Prepared remarks
Good morning, and welcome to Sasol's Interim Results Presentation for Financial Year 2026. My name is Tiffany Sydow from Investor Relations. And on behalf of the Sasol executive management team, we are pleased that you could join us today. With me is Simon Baloyi, our President and CEO of Sasol; and Walt Bruns, the Chief Financial Officer. The group executive management team is also present and will join for the market call, which follows directly after the presentations. A reminder that the presentation and all supporting financial materials are available on our website. Turning to the agenda for today. A reminder that our strategy follows a two-pillar approach. Firstly, to strengthen our foundation business, where Simon will begin today's presentation with our business overview, then followed by Walt, who will take us through the financial performance for the half year. The second pillar addresses our pathway to grow and transform the business in the long term, where Simon will conclude and provide an update on our progress. A market call will then follow immediately after the presentation where you can submit your questions via the webcast or join in the teleconference facilities. A reminder that the presentation contains some forward-looking statements and more detail is reflected on the slide in front of you. I would now like to hand over to Simon to commence his presentation. Thank you.
Good day, everyone. Thank you for joining us today. We value your time. The business environment remains volatile and the challenges are here. Our priorities are clear, and our execution is improving. Our strategy shared at Capital Markets Day in May 2025 remains unchanged to strengthen our foundation business while positioning Sasol to grow and transform. Today, I'll take you through the progress we are making on the journey, the areas where we're seeing traction and where our focus lies for the second half of the financial year. Let me start by framing the key themes for today. Firstly, safety. Nothing is more important than ensuring that every employee and every service provider returns home safely to their loved ones. While we are seeing encouraging improvements in leading indicators, the tragic fatality in September is a stark reminder that we are not yet where we need to be. Secondly, operational delivery in Southern Africa. Our focus on coal quality, reliability and disciplined maintenance is starting to restore stability across the entire value chain. Thirdly, International Chemicals. The reset is progressing. Markets are, however, tougher than we anticipated, but the actions within our control are delivering structural cost improvements and positioning the business for recovery. Fourthly, cash flow and balance sheet resilience. Despite challenging macros, we generated positive free cash flow by executing on the levers within our control. And finally, we continue to advance our Grow and Transform strategy in a pragmatic value-accretive manner, which I'll cover towards the end of the presentation. At Capital Markets Day, we made clear commitments to strengthen the foundation business. What matters now is delivery. I am pleased to say that we are delivering against most of those commitments. The destoning plant reached beneficial operation in December on plan and is already improving coal quality and supporting more stable operations at Secunda. Our Southern Africa value chain cash breakeven price ended around USD 53 per barrel, ahead of our full year target range of USD 60 to USD 55 per barrel. This reflects higher production and sales volume together with disciplined cost and capital management. Given softer chemical pricing and a stronger rand outlook, we are maintaining our guidance range. In International Chemicals, adjusted EBITDA improved year-on-year despite challenging markets, supported by early benefits from self-help measures. While our self-help measures are progressing and will ramp up in the second half, we have revised our full year adjusted EBITDA and margin guidance, which I'll talk through in more detail shortly. Net debt ended at USD 3.8 billion, and our continued focus on cash generation and cash flow resilience remains central to our deleveraging pathway. Walt will unpack the key drivers in more detail. Finally, supporting the Grow and Transform pillar, we secured an additional 300 megawatts of renewable energy, bringing the total to more than 1.2 gigawatts on the path to 2 gigawatts by 2030. This reinforces an important point. We are focused on the value drivers. We understand the challenges, and we are executing with purpose. Turning to safety. The fatality in September 2025 was unacceptable and deeply regrettable. Our investigation into this incident identified some gaps in risk awareness and inconsistent adherence to safety rules. In response, we have taken decisive action. This includes strengthening both leadership and personal accountability, reinforcing standards, intensifying our focus on high-risk activities and finally, improving service provider safety management. These actions are strengthening competence, rigor and ownership where it matters most at the front line. While there's no room for complacency, we are encouraged by improvements in leading indicators, including fewer hospitalizations and lost workday cases, lower injury severity and most importantly, no major process safety incidents over the past 18 months. Safety is the foundation of everything we do. We will continue to embody the learnings, strengthen our safety culture and hold ourselves and our partners accountable to ensure that every person returns home safely every day. I'll now touch on a few highlights of our financial performance. Despite a challenging macro environment, overall, team Sasol delivered a robust performance in the areas within our control. We improved margin realization, reduced cash fixed costs and optimized capital spend, whilst protecting reliability and integrity. Adjusted EBITDA for the group was lower year-on-year, reflecting weaker macro conditions. However, our cash flow levers were effective and free cash flow ended positive. This is exactly what we mean by disciplined delivery in a very challenging environment. Turning to the business updates. Let me first start with mining. As mentioned, the destoning plant reached beneficial operation on schedule and within budget. We are already seeing improvements in coal quality with average things now around 12%. External coal purchases remained elevated in the first half during the destoning plant ramp-up. While coal purchases will continue in the second half to supplement our own production, it is expected to be lower than the first half and normalize in financial year '27. The focus is now on firmly increasing our own production volumes, reducing external purchases and improving cost competitiveness in support of a more resilient value chain. Gas is an important part of the Southern Africa value chain and broader regional economy. The plateau extension projects are progressing well and remain on track to ensure a stable supply profile to financial year '28. In Mozambique, start-up delays at the CTT gas-to-power project have affected the timing of the PSA volumes. To manage this, approved sub gas arrangements are ensuring continued gas flows to South Africa while the CTT project progresses. Total gas volumes are unchanged. However, a revised gas production profile has deferred gas monetization. Together with a stronger rand-U.S. dollar exchange