Sasol Limited (SSL) Q2 2018 Earnings Report, Transcript and Summary

Please standby, we are about to begin. Good morning, and good afternoon, ladies and gentlemen, and welcome to the Sasol Results Conference Call. Today's call will be hosted by Stephen Cornell and Bongani Nqwababa, Joint President and Chief Executive Officers; and Paul Victor, Chief Financial Officer. Following the presentations, an interactive Q&A session will take place. [Operator Instructions] I would now like to hand the call over to Stephen Cornell. Please go ahead, sir.

Thank you, Cathy. Good day everyone. This is Steve Cornell speaking. Thank you for joining us on the call during which Bongani, Paul and I would discuss Sasol’s 2018 interim results. We have a published a slide presentation of our results, which you can download from the Investor Center on the Sasol website. In the interest of time, we will not strictly follow this presentation for the call as we would like to make more time available for questions. But before we begin, I would like to refer you to the Safe Harbor note on the forward-looking statements contained on Slide 2 of the presentation. This is our first results announcements since we have shared our refined corporate strategy, which sets us on our clear path to deliver sustainable growth and accelerated shareholder returns. As confirmed in November last year during our Capital Markets Day, our short-term focus between now and 2022 is to enhance our robust foundation businesses that this entails delivering the Lake Charles Chemicals Project and the Production Sharing Agreement in Mozambique. In addition, we will maximize value from our existing portfolio of diversified assets through robust asset reviews, continuous improvement and digitalization initiatives. This will ultimately enhance our competitiveness, reduce our cost base and improve our return on invested capital. Our results for the first six months of financial year 2018 reflect a largely strong performance and continuing progress in delivering on these strategic priorities. With that over to you Bongani.

Thank you for that introduction Steve and good day to you all. What you will hear from us is the following. I am now on Slide 4, market condition. Our sustained focus on cost, cash and capital conservation drove a largely strong set of results within the context of a volatile, but broadly growing global economy. Our results reflect both a continuation of prudent cost and capital management for the period, as well as the impact of several growth projects requiring additional resources for start-up and continuous operations. We are making steady progress in delivering the LCCP with our focus firmly on commissioning, operations and business readiness. In addition, other smaller projects, such as our Gemini joint-venture High Density Polyethylene plant in the U.S. and the 17th Oxygen Train in Secunda, have now reached beneficial operation. In line with our intent to deliver sustainable returns earlier to our shareholders by increasing dividend payouts, we are changing our dividend policy to a more consistent Core headline earnings per share base. Paul will elaborate on this later. We continue to actively manage our balance sheet enhanced through a pro-active hedging programme. This hedging programme has been quite successful in mitigating global volatility impacts on Sasol and we expect to remain active in this space for the near to medium term. We have also improved our overall funding position. Here at home, our commitment to Southern Africa, remains strong and active. We have, and will continue to ensure that our stakeholders derive benefits from our presence and that we are regarded as a trusted partner. For this reason, we maintain a robust sustainability and heightened investment focus in the region. To conclude that Steve and I will share on the call today, I will elaborate on the reasons why Sasol remains a compelling investment proposition, underpinned by our focused strategy and disciplined capital allocation framework. Paul will, of course, go into more detail on our financial and operational performance for the reporting period. After that we will open the session for any questions you may have.

If you turn now to Slide 6, will speak about the Lake Charles Chemicals Project, LCCP. As we have said before, LCCP is a game changer for Sasol. Once commissioned, this world-scale petrochemicals complex will triple our chemicals production capacity in the U.S., enabling Sasol to further strengthen our position in a growing global chemicals market. It will also add up to 20% to EBITDA or US$1.3 billion by financial year 2022. As at 31 December 2017, the project was 81% complete with construction execution around 54%. Capital expenditure is currently at US$8.8 billion of the US$11.13 billion project cost. We are very pleased to see an improvement in productivity post Hurricane Harvey and will continue to closely monitor the productivity rates as we approach beneficial operation for the first units in the second half of calendar year 2018. The tax reform in the US has positively impacted on the returns of the project and we expect, based on our current interpretation of the reform, that it will contribute around 0.5% to returns or equivalent increase of $500 million in net present value of this investment. Based on our internal assessment, we are of the view that the long-term internal rate of return is in a range of between 7.5% to 8.5%, based on conservative ethane prices. We will be reviewing these assumptions in the coming months in light of accelerated shale oil development in the Permian Basin of North America. At Spot Prices, using the last quarter of calendar year 2017 as a reference, the IRR is between 9% and 9.5%. These updated numbers include the benefits from the tax reform and lower spot ethane prices. Our focus for LCCP remains commissioning, operations and business readiness. To this end, the progressive start-up of utilities is already ongoing and gaining momentum. We continue to engage with prospective customers and around 90% of our specialty chemicals products will be placed with existing customers. We are also very happy to confirm that our first sales from the Gemini High Density Polyethylene joint-venture have been completed.

