thus, many macroeconomic variables are challenging to control, particularly oil prices and exchange rates.

Our focus as a team has been to ensure competitiveness during both favorable and unfavorable conditions, concentrating on fixed cash costs and capital expenditures.

Working capital also significantly impacts our operations, given the size of our company, so maintaining rigorous oversight in this area is essential.

From a South African standpoint, I want to highlight two major initiatives regarding coal quality challenges.

We believe we have identified a viable solution by repurposing an existing facility, with capital expenditure expected to be below R1 billion. We anticipate launching this de-stoning solution within the first half of FY 26.

Additionally, we are optimizing our emissions reduction strategy. This means we remain committed to achieving a 30% reduction in greenhouse gas emissions, but we have identified more cost-effective approaches, enabling us to maintain production levels in Secunda.

JIMMY MOYAHA: It’s great to hear that progress is being made. Before we wrap up, I wanted to ask about the emissions targets, as this has been pivotal to Sasol’s new strategy. How confident are you about meeting these goals?

WALT BRUNS: You’re correct. We have a lot riding on the second half of the year, and I’ll borrow a phrase from the Springboks: ‘We need the bomb squad to come to the party.’

We have a clear second half ahead of us without major shutdowns, so our volume recovery plans are beginning to yield results.

By adhering to our financial discipline regarding fixed costs and capital, along with managing working capital below the levels we concluded the calendar year with, we’re optimistic for a robust end to the financial year. I hope that next time we speak, that net debt will be below the $4 billion mark, and we can show continued improvements in free cash flow.

JIMMY MOYAHA: I’m certainly looking forward to our next discussion at year-end to review these numbers. Meanwhile, best of luck to you and your team for a strong second half. Thank you for your time and insights, Walt. We appreciate your updates. Walt Bruns, the chief financial officer at Sasol, has joined us to discuss their first-half performance.

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