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Edited Transcript of IVL.BK earnings conference call or presentation 11-Nov-19 10:59am GMT

Q3 2019 Indorama Ventures PCL Earnings Presentation

Bangkok Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Indorama Ventures PCL earnings conference call or presentation Monday, November 11, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aloke Lohia

Indorama Ventures Public Company Limited - Vice Chairman & Group CEO

* Dilip Kumar Agarwal

Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business

* Sanjay Ahuja

Indorama Ventures Public Company Limited - CFO & Executive Director

* Udey Paul Singh Gill

Indorama Ventures Public Company Limited - Executive Director & CEO of Fibers Business

* Vikash Jalan

Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance

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Conference Call Participants

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* Komsun Suksumrun

Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst

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Presentation

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [1]

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Joining me today is Mr. Aloke Lohia, our group CEO; Mr. Sanjay Ahuja, group CFO; Mr. D.K. Agarwal, our CEO for PET and Feedstocks; and Mr. Udey Gill, CEO for Fibers Business.

As a reminder, this results briefing is being recorded. So the slides for today's presentation can be found on our website, along with our media release that will go out tomorrow.

I'd like to remind the participants that the presentation include the forward-looking statements, which are subject to risks and uncertainties. Participants and guests are therefore encouraged to refer to the disclaimer on this slide. A replay of this call will be available on our website.

We'll be covering 4 topics today. So I'd like to request that you reserve your questions to the end of the presentation.

Now I'd like to invite Mr. Lohia, our group CEO, to take to the presentation. Thank you.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [2]

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Thank you, Vikash. Warm welcome to our analyst presentation for quarter 3 results. I will start with the key messages for you to take away from today's briefing. I'll elaborate on these takeaways as I go through the presentation.

Last 12-month volumes grew 24% year-on-year, of which 11% was on an organic basis, underpinned by the resilience in underlying demand, particularly in our Integrated PET business. We generated strong operating cash flows, up from USD 0.95 billion to USD 1.3 billion year-on-year. Our intense focus on working capital management is paying off. Last 12-month core EBITDA declined from USD 1.38 billion to USD 1.26 billion, primarily driven by the sharp decline in industry-wide spreads, in particular, in Integrated PET, MEG and IPA. Huntsman assets purchase, our largest and most strategic acquisition to date, is on track to close by 1Q '20. The Huntsman assets reported strong profitability in LTM in line with 2018. We expanded and announced our new investments in our recycling business. As a PET industry leader, we are excited to lead the industry's transition to a circular use of PET.

Crucially, in spite of the trade war inducing a challenging macro and industry environment and the undercurrent on plastics sustainability debate, I'm encouraged to see that underlying PET demand remains robust, which we are seeing through the IVL strong volume growth. I'm also confident at IVL's resiliency and ability to succeed throughout the cycle as demonstrated by our strong operating cash flows, which remained robust. I'm also confident with IVL's resiliency and ability to succeed through the cycle as demonstrated by our strong operating cash flows.

IVL has gone through several ups and downs in the last 12 months. I will share with you some of my reflections. First, what went well. As I mentioned earlier, I'm encouraged by the strong underlying volume demand growth translating into operating cash flow growth. I have already covered the Huntsman Spindletop asset acquisition, IVL's largest and most strategic acquisition to date, which I will discuss in more detail later. We are pleased that TRIS, the rating agency in Thailand, has reaffirmed IVL's AA- rating with Huntsman's -- Huntsman deal factored in, which is a testament of our healthy balance sheet. We have taken an important step forward on our recycling commitment by setting up a dedicated recycling business, Indorama Venture Recycling Group, with a regionally growth strategy in place.

What could have gone better? The trade war-induced, weaker macroeconomics environment has impacted industry by the Integrated PET, MEG, IPA and Lifestyle fibers spread. IVL is no exception, however, performs better than industry that is globally diversified footprint and value chain integration advantages. Inventory loss is due to the declining prices of USD 276 million. Our ethylene oxide and MEG site, IVOG, had a catalyst change planned shutdown, and then -- which led to an unplanned shutdown in 2019, which impacted volumes. And we also had a line conversion indicator. We converted 1 PET line into IPA in end of 2018, which also had a negative impact on our numbers. And all these led to an exceptional EBITDA loss of USD 155 million. We already announced in the last quarter that the Lake Charles cracker startup is delayed to first quarter next year. We are on track to start operations in the first quarter. The fibers Mobility vertical performed below our expectation, though better than the previous year. And this is on the back of softer global automotive sector.