rate, this has resulted in a PSA impairment. We are working on optimizing the gas production profile through ongoing performance testing and potential infrastructure improvements in the coming months. Sasol's methane-rich gas bridging solution remains on track, while past applications for the period FY '27 to FY '30 submitted to NERSA for approval. At the same time, we are developing longer-term gas optionality through LNG. We are working closely with our strategic partners to advance gas-to-power options. We are managing our gas portfolio deliberately, protecting near-term supply while keeping value-accretive options open to sustain profitability over time. Across our Southern African business, we are seeing tangible progress in restoring performance. Secunda production increased by 10% year-on-year, supported by the absence of a phase shutdown, improved coal quality and gasifier availability. At Natref, operational performance also improved and the commissioning of the last low-carbon boiler supports reliability while advancing our emissions objectives. Commercially, we will continue to prioritize higher-margin fuel channels. Following Prax SA interim business rescue, we stepped into the capacity and maintained stable Natref operations. This is to ensure that there is reliable supply to South Africa and our Tambo Airport. Our priorities for the second half are clear: sustained reliability at our operations through disciplined maintenance and stable operation and leverage the increased capacity at Natref to optimize product placement and maximize value for the group. In Chemicals Africa, our focus is to ramp up sales supported by stronger production performance, while maintaining benchmark price levels in a softer global market. International Chemicals continues to execute on our recent priorities outlined at Capital Markets Day. As previously stated, EBITDA increased by 10% year-on-year despite challenging markets. Our margins came under pressure due to softer global demand, higher feedstock costs and persistently elevated European energy prices. These conditions have weighed across the entire industry. However, delivery on the actions within our control is progressing well. Cash fixed costs declined by 6% year-on-year or 10% when normalized for exchange rates. Asset optimization and variable cost initiatives are starting to deliver benefits, with most boring actions completed or nearing completion across the portfolio. Commercial excellence initiatives, including continued focus on value over volume, are underway. While this takes time to flow through our earnings, we expect benefits to increase in the second half. Given the weaker-than-expected market conditions and the unplanned JV ethylene cracker outage at the end of the last year, we have revised our full year adjusted EBITDA guidance from USD 375 million to USD 450 million. We also revised our margin outlook to a range between 8% to 10%. Importantly, our reset phase extends beyond financial year '26. Innovation across the value chain and broader portfolio optimization initiatives are being assessed. These are aimed at further improving competitiveness. This, together with our current actions support our FY '28 target of USD 750 million to USD 850 million EBITDA. Sasol continues to make a meaningful contribution to society and the communities where we operate. In the past 6 months, we invested about ZAR 200 million in social programs aimed at uplifting communities across various sectors and regions where we operate. We invest in multiple education initiatives to address the shortages of critical skills needed in the workplace. We spent around ZAR 75 million on batteries, skills development and education initiatives. We continue to invest in community infrastructure in our neighboring communities. For example, the upgrade to the Doane and Pande Health Centers in Mozambique will help delivery, benefiting over 25,000 community members. In South Africa, we've also supported the successful B20 and G20 events during 2025 with sponsorship and embedding resources to support the execution of the events. These initiatives reflect our belief that long-term value creation for shareholders is inseparable from positive social impact. With that, I'll now hand over to Walt, who will unpack our financial performance.
Thank you, Simon. Good morning, ladies and gentlemen, and thank you for joining us today. I will take you through the financial performance for the first half of FY '26 and how it reflects tangible delivery against the commitments as we set out in our Capital Markets Day. The macroeconomic environment remains challenging, and the earnings reflect the external pressures. What is important is that we respond on the levers that we control. Tighter cost control, disciplined capital allocation and better operational execution across the portfolio is strengthening our foundation business and showing up in improved cash flow generation in support of our deleveraging pathway. Turning to the macroeconomic environment. Volatility and uncertainty persisted through the first half of FY '26. The Brent crude oil price was down 14% year-on-year, and together with a stronger rand exchange rate resulted in a 17% decline in the rand oil price. The oil market remains in surplus with supply growth and inventory builds outpacing demand. Given ongoing geopolitical uncertainty, we expect oil price volatility to persist in the near term. The strengthened rand against the U.S. dollar weighed on earnings given the dollar-linked nature of much of our pricing. While this created pressure on the income statement, the stronger closing rate provided balance sheet support by reducing the rand value of our U.S. dollar-denominated debt. Refining margins were a notable positive, supported by improved diesel differentials and stronger operational performance at Natref, helping to offset some of the oil price pressure in the fuels business. Chemicals remain the more challenging part of our portfolio with continued global overcapacity, softer demand and tariff uncertainty weighing on pricing and margins. While conditions remain subdued, the pace of decline is slowing. Selective end markets are stabilizing, and industry rationalization is accelerating, offering cautious optimism for recovery rather than near-term rebound. Against this backdrop of continued macro pressure, our focus remains firmly on the levers within our control. Starting with volumes. We delivered a 3% higher sales volume in the first half of FY '26, supported by improved production, while a better sales mix into higher-margin channels improved price realization. In the second half, the focus remains on sustaining volume delivery while continuing to optimize channel mix as markets evolve. On costs, we have not only contained inflation but reduced overall cash fixed cost by 2%, driven by lower labor cost and reduced external spend. We will continue the strict cost control into the second half, while also reducing external feedstock purchases. Capital expenditure was 43% lower than year-on-year, mainly due to the absence of a Secunda phase shutdown in the period, lower PSA spend in Mozambique, and reduced environmental compliance capital as these programs near completion. We are also optimizing our capital spend without compromising on safety or asset integrity. As a result, we have revised our full year capital guidance ZAR 2 billion lower to ZAR 22 billion to ZAR 24 billion for the year. Importantly, the ZAR 2 billion is not a deferral and