Moving onto Slide number 7 of the presentation. Within the 2018 to 2022 timeframe, we are driving a focused strategy to ensure we actively mitigate our financial risks and maintain a prudent approach to protect and strengthen our balance sheet. This will ensure we maintain our investment grade credit rating. As confirmed in November last year, we will step up shareholder dividend payouts to 40% or 2.5 times cover by 2022. As mentioned earlier, this payment will now be based on Core HEPS. During this timeframe we will also undertake incremental investment in our existing assets, adopting a balanced approach of growth and returning value to shareholders. We have entered into various hedging contracts to protect the company against volatility in commodity prices, currencies and interest rate changes. This will continue beyond our peak gearing period. Within our existing business we are looking to drive further value: delivered through our continuous improvement programme. Notwithstanding our past success, we see more opportunity, supported by our asset reviews and digitalization efforts, to provide even higher earnings and returns from these facilities. A relentless focus to capture these opportunities can be expected We will also actively and continuously manage our portfolio of assets. We will fix or retain those assets that will increase our returns, while exiting those that are not in-line with our strategy or have lower than desired returns. Here we are targeting more than $1 billion in divestment opportunities, which will yield additional liquidity benefits. Our actions will result in a deleveraged balance sheet, targeting a 30% gearing and net debt-to-EBITDA ratio of 1.5 to 2 times. Furthermore, unwinding the Inzalo transaction will be structured to ensure that our credit ratings are maintained at investment grade, while ensuring the least amount of dilution to our shareholders. These deliberate, proactive and focused actions, in addition to lower capital spend, will ensure we are free cash flow positive in financial year 2019.

I will now cover Slide 8 and 9 together. Today Sasol is a global company, but in so far as South Africa is concerned, we remain proud of our home market and our commitment to the country has never wavered. We are particularly encouraged by recent developments in South Africa that signaled a more stable political and investor friendly outlook. A more conducive business environment will create even greater opportunities for Sasol to be a force for good. We are firmly committed to sustainable transformation and broad-based black economic empowerment efforts. In our recent verification, Sasol achieved a Level 6 contributor status representing a key milestone in our journey of achieving at least a Level 4 contributor status by 2020. Our shareholders approved the Sasol Khanyisa B-BBEE transaction on November 17, 2017, which marks a significant milestone in achieving our B-BBEE ownership credentials. On capital projects, we recently inaugurated our completed FT Wax Expansion Project, and in March, we will inaugurate the world’s largest oxygen production unit, built by Air Liquide, in Secunda. Over the past three years, our capital investments have totaled over R20 billion in South Africa. And for this reporting period, we invested R8.7 billion in our home market. In Mozambique since 2004, at the time of the initial investment made by Sasol and our partners in Mozambique, over $3 billion has been invested in developing the country’s hydrocarbon industry. This investment has contributed over $1 billion to the government of Mozambique. On the PSA field development plan, we have successfully drilled and tested nine wells relating to the first phase of this license area. We anticipate oil production to be between the mid to lower-end of the range presented in the field development plan. The gas wells have confirmed that there is sufficient gas to cover our initial downstream opportunities. Sasol is actively working to ensure greater alignment and mutual benefit with the Government of Mozambique and its people. Our ongoing investment in Mozambique affirms our steadfast commitment to the country and entrenching Sasol as a trusted partner.

Now moving on to Slide 10. We strongly believe that Sasol remains a compelling investment proposition. Our overarching objective is to deliver superior value to our shareholders. Our investment case is rooted in our identity as chemicals and energy company, a focus on value-based growth and increasing shareholder returns by leveraging our competitive strengths. Investing in Sasol provides exposure to our robust portfolio, comprising feedstock-advantaged operations, combined with our human talent and unique technologies. We expect a further catalyst to be the upcoming free cash flow inflexion point post commissioning of the LCCP. Combined with our refined strategy and refocused approach to capital allocation, we have targeted EBIT growth of at least 5% in U.S. dollar terms and expected long term ROIC of more than 12% in U.S. dollar terms through the cycle. We aim to achieve these targets against a backdrop of: capital expenditure on sustenance of US$1.5 billion per annum; an optimal capital structure with a long term gearing target of 30%; increased dividend returns stepping up from the current 2.8 times cover, to 2.5 times by 2022, and moving to 2.2 times on a sustainable basis thereafter; and continued investment in growth opportunities via further industrial expansion, as well as M&A opportunities. One of the priorities in refining our corporate strategy was to map the best way forward for Sasol as a compelling investment. We are confident that we are well underway on this journey. Paul will now take you through the detail of our financial and operational performance. We will then open up the session for questions, which Steve will run. Thank you.

