- Record rand and US dollar headline earnings
- Headline rand earnings per share increased by 87%
- Most businesses achieved commendable improvements
- Total dividend increased by 20% to R5,40 per share
- Gearing improved to 38%
- Capital expenditure of R13,2 billion, with nearly R10 billion (75%) invested in South Africa
- Contribution to economic wealth of South Africa increased by 22% to R21,5 billion
- Sasol's international credit ratings upgraded
"A key feature of the year was strong commodity prices - both for energy and chemicals - as well as a stronger currency. Recent years have also shown similar volatility in these drivers. Sasol's strategy has remained unchanged and its successful implementation over many years continues to deliver strong attributable earnings growth," says Sasol chief executive Pat Davies.
Record headline earnings
Attributable earnings increased by 61% from R5,9 billion to R9,6 billion. Headline earnings per share increased by 87% to R17,49. In US dollar terms, headline earnings per share of US$2,82 represent a 107% increase.
Higher oil prices - stronger rand
Operating profit increased by R5,2 billion (56%) to R14,5 billion. Higher average international oil prices (dated Brent US$46,17/b versus US$31,30/b in 2004) boosted operating profit by about R2,5 billion. This benefit was partly offset by the adverse impact of the stronger rand during the year (average rate R6,21 : US$1,00 versus R6,88 : US$1,00 in 2004), which reduced operating profit by approximately R2,7 billion.
Translation effects at year-end were, however, slightly positive compared to the significant adverse effects at 30 June 2004, resulting in a positive turnaround of R1,1 billion. The net adverse currency effect on operating profit amounted, therefore, to R1,6 billion, representing a 64% reduction of the benefit derived from higher oil prices.
The net adverse impact of currency effects manifested themselves across all of Sasol's businesses. The benefit of higher oil prices were, however, only realised in the energy and fuel-related businesses with adverse effects being experienced in the chemical businesses because of higher oil-derivative feedstock costs.
"Our energy and fuel-related businesses achieved a 42% increase in operating profit," says Sasol deputy chief executive Trevor Munday, adding that: "After a few years of being depressed, international chemical prices and margins improved substantially. Together with the benefits of productivity improvements and selling or closing non-core or poor performing businesses, this resulted in the operating profit of our chemical businesses increasing significantly (130%), despite higher feedstock costs and capital write-offs relating mainly to impairments."
The effect of capital write-offs amounted to R1,3 billion (pre-tax), most of which arose in the chemical businesses. Significant impairments were made in Sasol Solvents and Sasol Olefins and Surfactants (O&S) and related primarily to the n-butanol plant at Sasolburg and the linear alkyl benzene (LAB) plant in the USA. In the case of the n-butanol plant, this write-off is a consequence of the investment made in previous years, when the weaker rand negatively impacted capital costs. The n-butanol plant's revenue streams are now based on a much stronger rand than originally envisaged.
Operating profit increased by R1,3 billion as a result of changes in IFRS accounting standards relating to depreciation and goodwill. During the year, the expected remaining useful lives of our assets were reviewed and - as a consequence - depreciation was reduced by R1,5 billion. This amount was partially offset by R0,2 billion because of the change in the accounting treatment of goodwill whereby goodwill is no longer amortised over the remaining life of the asset to which it is related, but is subject to an annual impairment test.
The decrease in the South African company tax rate from 30% to 29% resulted in a reduction of the tax charge of approximately R0,3 billion.
"Capital expenditure amounted to R13,2 billion. Major projects advanced included the fuel quality enhancement and polymer expansion project (Project Turbo) in South Africa, the Oryx gas-to-liquids (GTL) venture in Qatar and the Arya Sasol Polymers project in Iran", Davies said.
Gearing (net debt as a percentage of shareholders' equity) reduced from 41% at 30 June 2004 to 38% and was well within our targeted range of 30% to 50%. Sasol's credit rating was upgraded by Standard & Poor's to BBB+ during the year.
During the year Sasol was rated for the first time by Moody's Investor Service. In April 2005, Moody's assigned Aa3.za long term and Prime-1.za short term South African national scale ratings to Sasol. During June 2005, in anticipation of Sasol's debut Eurobond issue, Moody's also assigned Sasol Baa1 senior unsecured foreign and local insurer ratings, and Prime-2short term ratings.
On 1 August 2005, after the year end, Sasol's long-term foreign currency corporate credit rating was upgraded by Standard & Poor's to BBB+, following the upgrade of South Africa's foreign currency issuer credit rating to BBB+.
The total dividend declared of R5,40 represents a 20% increase compared to the previous year. The dividend cover of 2,9 is suitably within our target range of 2,5 to 3,5 times.