is not rolling over into later years. We saw a temporary increase in net working capital in the first half of FY '26 due to a timing lag between the higher production and sales with opportunities available to reduce working capital prior to financial year-end. On the balance sheet, liquidity headroom remains robust with more than USD 4 billion available. We will continue to actively manage our balance sheet, including our debt maturity profile as we prioritize sustainable deleveraging. Finally, we have and will continue to execute our hedging program, which I will unpack further on the next slide. Hedging remains a key component of Sasol's approach to managing macroeconomic volatility. We have completed the FY '26 hedging program with the FY '27 program underway. Given prevailing market conditions, we have utilized a broader range of instruments to maintain appropriate downside protection while being mindful of cost and retaining upside participation. During the first half of FY '26, foreign exchange losses, translation losses were largely offset by gains on derivative instruments, demonstrating that our hedging program is working as intended, especially in a stronger rand environment. For the second half of FY '26, the oil price risk is hedged at an effective hedge cover ratio of 55% to 60% and an average floor of approximately $59 per barrel. On the exchange rate, 25% to 30% of our rand-U.S. dollar exposure has been secured primarily through zero-cost collar structures within a range of approximately ZAR 18 to ZAR 22. We plan to complete our FY '27 hedging program by the end of FY '26. All the self-help measures that I've mentioned play into our deleveraging pathway, which remains our primary focus. We have made good progress in reducing both gross and net debt over the last 18 months, supported by a disciplined capital allocation framework with gross debt ending 9% lower compared to the prior year. We also improved the regional mix of our debt to better match the underlying cash generation of our assets with the rand for U.S. dollar bond issuance in July. For the first half of FY '26, we ended with a net debt of USD 3.8 billion. While slightly above our full year target, we remain on track to achieve net debt below USD 3.7 billion by year-end with second half cash generation expected to be higher through the management actions I mentioned earlier. We remain committed to the debt reduction trajectory as set out at CMD, which showed us reaching the net debt target and associated dividend trigger of USD 3 billion between FY '27 and FY '28 under different macro assumptions. Given the current macro outlook, the net debt target will likely be achieved in FY '28. That said, given the progress we've already made and the head start we have created, we will continue to press and expand on the levers within our control to mitigate the macro headwinds and achieve the target as soon as possible. Turning to more details on the group financial results. The key highlight is the positive free cash flow as defined in our capital allocation framework in the first half of a financial year for the first time in 4 years and a more than 100% improvement from the prior period. The absolute amount will continue to increase as we further progress the implementation of our plans. Gross margin declined by 6%, reflecting the impact of a 17% lower rand oil price and continued pressure in chemicals pricing as well as higher variable cost. This was partly offset by stronger refining margins and higher sales volumes. Earnings before interest and tax decreased by 52%, mainly impacted by non-cash remeasurement items. This related to impairments of ZAR 7.8 billion compared to ZAR 5.7 billion in the prior year. The current period includes an impairment of ZAR 3 billion on the Secunda liquid fuels refinery, CGU, which remains fully impaired. The recoverable amount of the CGU did improve through management actions, but was negatively impacted by lower forecast price assumptions and a stronger exchange rate. As a reminder, the overall Secunda complex, including the Secunda Chemical CGUs, continues to have significant headroom when comparing the total recoverable amount to the net book value. On the Mozambique and PSA gas development, we recorded an impairment of ZAR 3.9 billion, reflecting the revised gas production profile as outlined by Simon, and the impact of the stronger rand-dollar exchange rate. Furthermore, a delay in the start-up of the CTT gas-to-power project in Mozambique and the higher end-of-job cost estimate resulted in the full impairment of Sasol's equity accounted investment of ZAR 0.5 billion. Looking at adjusted EBITDA by segment. Performance across the portfolio reflects different market and pricing conditions but also highlights the benefit of diversification. Starting with the Southern Africa value chain, Mining EBITDA was lower, mainly due to the phaseout of export coal sales during the period. This was partly offset by redirecting volumes to Secunda operations, which benefits the broader SA value chain. We also realized additional income from leasing our Richards Bay Coal Terminal capacity. Gas EBITDA declined due to lower volumes as well as the stronger rand-U.S. dollar exchange rate. We expect higher sales volumes in the second half of FY '26 as the PSA ramps up. Fuels EBITDA increased, supported by higher refining margins and product differentials. This was further supported by higher sales volumes on the back of improved operational performance at Secunda and increased utilization at Natref. In Chemicals, both Africa and American EBITDA generation remains under pressure, reflecting lower prices, weaker margins, and soft demand in global chemical markets. Eurasia saw margin improvement, reflecting the benefits of our value over volume strategy and higher palm kernel oil pricing. Overall, the portfolio supported by targeted strategic initiatives seeks to balance earnings across sectors and geographies, further improving our resilience in an ever-changing global landscape. In closing, our financial priorities for Sasol are clear and unchanged. We are focused on improving sustainable cash generation, disciplined capital allocation, deleveraging the balance sheet, and proactive risk management. These priorities have been translated into plans with the key financial metrics for FY '26 included in this slide and largely unchanged versus what we told you before. We aim to deliver on our volume targets that Simon shared, keep cash fixed cost increases below inflation, maintain first order capital within the revised target of ZAR 22 billion to ZAR 24 billion and manage net working capital between 15.5% and 16.5% as guided at CMD. We remain committed to reducing net debt to below USD 3.7 billion by the end of the year despite the uncertainties in the macroeconomic environment, while continuing to manage risk proactively through the completion of the FY '27 hedging program. Ultimately, credibility comes from delivering what we say. We started the journey of delivery at the end of FY '25 and built on that momentum in the first half of FY '26. We cannot control the macroeconomic environment that we operate in, but we can control how we respond with decisiveness, discipline, and a clear bias for action. This is our commitment to you and underpins how we will continue to create sustainable value for our stakeholders. With that, I will now hand back to Simon for his closing remarks and look forward to engaging in the Q&A session later. Thank you.