Thank you Steve. Good morning and good afternoon ladies and gentlemen. It’s my pleasure to highlight some of the details about 2018 interim financial results to you today. Our results at the end of the earnings range provided for in our recent trading statement. If you turn now to Slide 14, we are pleased to note that our core earnings per share which is which is earnings per share adjusted for once-off items, as well as the impact of period in currency and derivation revaluations, amounted to R18.22 per share, which is 5% higher compared to the comparable period and it really reflects the sustainability of our business. Our operating profit of $11.8 billion was 14% down as the down, as the benefits of higher dollar value for chemical prices were in part offset by the stronger Rand dollar exchange rate, but also as a result of the impact of the re-measurement items and one off items which are also highlighted here on the following slide. A strategic focus to diversified earnings by product search and by geography is also gaining momentum. Earnings profile will however be further diversified once the LCCP comes online in the following two years and product slightly move much more to chemicals with the contribution of the U.S. being amplified in the earnings contribution. Headline earnings per share increased by 17% to R767 whilst earnings per share decreased by 1% to R11.29. Following shareholders request and also after careful consideration, and approval by the Sasol Board, the Board inline earnings per share well in the future form the basis on which we will determine our payout ratio, but still within the payout corridor of 2.2 times to 2.8 times core inline earnings per share. We do believe that this approach will show in basis from the impact of period in currency valuations as well as once-off items such as the high processing [ph] charge of Sasol Khanyisa. Accordingly, an interim dividend of R5 per share has been deployed along with the company’s cover based dividend policy. Capital expenditure dominated by this thing on the LCCP amounted to R27.7 billion for the period. It was even lower than our internal forecast, managed results of the impact of the stronger Rand also playing out in the capital forecast, as well as optimizing the spin on the LCCP but very important to note that as compromising the schedule of the project. I will now move on to operating profit. And take you through the items that impacted the move in operating profit as highlighted on Slide 15. The stronger average and closing rand/dollar exchange rate led to 11% reduction in operating profit. On the positive side, the higher dollar-based crude oil, fuels and chemical product prices positively impacted operating profit by 36%. Operating profit however was mostly negatively impacted by the following significant once-off and the re-measurement items. We also focusing on the negative entries, first a partial repayment of our Canadian shale gas assets amounting to R2.8 billion or CAD281 million, really on the back of lower for longer during cash prices. And in addition to that, the scraping of our U.S. GTL feed cost assets amounting to R1.1 billion or US$83 million following the strategic decision which we communicated at the Capital Markets Day to no further increase in greenfields Global GTL ventures. These negative variances were partly negative by a R600 million, positive net impact as a result of the mark-to-market valuation of our aging positions, as well as the impact of the mine stock cost in the prior period amounting to R1 billion and because of the rand occur in the first half of 2018, we do set to that positive impact. Operating profit was also negatively impacted by growth and base cost, which I will highlight and unpack on the following slides. Finally, it’s also very encouraging to note the increase in sales volumes and margins, which increase operating profit by 2%. Turning now our focus to Slide 16, we still hold to view that it very much have an infringed and embedded strong cost culture in Sasol, where we are continuously looking for areas to sustainably drive our cost as we strive to improve also our return on invested capital. During the first half year, cash fixed costs escalated in absolute or nominal terms by 10.7% or 6% in real terms. On a normalized basis cash fixed costs, excluding growth cost and once-off charges increased by 2% in real terms. In order to better understand these movements, I will now be taking you through the more significant items impacting the real cost increase of our cash fixed costs. Firstly, our LCCP and HDPE Gemini facilities as well as new capital projects such as the 17 oxygen train added 1.5% in additional growth cost in the form of cash fixed cost, compared to the prior period. While this represents an increase in cash fixed cost, the net positive benefit in terms of higher earnings and cash flows are and will in future be reflecting in our results. Second to this, once-off cost also contributed 2.5% to the cash fixed cost increase as really – mainly relates to three items. First, the Power Purchase Agreement with Eskom, which reached its end in April 2017 and it wasn’t renewed by Eskom that means it was a temporary benefit that we guided in the previous year. The pre-investment cost associated with our digitalization journey as well as transaction costs associated with our Khanyisa Black Economic transaction, these three increases were partly offset by the prior year’s mine strike cost. Thirdly, production interactions as well as some of our operations resulted in 2.3% real cost increase in the form of variable labor costs as well as maintenance costs. If you look at our labor headcount analysis in the annual book and you normalize that for growth, you will see that our labor headcount pretty much stayed flat and in some part actually reduced, compared to the comparable period. On a macroeconomic level, the South African Producer price inflation increased our cost by 4.7% and increase of the rand/dollar exchange rate at a positive impact on our overall cash fixed cost price of 0.3%. Despite the higher mid-year cost increases, we do however remain very confident that our nominal cash fixed cost increases for financial year 2018, we still track our full cost inflation assumption of 6%, and the