The last 12 months 3Q '19 financial highlights. Our volumes grew 24% in the period to 12.3 million tons, strong growth in Integrated PET and Fibers volume made up for the lower volumes in Integrated Oxides and Derivatives and the Specialty Chemicals business. Organic growth contributed to 11% of the volume growth. The remaining 13% of inorganic contribution was primarily from the consolidation of the PET business in India and the PET business in Indonesia. Revenues are up 15% in LTM to USD 11.6 billion. The revenue growth is slower than the volumes growth due to declining prices. Taking PET and MEG as a proxy, LTM 3Q '19, prices fell by 14% and 34% year-on-year during this period. LTM 3Q '19 core EBITDA is down 8% to USD 1.3 billion, sharp contraction in industry spreads, which offset volume growth. Focus on better working capital management resulted in strong operating cash flow, up 36% to $1.3 billion in the last 12 months. Core EPS declined from THB 4.46 per share to THB 2.63 year-on-year in LTM 3Q '19. Net operating debt-to-equity has increased from 0.53 to 0.61 on account of completed acquisition plus consolidation of the acquired India and Indonesian businesses.

Next, we'll go through the quarter 3 results. So moving on to our 3Q year-on-year performance. We registered a more pronounced decline in core EBITDA in 3Q '19 versus 3Q '18 as spreads came off from an exceptionally strong 3Q '18, resulting from supply disruptions. On the positive side, in areas within IVL's control, our efforts on better working capital management translated into a 47% year-on-year increase in cash flow from the quarter to USD 405 million. Our net working capital days reduced by 3.

To dive a bit deeper, let me elaborate in more details on the quarter performance of our 5 segments. The green segment, our Integrated PET business, illustrates the magnitude of Integrated PET spread contraction on total IVL core EBITDA in 3Q '19. Last segment performances benefited from higher volumes.

Integrated Oxides and Derivative contributed to IVL core EBITDA, represented by the red segment, halved, as a result of lower spreads and lower volume. Volumes were affected by the combination of planned turnaround at our IVOG site and unplanned shutdowns, including FM and line conversions from PTA to IPA. I'm happy to share with you that these facilities are back online and operating at planned capacity.

We have restructured our Fibers business, the yellow segment, into 3 market-oriented verticals: Mobility, hygiene and Lifestyle. Each vertical has a dedicated management team, which is tasked to consolidate its asset footprint to capture combinatory synergies. We will touch more on the Specialty Chemicals, light blue segment, later. But IPA prices collapsed on the back of new supplies, leading to a decline in core EBITDA. In spite of the challenging external environment, I want to commend my management team who have undertaken efforts in better working capital management to enable operating cash flows to grow from $101 to $121 per metric tonne.

This is probably the first time we are presenting to you the waterfall on our EBITDA per ton. So we have decomposed the core EBITDA per tonne changes from 3Q '18 to 3Q '19. As you can see on the graph, the lower core EBITDA is largely driven by lower spreads form Integrated PET, paraxylene, MEG and Lifestyle fibers and IPA. This is in line with industry trends. As these spreads are now close to average industry cash cost levels, our leadership team in our management offsite a couple of weeks ago was united in our resolve to intensify our focus on cost and efficiency management in aim to further strengthen IVL's competitive cost position.

We want to share with you how IVL has been able to grow our operating cash flow in a challenging industry environment. Our efforts on better working capital management were key to allow our growth in operating cash flow from the quarter. These efforts are continuing, and we expect to continue to see positive operating cash flow contribution from our working capital management efforts. As a result, IVL is able to not only sustain its dividend policy but pay higher than its stated policy of 30% of net profit.

Shifting focus to our largest segment, Integrated PET. Volumes are up 22%, with organic growth contributing 9%, demonstrated by the strong underlying PET market growth. Volume increase was offset by a decline in EBITDA per ton, which was driven by the lower industry-wide Integrated PET spreads. On an EBITDA per ton basis, the decline was driven by lower spreads for both Integrated PET and PTA, especially in Europe and Asia, and a decline in paraxylene spreads. To counter the currently low spread environment in our Integrated PET business, our management will focus on cost-saving initiatives, operational excellence and reliability, working capital optimization in parallel with implementing our recycled PET growth strategy.