Thank you, Walt. Let us now turn to a brief update on our Grow and Transform strategic agenda and the key progress made in the last few months. Our approach to decarbonization remains pragmatic and value accretive, reducing emissions while safeguarding energy security and affordability. The principle remains, we will scale solutions in line with market demand, leverage our existing assets and only pursue pathways that are value accretive for Sasol and the shareholders. Since Capital Markets Day, we have made good progress across renewables, carbon offsets and sustainable fuels, all aligned with clear commercial logic. In renewable energy, we have now secured more than 1.2 gigawatts in South Africa, moving steadily towards our 2-gigawatt target by the end of 2030. We have now contracted approximately 9 million tonnes of carbon offsets over the next 3 years, securing around 60% of our offset requirements. Following the piloting of renewable diesel at our Natref facility, certification is nearing completion and is planned for the second half. These position us well to compete in this market. Renewable energy is a good example of moving from strategy to delivery. As mentioned, we've now secured more than 1.2 gigawatts of renewable energy in South Africa. This was achieved by securing a further 300 megawatts of renewable energy being a solar and battery storage project that reached financial close this month and is expected to be online in 2028. Execution is also progressing well with 180 megawatts already operational and 740 megawatts under construction. In December 2025, we received our renewable energy trading license from NERSA. This trading license will enable us to manage excess generation and with flexibility to use the supply where it exceeds our own demand. As the portfolio scales, we can, therefore, progressively build a stand-alone power business. Commercially, since launching Ampli Energy with Discovery Green, demand has been strong and the offering has been oversubscribed. Overall, renewable energy is already lowering our cost base, reducing emissions and creating a scalable platform that opens access to new markets over time. Looking beyond 2030, our focus is on sustaining value across the group and ensuring the business remains resilient over the long term. Our priority is to protect the strength of our existing businesses, maintain flexibility as markets and policies evolve, and develop new sources of value where there is clear commercial logic. Across our energy and feedstock platforms, long-term supply options are progressing. These alongside initiatives in the gas value chain that extend optionality and support continued market participation. From a carbon regulatory perspective, allowances are in place through 2030. The proposal for carbon tax recycling has been submitted and engagements continue. This will help us to manage transition costs and support value-accretive reinvestment in South Africa. In International Chemicals, the business is being reset to improve competitiveness and profitability, unlocking future value. At the same time, we are building new businesses, sustainable businesses, including renewable energy trading and sustainable fuels chemicals, creating additional pathways for growth and value creation over time. In January, a EUR 350 million grant was secured by Zaffra, our joint venture with Topsoe for an e-SAF project in Germany. This disciplined approach supports a business that remains resilient through the cycle and capable of delivering long-term shareholder value. To close, I'm confident that we are on the right path. We are strengthening the foundation, executing with discipline. We are laying the groundwork for future growth. There's still work to do, but we have the right strategy, we have the right focus, and the right people to deliver on our commitments. My executive team and I look forward to further engagement in the Q&A sessions. Thank you.
Thank you, and welcome back to the Q&A session where you'll have an opportunity to direct your questions to Simon, Walt, and the rest of the executive management team. Joining us on stage today, to my left, we have Victor Bester joining us, he's the EVP of Operations and Projects in Southern Africa; Antje Gerber, the EVP of International Chemicals; and to my immediate left, Sandile Siyaya, who's the EVP of our Mining business. In addition, we also have other GSE members present in the room today for support to our Q&A. Vuyo Kahla is our EVP of Commercial and Legal; Christian Herrmann is our EVP of Marketing and Sales for Energy and Chemicals Southern Africa; Sarushen Pillay, who's the EVP of Business Building, Strategy and Technology; and Thabile Makgala, the EVP of People, SHE, Risk and Corporate Affairs. We urge you to please submit your questions via the online Q&A platform on the right-hand side of your screen. Alternatively, you may also dial-in via our Chorus Call link, where you will have the opportunity to voice over your questions. I will alternate between the two platforms to ensure fair participation of all. Thank you. We'll begin now. If I could turn over to Chorus Call, please, for the first two callers who are queued.
First question comes from Gerhard Engelbrecht of Absa CIB.
Gerhard, can you hear us? Please go ahead with your questions.
Questions and answers
Unfortunately, we're not getting any response from Gerhard's line. Going on to the next question, which comes from Adrian Hammond of SBG Securities.
I have three questions, if I may. Firstly, for either Simon or Victor. Let's talk about your Secunda volumes, if I may. And looking towards the next financial year, you've achieved annualized run rate in the second quarter of about 7.6 million tonnes. Notwithstanding you'll have maintenance scheduled next year again, it looks like that you might achieve your top-end guidance sooner than expected. Could you comment on that? And perhaps Victor can elaborate with some progress on the refurbishments of the gasifiers. And then secondly, just your view on this carbon tax suspension that's been proposed by the minister and whether you think that will play out or not? And then lastly, on the MRG pricing submission, does this pricing that you've submitted preserve revenue and EBITDA as it currently is for this gas business? And perhaps you can elaborate on how many years this bridge gap will be in place for and how much the CapEx may be for that?
Thank you, Adrian, for the questions. Simon, would you like to kick off?