normalized cash fixed cost in the real terms will remain flat for financial year 2018, compared to financial year 2017. Moving on to the capital expenditure slide on Slide 20. Our capital expenditure amounted to R27.7 billion and this includes the accrual so it’s not a cash flow number, its accrual number. This includes R16.7 billion or $1.2 billion relating to the LCCP. We have also adjusted our 2018 capital forecast downwards to R54 billion, we now estimate the capital expenditure on the LCCP to be approximately $2.4 billion for financial year 2018 and $1.1 billion for financial year 2019. Although, this represents several spending on the LCCP, again, I want to reiterate that LCCP remains on track for the startup of its first modules as previously mentioned to the market as scheduled for the second half of this calendar year. On the interim focus is detailed on Slide 21, and I would like to extract the following key and salient points. As we drive future shareholder value, we will be guided by our prudent financial risk mitigation strategy. Our continuous focus on delivering operating efficiency and enhancing our robust foundation businesses, and lastly delivering all of this in a optimal capital structure. Our hedging program is a key component of our financial risk management framework and it provides certainty to manage securing and ensure succession liquidity. With this undertake in November 2017 to update our shareholders globally with regards to the funding plan to refinancing dollar preference sold to date created by our current hedging program as well as the contributions of our cost management and cash conservation programs allows us to signal the first launch of 9.5 million preferred shares, which is scheduled to unwind by June 2018, by using existing cash and facilities. This will bring about the high gearing number for financial year 2019, but it will not impact our investment credit ratings and it will not valued shareholders. Continuous market volatility will be considered and providing the final decision with regard to the second tranche of 16.1 million shares, which will early unwind in September 2018. The Sasol board will inform our shareholders of its decision in August 2018, and again, will both decision on balance sheet help sustaining investment credit ratings and again, looking advise of minimizing equity dilution to shareholders at that point in time. Stephen Cornell also outlined the progress on our asset review process and this couple to the continuous improvement prices will improve profitability in cash flows of our foundation businesses, is positioning as quite favorably to deliver at 2% ROIC uplift by financial year 2022 or financial 2017 baseline. Details of these plans will be share to the market later during the year. Finally, we’ll focus on as delivering all of this in an optimal cash flow structure. The active liquidity management and also following the disciplined capital allocation process allows us to deliver a superior ROIC and increased free cash flows to our shareholders now and going forward. In executing our new terms – near-terms funding plan, we had increased our U.S. dollar revolving credit facility from $1.5 billion to $3.9 billion and excluding the maturity to five years with a option to extreme advice further two years at very favorable terms. We’ve also established an ZAR 8 billion domestic medium-term those program to enable us to access the South African debt-to-capital market and will required. Our refine strategy coupled with in – focused on disciplined capital allocation also allows and will ensure that we continuously focus on delivering and investing in a high-quality investments for our shareholders. Lastly, our investment credit rising is a critical focus area for us. We are very pleased to announce that really decided to decouple such as credit rating from the Solvents rating that’s a lining its approach with that operation team. And if you compare our credit rating again data of the Solvents, we are now in terms of the S&P rating to notches above the Solvents rating and one notch in terms of the Moody’s rating. Before I hand back to Bongani and Steve, I would like to share our outlook for the second half of financial year 2018 on Slide 22. With the expect market volatility to continue in financial 2018, but we also depreciated all of this from as a background of the growing global economy. And this still allows us to leverage our strong position and deliver sustainable value to our shareholders. We expect our mining business to continue to safely return to improve production levels, as we focus on continuously supplying coal to Secunda Synfuels. Total production for the mining complex will have ever be lower compared to what we plan for the full financial year 2018 without impacting a continued supply to Secunda Synfuels. For financial year 2018, we expect the South African liquid fuels sales volumes to be approximately 59 million barrels, which is very much in line of what we making during our in release earlier in piece. Our ORYX GTL utilization rates average about 92% and Secunda Synfuels operation forecast to achieve production of around about 7.7 million tons. Normalized Base Chemicals sales volumes are expected to be between 1% to 3% higher and the normalized operating profit for the Base Chemicals business to range between ZAR 3 billion and ZAR 5 billion for the year. Normalized Performance Chemicals sales volumes are expected to be between 2% and 3% higher with our Wax Expansion Project expansion project with the producing capacity will increase to 116 kilotons of OpEx. We also expected the average margin in the PC business to remain very much resilient. Normalized cash fixed costs as mentioned earlier, are expected to attract our forecasted inflation rate of 6%. On an macroeconomic term for financial year 2018 and 2019, we expect the Rand dollar exchange rate to average between ZAR 12.50 and ZAR 14 to the dollar and the average in crude oil prices to remain between a trading brand of ZAR 55 and ZAR 65 to the barrel. Finally, we expect our balance sheet to reach gearing level from now of between 40% and 44% and the net debt to EBITDA to now be now be below 1.7x. On that note, I'll hand back to Steve, who will facilitate the Q&A session. Thank you, Steve.