This slide over here presents the bridge for 3 quarter -- third quarter 2019 results on a per ton basis. Lower EBITDA was driven by lower spreads in both PET, PTA and paraxylene. PET, PTA and paraxylene have been separated over here over the entire volume of about 2 million tons. This is in line with lower industry spreads for these products, upside from cost efficiencies in production and regional mix.

On a regional basis, we recorded the strongest EBITDA in the Americas, where the spreads were least impacted, apart from the lower spreads in paraxylene. As you can see in the table, adjusted for the paraxylene spread changes and inventory losses, our business performed well in the U.S. overall and on a per ton basis. However, as volume flows from China, destined to the U.S., were diverted to Europe, we saw margin pressure in Europe. Likewise, Asian margins were challenged to build stocks in China and a strong supply environment. So essentially, what we feel is that the consumer demand for PET has remained constant, unaffected, but there is a [mill] demand which has contracted this year, primarily, I think, because of the concern with the trade wars, with the concern on paraxylene, MEG prices. So it's a question of wait and watch.

This particular initiative is something that we are very proud of. Coca-Cola announced this breakthrough technology that can transform low-quality plastic into high-quality food-grade packaging. To date, about 300 sample bottles have been produced using 25% recycled marine plastic recovered from the Mediterranean Sea and beaches. More materials are available to make recycled products, reducing the amount of virgin PET needed from fossil fuels and resulting in a lower carbon footprint. The bottle technology breakthrough is a result of strong collaborative partnership between Indorama Ventures; Ioniqa, a startup partner in chemical recycling in Netherlands; and The Coca-Cola company; and other partners.

Moving on to the Integrated Oxides and Derivatives business. It has been a very challenging year for our Integrated Oxides and Derivatives business. The decline in profitability is mainly due to the declining MEG spreads and unplanned shutdowns and equipment changes. EO, which represents around 40% of our production volume, has performed well overall. EO margins have remained relatively stable as reflected in the EO contribution to core EBITDA. That particular line item has been added in this graph in the table below. The drop in the core EO EBITDA per ton in quarter 3 over quarter 3 last year is essentially because of the increase in ethylene prices in quarter 3 in the U.S. EG, which is cyclical and represents the remainder of our production volume, has been challenged. The EBITDA decline in EG reflects a decline in industry-wide MEG spreads due to supply increases in Asia. Unplanned shutdowns and equipment change, as discussed earlier, significantly added to the exceptionally -- exceptional profit decline. Unplanned shutdown contributed to 37% -- $37 million core EBITDA decline in LTM. The facility is now back online and operating on plan. This was compounded by a $23 million EBITDA loss in LTM from the IVOG catalyst change. Going forward, our management focus in Integrated Oxide and Derivatives is fourfold.

The Spindletop or Huntsman integration and to capture the identified synergies, start-up the Louisiana cracker in Lake Charles, implement operational excellence and reliability by leveraging the operations and efficiency management capabilities from the acquired Spindletop assets.

I'm pleased to highlight the recent release of Huntsman 3Q results and the reporting of the discontinued operations, which comprises of the assets we are acquiring. Huntsman reported a 56% increase in EBITDA from 3Q '18 to 3Q '19 for the units that IVL is acquiring. This is in spite of the decline in MEG EBITDA contribution, which was sizable last year.

I also want to acknowledge and thank you for your feedback on the communication on the Huntsman deal and clarify 2 items. There was a question about the difference between the Huntsman reported numbers and IVL adjustments. Let me clarify again that this was due to the differences in the accounting standards on turnaround and inspection and is shown here again. In addition, we received request to clarify the sources of the announced $100 million synergy gains we expect to deliver over the next 3 years. $40 million of these operational excellence, which includes synergies and procurement, operational and labor efficiencies. $60 million are coming from specialty surfactants project with a CapEx of $240 million.

After further assessments since the announcement, we have identified further operational synergies than announced. We will give you a more detailed update on the total synergies that we expect from the acquisition during our Capital Markets Day in February.