Yes. I'll begin, and then I'll pass it to Victor for the guidance on Secunda. I'll address the carbon tax and the MRG as well. Regarding Secunda volumes, you're correct that if you take our H1 results and double them, you'll reach a figure at the high end of our market guidance. However, Victor will provide more details. Our performance is influenced by both coal quality and gas fire maintenance, which Victor can explain further. We need to complete our program before we can provide any different guidance. On the topic of carbon tax, we've seen media coverage on the minister's perspective, including suggestions to eliminate it. From Sasol's standpoint, it's important to remember that carbon tax was introduced in South Africa to address the CBAM issue. Without a carbon tax in place, importing into Europe would trigger CBAM implications. I believe our country took the right steps to safeguard itself. However, our focus is on how carbon tax should be implemented. We believe it needs to be a mechanism that supports rather than punishes. To that end, the entire business community in South Africa, including us, is proposing a carbon tax recycle mechanism that would reinvest funds into the transition of the fossil fuel sector, which is essential over the next 15 to 20 years. Regarding your final question on the MRG, we have submitted our pricing to NERSA, and that should be made public soon. As for MRG, based on input costs, it will be slightly more expensive than the current gas, but that’s part of the NERSA process, and I encourage NERSA to continue its work. The capital expenditure for the bridging solution for MRG is not substantial, and it is factored into our overall CapEx profile. Victor, perhaps you can elaborate on why we aren't adjusting the guidance at this stage.
Thank you, Simon. I am optimistic about our performance and results at Secunda, but we need to approach it with some caution. As I mentioned during the Capital Markets Day, we are following a specific ramp-up curve towards fiscal year 2028. To give you an update, the gasifier restoration program is progressing well. So far, we have completed 25% of the fleet and aim to reach 40% by the end of this financial year. Until we have assessed the entire fleet, estimating a sustainable number by projecting our year-to-date performance would be somewhat speculative. It is important for us to fully understand the scope of work and restoration required for our gasifiers. However, the results from the 25% we've seen so far are very promising. Additionally, we have successfully reduced our geo durations from the higher figures of the previous financial year to the current lower numbers. I am confident that we are on track to achieve our ramp-up goals for fiscal year 2028.
Thank you, Adrian. Moving to the next caller, please.
And we've been rejoined by Gerhard Engelbrecht of Absa CIB.
Sorry about earlier. I hope you can hear me now.
We can hear you. Go ahead, Gerhard.
I have a question about your degearing guidance. You mentioned that you're aiming to reduce net debt by the end of the financial year. Considering the stronger rand in the second half, lower refining margins, and decreased chemical prices, along with your significant CapEx increase planned for the second half, I’m curious how you reconcile these factors. Additionally, since you mentioned you haven't deferred any CapEx that would impact your long-term guidance, do you anticipate lowering that guidance? Your projected second half CapEx is nearly 60% higher than the first half and 30% higher than the same period last year. How should I interpret that? Lastly, I noticed you issued some medium-term notes. Was now a strategic time to purchase dollars for debt repayment, and what was your rationale behind the timing of the note repayment? I also want to note that I was pleasantly surprised by your cost, similar to last year.
Sorry, Gerhard, we lost track of the last part of your question. Can you please repeat the third question you had about the medium-term notes?
Yes, I'm sorry. I was just going to say, I just thought that now with the rand is strong, a good idea to rather buy dollars and to prepare for the debt repayments that are on the horizon with the rand so strong. So I was just curious as to why you decided to repay the medium-term notes?
Okay. Thank you for those questions. Simon, would you like to kick us off before we head into the financial questions? Would you like Walt to take all of them?
Yes, regarding capital expenditures, all these inquiries are financial in nature. Overall, in relation to capital expenditures, the significant difference is due to the absence of a phased shutdown and the completion of major programs like the PSA. Additionally, we have implemented our own capital efficiency strategies toward the end of the last financial year and into the first half of this year. Thus, we are utilizing a risk-based approach to ensure the integrity and stability of our assets is maintained. With that, Walt can address the three financial questions.
Yes, thanks, Gerhard, for the questions. I'll address them systematically. Regarding the degearing guidance, we anticipate being below USD 3.7 billion in net debt by year-end, indicating that we will generate free cash flow in the second half. Pricing is somewhat uncertain; current oil prices vary widely, and when adjusted for the current exchange rate, I see the rand oil prices remaining similar to the first half. However, there is a possibility that they may decrease. I expect volumes to be slightly higher, as we built some inventory in the first half, which will lead to a working capital unwind as we align sales and production. We will maintain our cost discipline, and we do expect an increase in CapEx in the second half due to some front-end loaded projects, particularly in mining, aimed at boosting our own production and reducing external purchases. There will also be some non-phase shutdown capital in Secunda, which we will aim to optimize. Our team is thoroughly analyzing our capital expenditures to not only assess the scope of work but also to lower overall costs. For the CapEx related to the RCF, we aren't adjusting the guidance at this time, but it's important to note that the ZAR 2 billion will carry over into the next financial year. We maintain our previous guidance of around ZAR 28 million to ZAR 30 million for the first order, excluding selective growth, and we will look into possible further reductions as we approach FY '27 and finalize some scoping work. In terms of dollars, we purchased nearly $0.5 billion in the first half, which we allocated to the RCF, stemming from the ZAR to U.S. dollar bond issuance we completed in July. We also transferred some excess cash into the RCF in the first half. Regarding the DMTN, we settled a relatively small amount of around ZAR 800 million that was maturing. We will continue to enhance our capital structure. Many might have questions about the maturities in '26 and '27. We have a proactive and disciplined approach to capital management and continue to see Eurobonds as a viable option. Currently, we have significant liquidity, exceeding USD 4 billion, and after the July transaction, we have more flexibility in managing these imminent maturities and are now focused on medium-term refinancing while evaluating all our options.