Thank you, Paul. Operator, you can open up the lines for questions.

Certainly. [Operator Instructions] And we’ll first go to Gerhard Engelbrecht from Macquarie.

Good afternoon, thank you. I've got a couple of questions. The first one is, can you please given estimate of the ramp up by Gemini. How long and could you get a full production and is this a read through for the ramp up on the Polyethylene plants at LCCP. And then can you give more details on this outstanding tax litigation, it looks like the Sasol tax claims or increasing and could increase even more if the 1999 to 2004 assessments are followed. And then lastly, I could ask realizing a $1 of asset sales, Canadian shale is about CAD 300 million sale on your books that’s substantial additional asset certificate book value for those assets. Can you elaborate on that that seems quite significant to me? Thank you.

Thank you, Gerhard. I'll take the asset sales. Paul, will you take the outstanding tax. And Stephen, can you start with how the Gemini startup, how it went?

Gerhard, thanks for the question. So with respect to Gemini we spotted up in November, monomodal production mode for the first two months, we switch now to the bimodal production mode. And in the first month of January, the preceding month we had some operational issues to switch fully to the bimodal mode, but things are settling down. So coming back to your ramp up question, I think our general approach and this is consistent with our approach also in terms of ramp up on LCCP, is to ramp up to full capacity in the close three years of operation.

Gerhard, good afternoon. And so just to provide some color on the tax message, effectively these text message and before I [indiscernible] expanding this, I must say that, until now those are the only two text message although they’ve been significant that has been raised by Sasol, all the other taxes had been updated, checked and cleared and it’s not only Sasol is also globally. It doesn’t take away that the revenue service's globally came from time to time loss investigation, but we feel that most of our taxes by these two investigations is in good space. In fact, briefly and to talk about the first one, which is known one which we’ve communicated before to the market, which is due to the Sasol's oil will procurement challenge that you receive from Sasol. The latest update since we spoke to you is primarily exactly the same, while there’s one difference that we had been allowed to appeal to the Supreme Court of Appeal. That case we’ll serve to the Supreme Court of Appeal in early October and by November – early November. Hopefully, we will get kind of a closer in terms of this specific method. We still feel comfortable based on the legal advice that we’ve received and further additional information which we can share with you when we meet with you that we still hope a very high prospect of success, in winning this case. But it needs to go through report. We’re quite comfortable that there will be fast judges hearing our court case, in the Supreme Court of Appeal and we just need to go through the process now. So other than that there’s been no change completely what’s we communicated before. The additional item is orders that Sasol completed with regards to offshore financing treasury entity that in prior year’s project 2012 we operated from the oil of land actually allowed us to actually move to treasury onshore with enquiring currency losses or evaluations. So before 2012, we operated the treasury function in oil of land. Sasol completes that the principle of effective management. And actually applies a change practice note, which they released in 2015 and they backdated it. Now our legal advice is that you cannot backdate practice notes with prior years and based on that we believe that unlawful. And again, we now just at objection phase of the assessments, we will follow objections in the coming weeks and then the process is really will stop. So unless this matter doesn’t get resolve between policies which are down, we’ve already did on our legal rights and probably resolve this case at the earliest by 2020 or 2021 that we again believe that we’ve got a strong legal footing and we will keep on challenging these cases on legal mirror through the normal legal process.

Thanks, Paul. Sorry, Steve. I just look different view on the tax issue. You say, Sasol there is also notified Sasol of an intension took place in field ordered for 1999 to 2014 on hold. Could that be additional liability or risk?

