Sasol Limited Audited Financial Results for the Year Ended 30 June 2020

Source: 8/17/2020, Location: Africa

Sasol delivered a satisfactory set of business results for the first half of the year, driven by oil prices averaging US$62,62/bbl and a solid production performance. During the second half of the year our earnings was severely impacted by the sudden collapse in oil prices and the economic consequences of the COVID-19 pandemic.

The combined effects of unprecedented low oil prices, destruction of demand for products and impairments of R111,6 billion resulted in a loss of R91,3 billion for the year compared to earnings of R6,1 billion in the prior year. Within a volatile and uncertain macroeconomic environment, our foundation businesses still delivered resilient results with a strong volume, cash fixed cost and working capital performance.

The 18% decrease in the rand per barrel price of Brent crude oil coupled with much softer global chemical and refining margins negatively impacted our realised gross margins especially during the second half of the year.

The LCCP delivered an improved earnings before interest, taxation, depreciation and amortisation (EBITDA) performance in the second half of the year of approximately R100 million (US$8 million), despite a very challenging macroeconomic environment. This compares to a loss before interest, taxation, depreciation and amortisation (LBITDA) of R1,1 billion

(US$70 million) recorded in the first half of the year.

Earnings were further impacted by R3,9 billion in additional depreciation charges and approximately R6,0 billion in finance charges for the year as the LCCP units reached beneficial operation.

Our Energy business's gross margin percentage decreased from 43% in the prior year to 38% due to the significant impacts of supply and demand shocks that led to lower crude oil prices and product differentials. We expect that oil prices will remain low for the next 12 to 18 months as the impact of COVID-19 becomes better understood. Oil markets also continued to remain exposed to shifts in geopolitical risks as well as supply and demand movements.

Despite experiencing softer commodity chemical prices across most of our sales regions due to weaker global demand and increased global capacity, our Base Chemicals and performance Chemicals businesses, including LCCP, reported increased sales volumes of 19% and 8% respectively, and maintained robust results on certain products, ensuring a level of resilience in our cash flows.

Total cash fixed costs for the first half of the year were trending above 10% compared to the prior period, however, in the second half, we significantly improved our total cash fixed cost performance resulting in the full year cost remaining flat when compared to the prior year. This was largely attributable to the implementation of our comprehensive response plan focusing on cash fixed cost reduction and enhanced cash flow.

As a result our key metrics were impacted as follows:
- Working capital managed to optimal levels achieving an additional benefit of R9,2 billion relative to our internal plans. This resulted in a historical low working capital ratio of 12,5% compared to 14,8% for the prior year.
- Investment in working capital decreased by R5,8 billion during the year;\
- Capital expenditure optimised by approximately R6,0 billion by deferring certain expenditure without compromising on safety and the reliability of our operations;
- Loss before interest and tax (LBIT) of R111,0 billion compared to earnings before interest and tax (EBIT) of R9,7 billion in the prior year;
- Adjusted EBITDA(1) declined by 27% from R47,6 billion in the prior year to R35,0 billion;
- Basic earnings per share (EPS) decreased to a R147,45 loss per share compared to earnings per share of R6,97 in the prior year;
- Headline earnings per share (HEPS) decreased by more than 100% to a R11,79 loss per share compared to the prior year; and
- Core headline earnings per share(2) (CHEPS) decreased by 61% to R14,79 compared to the prior year. Balance sheet management
Cash generated by operating activities decreased by 18% to R42,4 billion compared to the prior year. This was largely due to the softer macroeconomic environment during the first six months of the year which was further impacted by the severe economic consequences from the COVID-19 pandemic and lower oil prices during the second half of the year, coupled with the LCCP still being in a ramp-up phase. The decrease was partially negated by another strong working capital and cost performance from the foundation business. Investment in working capital decreased by R5,8 billion during the year due to focused management actions, resulting in a working capital ratio of 12,5%.

To create flexibility in Sasol's balance sheet during our peak gearing period, we have successfully engaged with our lenders to waive our covenants as at 30 June 2020 and to lift our covenants from 3,0 times to 4,0 times of Net debt: EBITDA (bank definition) as at 31 December 2020. This provides additional flexibility, which is subject to conditions, consistent with our capital allocation framework, prioritising debt reduction through commitments to suspend dividend payments and acquisitions while our leverage is above 3,0 times Net debt: EBITDA. We will also reduce the size of our facilities as debt levels reduce. Our Net debt: EBITDA ratio at 30 June 2020, based on the revolving credit facility and US dollar term loan covenant definition, was 4,3 times. The weaker Rand/US$ dollar exchange rate at 30 June 2020 impacted Net debt: EBITDA by 0,6 times.

During the year we secured incremental US dollar liquidity through a US$1 billion syndicated loan facility for up to 18 months, and bilateral facilities (with a combined quantum of US$250 million) with a tenure of two years. These facilities enhance our US dollar liquidity position during the peak gearing phase as the LCCP ramps up. In the South African market, we have both bank loan facilities and an R8,0 billion Domestic Medium-Term Note Programme (DMTN) which was established in 2017. In August 2019, we issued our inaugural paper to the value of R2,2 billion in the local debt market under this DMTN programme.

As at 30 June 2020, our total debt was R189,7 billion compared to R130,9 billion as at 30 June 2019, with approximately R174,6 billion (US$10,1 billion) denominated in US dollar. Our balance sheet is highly geared, requiring a reduction in US dollar denominated debt in order to achieve a targeted Net debt: EBITDA of less than 2,0 times and gearing of 30%, which we believe would be sustainable with oil at approximately US$45 per barrel (in real terms). Through our comprehensive response plan we have taken immediate steps to reset our capital structure by targeting to generate at least US$6 billion by the end of 2021.

Our gearing increased from 56,3% at 30 June 2019 to 114,5% mainly due to remeasurement items (39%) recognised, a weaker closing Rand/US dollar exchange rate (6%) and the adoption of the IFRS 16 'Leases' accounting standard (4%). Deleveraging the balance sheet is one of our highest priorities to ensure business sustainability to position us for the future to deliver value to our stakeholders.

Consistent with our long-term commitment to return to an investment grade credit rating, we are engaging with ratings agencies regarding the progress on our comprehensive response plan.

As at 30 June 2020, our liquidity headroom was in excess of US$2,5 billion well above our outlook to maintain liquidity in excess of US$1 billion, with available Rand and US dollar based funds improving as we advance our focused management actions. We continue to assess our mix of funding instruments to ensure that we have funding from a range of sources and a balanced maturity profile. We have no significant debt maturities before June 2021 when the US$1 billion syndicated loan becomes due. In accordance with IAS 1 'Presentation of Financial Statements', the recent conditions which underlie the covenant waiver requires an assessment of our debt maturity that resulted in a further US$1 billion being classified to short-term debt at 30 June 2020.

Our net cash on hand position increased from R15,8 billion as at 30 June 2019 to R34,1 billion mainly due to proceeds received from the US$1,0 billion syndicated loan as well as draw downs on the revolving credit facility negated by LCCP capital expenditure for the year.

Actual capital expenditure, including accruals, amounted to R35 billion. This includes R14 billion (US$0,9 billion) relating to the LCCP and is in line with our internal targets.

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