Thank you, Gerhard, for your questions. I want to address a similar inquiry from Sashank Lanka at Bank of America regarding the increase in capital for the second half. I believe you've covered that. Thanks, Walt. I will now move on to the online questions, focusing on the numerous inquiries related to the balance sheet and capital allocation. I'll start with a few at a time. The first question comes from Lorenzo Parisi at JPMorgan, but that has already been addressed concerning the repayments. Next is a question from Stella Cridge at Barclays. Do you consider the current cost of borrowing in the U.S. dollar bond market to be more attractive than before? Additionally, Kay Hope from Bank of America has a follow-up question. Do you have any foreign exchange targets for your debt moving forward? Specifically, are you planning to increase local currency debt and reduce USD-euro obligations, which you've partly discussed earlier? What is the current ratio of euro and dollar debt compared to your revenues? Lastly, regarding CapEx, there's a question about the CapEx expenditure classification policy. It seems that the CapEx resembles repairs and maintenance, and if it were classified as an expense, the EBITDA figure would better reflect the company's actual performance. That question was from Heinrich, though I'm uncertain of his affiliation. Let's start with this set.
Thanks, Stella, for the question. I believe the current cost of borrowing in the U.S. dollar bond market is more attractive than it was 6 to 12 months ago. Most of our longer bonds are trading at a yield below 9%, which is an improvement compared to earlier figures. However, we need to continue exploring ways to optimize that cost. Some of the bonds maturing have a significantly lower cost of borrowing, creating a differential, but we find the current cost more appealing than before. Regarding Kay's question about the FX targets for debt going forward, the size of the South African market and the amount of debt we need to refinance cannot accommodate such issuance. We have increased our ZAR debt to just over 12% of our total debt and will keep looking for opportunities to grow that. If you look at the mix regarding EBITDA per region, 84% of our earnings still come from our Southern Africa business, and 16% from the International business. That has improved over time; last year, it was closer to 87-13. We are seeing an increase in contributions from our International business, so we aim to better match the debt with earnings across the portfolio. As for the CapEx classification policy, we follow the IFRS standard IAS 16. We evaluate our significant components, and if we modify or replace them, we capitalize those costs. For smaller components that are not significant, we expense them through the income statement under repairs and maintenance.
Thank you, Walt. Before I let you go, there are two more questions on capital guidance. A question from Anton from Nolo. For the lower capital guidance, how much of a factor was the stronger rand in reducing equipment import costs? And then another question from Lorenzo Parisi from JPMorgan. How are you thinking about refinancing the longer-dated notes from 2028 in terms of timing?
Okay. Yes. So I think no doubt, I mean, the stronger rand, and I think that's the balance at Sasol, the stronger rand hurts us on the income statement, but does help us on the balance sheet. I would say the low CapEx guidance, there was a portion of it related to the stronger rand, but it's not a material portion or significant. So it's really around looking at our cost and how do we optimize scope and spend. And then on the longer-dated bonds, as I mentioned, we continue to take a proactive approach to this. We are looking outside the window and at the maturities of our different bonds, and we'll assess our options as the market develops. And as we go on this roadshow, too. I think we're spending some time also in Miami with some of our debt investors, and we'd like to understand from them how they see our credit going forward, too.
Great. Thank you, Walt. I'm going to move on to the International Chemicals business. There are two questions from the first one regarding the closure of chemical plants in Europe, particularly Germany, due to high energy costs and an unsupportive operating environment. What is Sasol's perspective on its operations in Europe? The second question is about the risk to your fiscal year '28 EBITDA guidance of $750 million to $850 million provided at the Capital Markets Day, considering the EBITDA guidance has been reduced for this financial year '26?
Thank you, Tiffany. I'll start and then ask Antje to add. Regarding the EBITDA guidance, at the recent Capital Markets Day, we mentioned three key areas where improvements are necessary to reach our target. The first is the expected improvement from the market. The second involves optimizing costs, and the third focuses on our commercial approach, emphasizing value over volume and renegotiating contracts. This is the framework we've used to uplift the business. Looking at our results, we've performed well in areas we can control. However, the market conditions have not aligned with our expectations. For now, we will maintain our guidance and continue to monitor the market. This also applies to your question, Tabo, about others closing down; our priority remains on what we can do to enhance our business. Now, I’ll hand it over to Antje.
Yes. Thank you, Simon, and thank you, Tabo and Sashank, for the good questions. Maybe starting, first of all, with the chemical plants or the situation of the chemical industry in Europe, which is in a tough spot at the moment. So it remains a challenging operating environment in Europe, given the structurally weak demand, overcapacity, high and also volatile energy costs and the increased regulatory complexity. Our strategy at Sasol does not assume a fast recovery of these issues. We are operating on, as Simon has said, value over volume basis in Europe. And while we do that, we actively optimize as well our portfolio, our portfolio of our offerings, products, but also how we operate in Europe. And while we focus more on specialty and contracted positions and volumes, we can also then earn acceptable returns, and you've seen that in our current results. On the other hand, where the assets do not meet our hurdle rates, we will also continue to take decisive actions and Europe must perform on its own merits. So we do not invest in hope. And that goes as well to the guidance of fiscal year '28. And to your question, Sashank, we are still confident that we can meet that guidance, which we have laid out on the CMD because 2/3 of those deliverables will come from our self-help measures. And we are here executing on identified actions and not aspirational growth assumptions going forward. 2/3, as I've said, are self-help measures. And I mean, some of the turnaround actions you can see already bearing some fruits. And we are very clear that they kind of here will also accelerate going forward in the next 2 years. We are just in year 1 of our turnaround.