So the current guys in the simple Sasol method on the practice of substance reform and that’s the principle that needs to be kind of confirmed by the court within the operating entity Sasol oil as such in procuring oil from the oil of land and from the UK. Based on the current quarters, Sasol being agreed to stop the fuel order subject to the court hearing, so we are going to give a unfavorable tax hearing or tax outcome in case there will a further tax exposure in addition to the $1.2 billion in terms of what we currently provider for. It’s a favorable hearing from Sasol that will then obviously drop the fuel order because it cannot challenge kind of the principle that reporting time into the tax payer's favor.

Thanks.

The last question was regard to the asset review process, what we’ve said is, that we expect to drive something greater than $1 billion in terms of – at the end of assets that may be disposed out. It's not a hard target, it's our current view basis the process, we’ve said, we’re about 70% complete with the analysis of all our assets, we’ll finish that up throughout the rest of this calendar. And we’ve announced to the market that we are actively perusing the sale of the Canadian shale gas or others that are progressing through the process, and we expect those – the right time to be announced as well. I wasn’t exactly sure what’s your question was given the size of our company in terms of market cap that we expect about $1 billion, seems extremely reasonable. And basis the analysis that we have done to date it’s seems to be reasonable as well.

Okay. Thank you.

And we’ll take our next question from Chris Nicholson of Morgan Stanley.

Good afternoon, guys. Thanks for the call.

Hi, Chris.

Hi. I have two questions, the first one is that in the budget statement last week from the mid to finance since announcing structure of carbon tax in South Africa in the beginning of 2019. My question revolves around the outfits that would be available to Sasol I understand there is a basis offset of 60%, 70% and potential maximum offset about 90%, 95% could you provide some details I guess based on the amount of offset that you believe will be available to Sasol against the carbon tax. That’s the first question. And the second question just revolves on ORYX, I know it’s in the notes to the release you did out this morning that Sasol is now liable for 100% of the tax in ORYX. Could you just confirm if that is correct and then what the anticipated dollar or Rand impact would be going forward specifically for marketing purposes. Thank you.

Thanks, Chris. Bongani will you take the one on our view on the carbon tax and Paul will you take the tax liability.

Chris slightly couple of taxes they concern the effecting two states that it’s not the correct that we have post to the imposition of carbon tax because in our view it makes the South African companies uncompetitive if there is no level playing field with the rest of the world where which we compare to it, but at sometime also if not solving the issue of emission because the emission are actually on a lower trajectory then lower promised to the rest of the world. So in all indications if you look at revenue – revenue mechanism rather than dealing with the fundamental problem. That is – where are we, we received a second truck deal in December last year and we suppose to submit our comments and then hear the number of the near inflation in development, that’s likely to take time because it is still not happened but we still go through those process. And in terms of credits we are going to hear, in our previous analysis the credits were going to be substantial so that the incremental tax and Paul will confirm this was going to be not significant compared to what it would for 2020. Our problem is still the lack of transparency is to what are the post 2020 ratification. And if we assume that there will be lower credit because, we are assuming that is not significant prior to 2020. If we assume that we have no credits as the last time, we calculated, it was going to be about 3% of earnings cost 2020, but Paul can confirm the number pre-2020.

So Bongani, we are still an analyzing the number, as you rightly say for financial 2019 and 2020, we don’t expect that to be significant, it can still range from an low number to mid number, and we will rather update what we got data clarity through our engagement [indiscernible] exactly what will be impacted. We can also discuss that more with the people involved in the days to come, just to give an indication of what’s the different scenarios that can potentially impact the low end or the mid end of the carbon tax. But it’s as what you say. Now that is going to be a significant impact on the earnings. And when it comes to audits, GTLs, joint venture, a tax – the tax holiday has stopped in 2017, Chris, let’s make it easy for you. Our assumption based on the current year's forecast is that the annual tax, which we obviously, assets by 100% of our contribution is then to reduce our operating profit, which we normally had from ORYX joint venture around about $40 million per annum. So that's around about the debt exposure from an earnings perspective, it obviously depends on the earnings number. But it’s around about $40 million per annum. Thank you…

40% effective rate is that correct if I look at the shared numbers.

35%, Chris.

35%, okay, excellent. Thank you very much.

We will now take over next question from Alex Comer of JPMorgan.