Sasol Mining
The operating profit of Sasol Mining of R1 247 million was 4% better than the previous year despite sales volumes being 9% lower because of the closure of the coal-fired gasifiers at Sasolburg following the introduction of natural gas from Mozambique.
Sasol Synfuels
Primarily because of higher oil prices, net of the oil hedge which expired at the end of May 2005, Sasol Synfuels achieved an increase in operating profit of 37% to R7 560 million. Production volumes decreased slightly (3%) because of the adverse impact of unplanned shutdowns, which was partly offset by the benefit of introducing natural gas to improve plant operational stability.
Sasol Liquid Fuels Business (LFB)
Higher refinery margins resulted in our liquid fuels business increasing operating profit by 33% to R1 900 million. Sales volumes transacted through Sasol and Exel retail fuel outlets exceeded expectations and market share objectives were met.
The proposed merging of our liquid fuels business with Engen was conditionally recommended during the year by the Competition Commission to the Competition Tribunal. The envisaged formation of the merged entity (Uhambo Oil) will be considered at the Competition Tribunal during October 2005, and the announcement of our significant equity empowerment transaction is imminent.
Sasol Gas
Primarily driven by higher sales of natural gas both to external customers and Sasol businesses, operating profit increased by 141% to R932 million. Post-commissioning problems were experienced with the newly-installed auto thermal reformers (ATRs) in Sasolburg resulting in supply problems which have since been resolved.
Sasol Synfuels International (SSI)
This business hosts the growth ambitions of the group relating to GTL and coal-to-liquid (CTL) ventures. Its costs are associated with advancing the Qatar and Nigeria GTL projects and evaluating others in accordance with our strategic objective to build these global businesses. Costs rose to R199 million in the year as a direct consequence of increased activity in this respect, net of receipts of R33 million.
Sasol Olefins and Surfactants (O&S)
The operating loss of Sasol O&S of R221 million includes capital write-offs of R783 million which arose mainly because of impairments. The significant assets impaired include the LAB plant in the USA and the zeolite plant in Italy. Sunk costs associated with the proposed octene-3 plant in South Africa have also been impaired.
Excluding these capital write-offs, the operating profit of R562 million also includes a net benefit of R374 million from accounting standard changes, resulting in an operating profit of R188 million which compares with an operating loss incurred in the previous year of R46 million.
While significantly higher oil-derivative feedstock costs were recovered through higher selling prices, the (comparable) improvement in operating performance materialised mainly because of continuing successes in cost reductions and productivity improvements.
The recent announcement that Sasol is considering the disposal of its O&S business, excluding the co-monomer activities in South Africa, reaffirms Sasol's plans to concentrate on projects that integrate its technology and secure full integration upstream into feedstocks.
Sasol Polymers
Higher international polymer prices and margins, together with ongoing benefits arising from productivity improvements, offset much higher oil-derivative feedstock costs. Sasol Polymers achieved a pleasing 44% improvement in operating profit to R1 484 million.
Sasol Solvents
Various plant outages experienced throughout the industry and strong international demand resulted in global supply shortfalls which caused unprecedented high solvent selling prices and margins. As a result, and aided by the benefits of stringent cost management, Sasol Solvents increased operating profit from R117 million to R1 243 million.
Other businesses
Sasol Wax experienced a slight reduction in operating profit to R212 million because of not being able to recover higher oil-derivative feedstock costs through higher selling prices, primarily in Europe because of intense competition from Chinese producers.
Sasol Nitro had an excellent year with its operating profit increasing more than twelve-fold to over R400 million, mainly because of improved margins and higher volumes in both the fertilizers and explosives businesses and non-recurring capital items from the previous year.
Sasol Petroleum International (SPI) benefited from the contribution of increased gas production in Mozambique and its oil revenues from off-shore West Africa. It achieved an operating profit of R277 million. This is the first year this fledgling business has been profitable. This performance augers well for the future.
Profit Outlook
International oil and commodity chemical markets and prices are unstable and so forecasting these with confidence is not possible. Nevertheless, based on prevailing price levels and assuming no major disruptions in world currency and energy markets, we anticipate moderate to strong growth in earnings in the year ahead.
Davies said that despite the impact of commodity prices on Sasol's results, the group strategy remains consistent. "Value creation remains the force behind our key growth drivers which include technology leadership, strict financial discipline, experienced management and operation excellence. Our value creation imperative continues to be the commercialisation of GTL and CTL, exploitation of upstream hydrocarbon opportunities, and the strengthening of our chemicals portfolio."
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