Thank you, Antje, Simon. If we could move back to Chorus Call, there are two more callers. Could we get the questions, please, operator?
Next question comes from Chris Nicholson of RMB Morgan Stanley.
Yes, I've got two questions. Just the first question is, could you just go into a little bit more detail on what's happening with the Gas from the PSA? You've downgraded guidance for Gas this year. Obviously, we understand the PPA assets is just rolling off. But you downgraded guidance and you've also put through this impairment of lower expected volumes from the PSA asset. Is that an absolute volume? Or is there something around the link to the amount of volumes that are kind of capped into the CTG gas to power plant? So a little bit on that. And then could you also just talk to the agreement that you've managed to strike with Prax and the current business liquidation there? How long are you able to utilize their share of the Natref refinery? And do you share the full 33% of those benefits? Or does that all flow to your bottom line?
Thank you, Chris for those questions. Simon, would you like to start this one?
Yes. I’ll begin with Prax and the PSA. Victor, feel free to add anything I may miss. Firstly, regarding Prax, they are currently under business rescue, so we can use that portion of the volume as long as the situation continues. However, someone is managing a merger and acquisition process, which means we will know more by December. There may be a new owner who takes over that 33%. We'll see how that unfolds. In the meantime, we have access to it, although we're not operating at the full 33%. The refinery can operate between 620 and 650, but we’re currently around 500, fluctuating between 480 and 500 based on our ability to manage those volumes. This directly impacts us, but it also has working capital implications because we need to cover the crude for all finished products or components for the entire refinery. Regarding the PSA and the gas from Mozambique, the volumes are intact. The impairment you’ve noticed was mainly due to two factors: the rand-dollar exchange rate, which accounts for about 40% of the 3.9 number, indicating that reverting to previous assumptions could easily reverse that impact. The second factor was that not all the gas could flow. The volumes are there, but the flow was restricted due to a swap gas arrangement, affecting the timing of when we can access the gas. We are working on conducting high-performance test runs and might make some adjustments to facilitate the gas flow. That's the current status for the PSA. Victor, perhaps you can address the final question regarding our revised guidance for gas volumes, as it might relate to the CTT not being operational, which impacted the expected gas contributions.
Thank you, Simon. I would like to add that the impairment is primarily linked to two factors. The CTT power plant is facing delays, which affects the impairment. Additionally, we commissioned and achieved readiness for operations on the PSA asset in the second quarter of this year. As we operate the unit, we have identified certain physical restrictions that limit its capacity to process excess gas to South Africa. The unit still needs to undergo a performance test, which will help us understand the options available for overcoming these restrictions. Essentially, the impairment reflects a delay in the amount of gas we can process through the unit. After this high load test run, we expect to determine what actions are necessary, which we believe will require little to no capital investment to enhance the unit's capacity for gas processing. A review on this will take place later in the financial year. The reduction in gas guidance is primarily linked to demand and involves two main components: lower demand from our external customers and increased gas production from Secunda operations, which displaces natural gas. Additionally, recent floods in Mozambique and the performance of our wells there also contribute to the need for work on licensing and timely commissioning as the PSA comes online.
Thank you, Chris, for your questions. We can go to the next caller, please.
Next question comes from Alex Comer of JPMorgan.
Can you hear me?
Yes. Go ahead, please, Alex.
Yes. I have a couple of quick questions. Regarding the grant for the project in Germany, what production volume of e-SAF is that $350 million intended to support? Could you clarify if that is a capital expenditure grant? What exactly is it for, and what volumes do you expect to achieve from it? Also, when do you anticipate that production will start?
Is that your only question, Alex?
Yes. Can you explain how the EBITDA translates to cash generated from operations? There appears to be a significant disparity there.
Yes. I think on the grant, I mean, as for the project development, I mean, Sarushen, you can add more. I mean, just to remind the audience, Zaffra is a joint venture between us and Topsoe to develop SAF, especially in the EU. So we are pleased with the award of this grant, I mean, which will then allow us to study this. Of course, it will ultimately be anchored by offtakes before you take an FID. But Sarushen, you can give more color on the timing and the CapEx for the project.
Thanks, Simon. So the plant, Alex, it's a small plant. I mean, we're looking at about 2,000 barrels a day. That translates to about 40,000 tonnes of SAF. And as Simon said, we will now move into feed or the detailed feasibility and then feed, but it will be anchored on offtake, right, before we take FID. But if all goes according to plan, we expect first production around 2030 for that plant.
All right. Thanks. I mean, Walt, you can take the EBITDA.
Yes. I think the team has sent you a reconciliation showing the movement between the adjusted EBITDA and the cash. It's safe to say there are some non-cash movements in the numbers, and we can share that. They have cross-referenced it to the different parts of our analyst book and the interim financials. We would prefer to discuss that offline.
Thank you, Alex, for your questions. I would like to acknowledge a question from Sashank Lanka regarding the timing and opportunities related to Prax, which we've already discussed. Let's move on to the questions about SA operations. The first question comes from Tabo Pato at Katalyst Partners. Excluding the impact of the shutdown in Secunda, how does this production compare to the first half of 2025? Additionally, it has been two months since coal destoning reached BO. At what percentage capacity is the plant operating, and are there signs of improvement in production that we can expect to reflect in the Q3 results? Next, regarding the Natref agreement, Jesse Armstrong from Fairtree has a question. How much of the total net working capital increase in the first half was related to Prax's working capital? What volume of Chem Africa has been produced but not yet sold that might carry over into the second half? Are the lower sales volumes compared to production more related to logistics, demand, or U.S. tariffs? I will pause there.