Hi, guys. A couple of quick questions. While we are on the strategic topic of tax, I noticed in your release the tax rates have changed in the business and your EBITDA going to increases in the U.S. tax relative to the tax reform. But I'm just quite surprised, there seems to be quite a big jump in your Energy business from 25 to 31, which I would thought was entirely South African business. So that's the first question. Secondly, just on the LCCP, I mean, you talked about NPV is increasing due to – or NPV have spotted 8.5% or 9.5%. I think you gave a number of around about $1 billion in 2020 for financial year for EBITDA. I just wonder what EBITDA would do you have in 2020 at spot, do you think. I just wonder, what will the impact on actual profits will be at spot? And then, just on labor costs, we did it based on it seems to sort of tick up a little bit more than expected. I'm just wondering whether you could give a bit more clarity on how you intend to hold labor cost staying going forward? Thanks.

Thank you, Alex. So on the tax rate, I'll start on the EBITDA of the LCCP, I’ll may need some help. And then Bongani, you want to do the labor.

So the U.S. tax rate of the tax consideration, ultimately, the first part of the question relates to energy business. And Alex have you just remember that you got U.S. GTL fee cost as we impair, and that ultimately will scratch and that ultimately sits in the energy business. And that will have impact on the effective tax rate for that specific business. The same goes for the Canadian asset that you also impaired, you will only being do that increments, you do see that effective rates jumps, because all of the tax wise and then ultimately, on a normalized basis, you will see that very much more in lined in terms of what we expect. The same goes with Sasol, if you look at the Sasol effective tax rate, it was certainly 1%, if you slip out the re-measurement items, it is actually sitting at 26%. And that's a very good rate, if you compare it against corporate rate of ORYX of around about 28% of what we guided before 30% discount of a number that we are targeting. And the debt really comes down to the energy efficiency benefits and allowances that we were successful in claiming of the most couple of years of operating our plant more safety and efficient. We can also share with you more both details in terms of the tax appeal, but it’s really applied between the once of re-measurement items and then ultimately, the benefits that we are getting from energy efficiency allowances.

So Paul to be clear. Sorry, it’s not – to put it out. So the energy tax changes in due to the U.S. tax reforms as due to the right times.

Yes, definitely it’s write downs, not the letter.

All right. It’s doesn’t say that in release anyway don’t mind. Steve, you will talk about LCCP.

Yes. So in terms of the LCCP, you'd ask about the cash contribution or EBITDA, we originally had said that around FY 2020, we would close to $1billion contribution in EBITDA. I think you're aware that was based on ethane pricing starting at about $0.30 a gallon and then moving up overtime to about $0.50 a gallon. December 2017, spot prices of is about from ethane is about $0.24 a gallon. So I don't have a number in terms of converting that in to an EBITDA, if that was his question.

We also don’t have – we also haven’t – spot prices to be presented to the market, but what I will do is once we’ve had the meeting with [indiscernible] may just share kind of the details with you.

In terms of the labor cost, let me start by seeing by actual fiscal number of a employees is flat at 50,900 in spite of 13 new operations. And then in terms of the labor cost with us going to be improve too much detailed of mining or chemicals or petroleum itaveraged about 7% to 7.5% in terms of increases. Once it’s increased to the labor cost also – the variable cost element because with our plant maintenance as we communicated this morning not only did we in care additional maintenance course, but we had a incremental labor course because of the employment maintenance.

Next question operator.

And the next question will come from Pavel Kushnir from Deutsche Bank.

Hi, thank you. I have two questions if I may. First of all, I’m looking now at your Capital Market Day presentation, for 2018, 2022, you mentioned the dividends uplift to 40% payout. And that's created an impression that you will be paid out 40% of your earnings starting this particular financial year. However listening to you today and referring to Slide 7, I understand that you are likely to stay at dividend cover ratio of 2.8 times, which is 36% payout. So which is right? The Capital Market Day presentation where you mentioned 40% in 2018, 2022 or today’s presentation, which implies a much smaller payout ratio? My second question is about working capital increase. It was quite dramatic in the first half this financial year. What kind -- I know that in your financial release, you highlighted that you expect a reduction and you see working capital ratio at around 18%. Maybe you can elaborate on that and tell us whether we should expect a neutral impact of the working capital on your cash flow this year and in general, how the working capital may develop? Thank you.

Thank you, Pavel. Pavel, I'll take the first one and Paul you take second one on working capital. We did not made the statement, in fact, we didn't say that the Capital Market Day that as of FY 2018 we would instantly move from a 36% payout to a 40% payout. What we did in Capital Market's Day is break it into the near term, the period between FY 2018 and FY 2022, and longer term, post-FY 2022. What we have said is, as our balance sheet delevers over this near term period as we start to move the gearing down then we’ll start to move to the payout up. So we just talked about the cash contribution of the LCCP generating about $1 billion – roughly $1 billion in FY 2020. And we’ll start to delever. We are trying to say that, in that period, we will walk it up. We didn't want to signal, which quarter or which period, but in that period, maybe more than one step, we may choose to do it progressively. So the answer is, our objective as shown in the Capital Market's Day is by FY 2020, we will be at a 40% payout. But that will not start instantly in FY 2018.