Yes. I mean, thank you for the questions. The Secunda one, the impact of a shutdown is between 80 and 100 kilo tonnes. So I think you can just subtract that from our number, then you can compare with last year's number. Then the destoning plant it is done and it's running, it's up to speed. Sandile, you can give more color on that. I mean, Sandile is with the Mining operations. You can give more color on where we are on the destoning plant. But I think it's all done. And then, all that's remaining now is exactly what Victor has said. I mean, the first step was coal quality, then it was a progressive step to repair our gasifier fleet of 84 gasifiers and we've done 25% of the gasifiers. But Sandile, you can give more color on the destoning plant.
Thank you, Simon. And just the response to Tabo's question. So, as Simon has indicated, the destoning plant is done. And as you recall, with the CMD commitments, we had committed that the output from the destoning plant, we will be looking at supplying coal at below 12% to SO. However, for this year, we committed that it will be between 12% and 14%, and we are achieving those numbers. In terms of capacity, we are at full capacity. We will, however, continue to optimize the operation of that destoning plant.
Thanks, Walt. You can deal with the working capital.
Yes. There is approximately a ZAR 1 billion impact in the first half of the year related to the management of Prax's working capital. On the Chemical side, while we have seen some demand weakness in certain products, it is not widespread. The situation relates more to timing and logistics. We are observing improved performance compared to our previous baseline, and we are actively filling up the supply chain. Our products are being regularly dispatched via Richards Bay and Durban to various customer locations. The focus now is on converting those volumes into sales more quickly. This inventory transition into sales is part of what we anticipate will support improved earnings and cash flow generation in the second half. I will leave it at that.
I think there’s a follow-up question about South African operations from Gustavo Campos at Jefferies. Do you anticipate that EBITDA in the South African value chain will continue to decrease in the second half? Will the stronger rand in the second half have no effect on your profitability considering the hedging program? You also reached the South African oil breakeven of $53 per barrel. Where do you foresee this being in the second half of '26? Additionally, there is a question from Siam Bata at Old Mutual regarding the hedging strategy for crude and the exchange rate. Can we discuss the considerations of using puts only versus zero cost collars? Let's start with the question about South African operations and EBITDA performance and then we can move to the hedging discussion if that works for you.
Yes, I wouldn't say we expect a significant decrease in EBITDA in the South African business. The pricing may come under pressure depending on the rand oil price used. However, we do see an improvement in sales volumes. It's hard to say there won't be any impact on profitability from a stronger rand. We've hedged 25% to 30% of our rand-dollar exposure on the income statement, so there will be some effects from the stronger rand, especially when translating our chemical prices back into rand. We manage this through a combination of strategies I mentioned earlier and foreign exchange contracts on a transactional basis. Regarding the breakeven point in South Africa, which stands at $53 per barrel, we are pleased with that trend, but I wouldn't categorize it as the new sustainable level. The Secunda phase shutdown was not included this year, which likely impacted the annual figure by about $4 per barrel. We will work to reduce this amount, but I don’t want to establish that as our new baseline. That's also why we haven't revised our guidance for FY '26 from the $55 to $60 range. We anticipate it will be closer to the lower end of that range, but it largely depends on the exchange rate, which influences our calculations. In terms of the comments on the hedging instruments, so historically, we've used just puts or vanilla puts on oil and zero cost collars on the exchange rate. The challenge for us right now is just getting them at the levels that we would like. So ideally, oil at a puts of $59 per barrel, you're going to pay north of $4 to $5 per barrel premium. That's quite rich, especially if we're trying to hedge out 22 million, 23 million barrels. So what we've done is expanded the instruments. So we use a combination of put spreads. So we limit the downside, but we don't protect 100% of the downside, and that's in a range of around $59 to $40 per barrel. And then we've also introduced some butterflies, which means that we can get the hedge floor of $59, but we give up a little bit between a certain cap on the upper end, and that we try and limit that range as much as possible. So I think my comment in my script around managing the risk, but also finding an optimal level between cost while retaining some upside participation. And then we've done something similar on the rand. I think we extended our hedging program this time last year. Normally, we hedge just 12 months out. We extended it to 18 months in January of last year. And right now, obviously feel very comfortable because we've got zero-cost collars between ZAR 18 and ZAR 22 for this period. So we're certainly in the money at the moment on our hedges, given the rand is trading close to ZAR 16. Moving forward, we've had to expand our instruments there because we try to target a slightly higher floor price of where we currently are at ZAR 16, and that's where you'll see some more butterflies being introduced there or potentially some put spreads. But we'll continue to look at it, trying to manage cost risk and upside participation.
Thank you for the question. Thank you, Walt. Just a reminder, if you have any further questions, please submit them online. If you'd like to ask any more, please submit them. Just want to check with the Chorus Call operator, are there any further people queued on Chorus Call?
At this stage, we don't have any further questions from the lines.
One last question from Gustavo Campos at Jefferies. What is the nature of the short-term and long-term financial assets? Why are they not included in net debt calculations? And why not liquidate them to reduce the leverage further?
There are several reasons for that. Some relate to our insurance captive that we maintain offshore, which we have historically not included. Additionally, there are some embedded derivative assets connected to our oxygen supply contract with Air Liquide, as well as some restrictions on their use. We do not have full access to these assets, which is why they are not accounted for in our net debt calculation.
Great. I think there are no further questions online. No further questions from Chorus Call. So that wraps up our Q&A for today. Thank you very much to all who have joined and participated, and we wish you well and a pleasant day forward. Thank you.