If I may, and just also on the working capital, we did also highlight if we going to refinance in dollar on the balance sheet it will leverage the balance sheet for another year, and because of the data need over, we still have to get to a plus 30% targeted year in ratio before going to step up the dividend up 2.5 times, and that will gradually happen over the next couple of as indicated. On the working capital side, basically from our analysis, we had a rough December, I have to be honest if you. We had full constraints in [indiscernible] which prevented us of shipping and selling our product. And then also from the liquid fuel side perspective, we really add Sasol, which actually industry in terms of liquid fuel products petrol and diesel during December. Now we have confirmed subsequent to in January and in February, that those stock levels have been moving down and will be further down towards June, and that will be in this – let’s say normalized position of 18% working capital as a percentage of turnover. So we do see that it’s run about $4 billion rent impact that it had of working capital on the balance sheet that we couldn’t sell, but we are quite comfortable, we feel comfortable that will be released in the next six months and actually we’ve made some good invoice into that in terms of January and February. So it’s not something to be concerned about the second half will just the data as the result of that stock hold that we had at the end of December.

Next question will come from Johann Steyn with Citigroup.

Thank you. Hi guys. Most of my questions have been asked. Just one remaining one is on your top generated capital target. If you compress to give a little bit more detail and when exactly do you aim to achieve this? What kind of assumptions do you have on that in terms of prices and then also importantly what exactly is your submission of your generated capital both on the numerator and denominator side as we’ve seen in the past of these things can be respectively touch to get whatever you want? Not you, but in general in the industry?

Thank you Johann. Paul can you give some…

Thanks Johann for questioning. [Indiscernible] There are many interpretations when it comes to ROIC, to make it easy to ease of reference when we defined LTIs, we will also clear about the definition of what – how we will calculate the return on invested capital, so for the benefit of everybody, I do want to refer you to disclosure that you made as part of the remuneration policy and how we calculate and also just for the return on invested capital, which is also kind of there are many different definition in the market. Ultimately when it comes to the 12%, the 12% as the base assumption which use a $60 real Brent crude oil price, you recall that we did mentioned during the Capital Markets Day that our strategy has been both on the $60 growth in real terms going forward, but and that really informed our target. And if oil prices do move level to $50, I think 12% will be challenge, but we don’t anticipate a 12% ROIC world through the cycle in the $50 world. If it’s higher than $60 then ultimately that ROIC will be benefit as a result of that. All our plan stake up in terms of the 12% and all the 12% will be realized in U.S. dollar terms, I guess what you will do is, when we release our plans in terms of continuous improvement, we will also make sure to give you indication of how we plan to step up earlier openings growth base business plus LCCP and all of that commoninto the 5% EBIT growth as well as the 12% U.S. dollar ROIC target. So those results unplanned to make available later during the year. We're still working those, but on a high level $60 we to use that by $62 from our 12% ROIC guys.

Johann clear?

Yes. Thank you very much, guys.

Okay, very good. Operator, I think we have time for one more question.

Great. That question will come from [indiscernible].

Hi, I just have one quick one. I wanted to know, if you have any plans to come to the debt market in 2018?

Into the debt market. I guess I need to look at our CFO for that.

Yeah, [indiscernible] we can indicate I think that the Markets Day we see that we first wanted to focus on short to near term strategy with all significant implies and also having all the other facilities implies which you are comfortable, I think sufficient liquidity of the short to near term. It doesn’t like why that we need to thinking about longer terms and our longer term debt maturity occurs and we are currently in the process of considering the various options and vehicles in terms of how we want to approach that. We will only communicate to the market, because we don’t want people to run on this, and the both so has to make a final decision in terms of the prepared loop that we will and I believe is anything to the board, so you can expect later this year probably during focus, as per volume update of how we plan to approach the capital market, capital big market going forward and how we plan to actually manage and gear the companies funding and liquidity over the long term beyond and LCPP [indiscernible]. So more to come, but at this stage that’s I think it’s not just be more to shake at the moment.

Thank you.

Operator, let me close. And thank you everyone for their attendance and thank you very much for your continued interest in Sasol. We hope we’re able to give clarity on the interim results and answer your questions. So we will talk to you again soon. Thank you so much.

Ladies and gentlemen that does concludes today call. We thank you again for your participation. You may now disconnect.