Back to the strategic rationale for the deal. The investment thesis for IVL to acquire Spindletop is clear. The business is geo-advantaged, low-cost USGC feedstock; foundation for IVL to grow in advantaged feedstock region, with end product going into the Hygiene and Safety products; and a captive outlet for excess Lake Charles ethylene, providing further value chain integration.

This quarter, we are sharing a lot more information on our Fibers segment, the 3 segments within fiber. Let us move on to this segment. We have recently reorganized our business into 3 market-oriented verticals with independent management teams that have the mandate to integrate and consolidate the asset footprint and drive profitable growth. As mentioned earlier, these 3 verticals are Hygiene, Mobility and Lifestyle.

To give you an overview of the performance of each vertical, Hygiene volumes were higher in third quarter '19, driven by strong nonwoven fabrics and fiber demand in North America. Mobility has remained resilient but is below our plan due to the global slowdown in demand and weak automotive sector performance. Lifestyle has been adversely impacted since 2018 as stock overhang has been affecting margins. This is expected to normalize as end demand continues to grow.

We have launched a comprehensive review of each vertical to lower the cost and improve productivity, optimize and consolidate the asset footprint and capture synergies, refine the operating model and reorient each vertical to a customer and efficiency focus.

The idea over here is that the core ROCE of these businesses is below our targets, and there is a significant opportunity to improve on this. We'll be sharing the plan and specific actions of this business transformation in the upcoming Capital Markets Day in February 2020.

Similarly, a bridge on the Fiber segment. As you can see, the cost improvement is taking place. And the spread impact -- when we go to the next slide, we will see the -- I think the breakup of the spread impact.

So looking at the slide, a few trend emerges. The reduction in spreads on margins has been the key driver of the decline and is a result of the market softness and stock overhang in the Lifestyle segment. At the same time, new projects have also been a drag on the EBITDA per ton, primarily driven by the mix effect due to the acquisition of Fibers business in India. The above has been partially offset by cost efficiencies due to regional and product mix.

So this slide shows you, probably for the first time, the financials of our 3 segments within IVL -- within Fibers. On an LTM 3Q basis, all segments recorded volume growth, with sizable growth in Lifestyle and Hygiene. On an EBITDA per ton basis, the Mobility and Hygiene segments delivered improved margins, while Lifestyle segment profitability came down due to the stock overhang that I discussed earlier.

The Specialty Chemical business segment has delivered lower earnings, mainly due to the sharp decline in industry-wide IPA spreads, which has led to a negative EBITDA contribution from this product. IVL has been part of this volume growth when we converted 1 line of PTA in America into IPA in late 2018. On an LTM basis, the NDC and PET HVA segments improved but declined in 3Q '19. As part of our currently ongoing broader long-term strategy review, we are assessing our current and our future Specialty Chemicals product portfolio and defining our desired position in Specialty Chemicals. Again, we will update you on our direction in the next Capital Markets Day in Feb 2020.

As we study the decline in the EBITDA per ton of Specialty Chemicals, a few key trends emerge. Spreads other than in IPA have been resilient and grown. Costs improved, with better regional and product mix. The unplanned shutdown in Auriga assets reversed the benefits we achieved from the cost efficiencies.

Moving on to the last segment of Packaging. This vertical has performed strongly, both in the last quarter and in the last 12 months. Performance in this segment has been supported by strong growth in both margins and volume, including from our acquisition of Medco Plast in Egypt in November 2018. We believe that this segment performance is in line with the continued demand growth for our PET packaging. This is in line with the role of PET as a preferred form of packaging, given its beneficial properties on cost, carbon footprint and recyclability compared to other beverage packaging materials.

Now we turn to the IVL's growth CapExes, including our recent acquisition of Huntsman assets. As our list of projects demonstrate, I will pursue attractive growth opportunities and make investment through the cycle globally and across our businesses. The Integrated PET vertical sees us continue to expand via the Corpus Christi project in North America, which is a joint venture with Alpek of Mexico and Far Eastern Group of Taiwan. We continue -- or we have even increased our focus on the recycling platform, and we see that as an opportunity for us to improve our innovation and our alignment with our customers. The Integrated Oxide, Derivative verticals continue to add capacity, both via the IVOL Ethylene Cracker in U.S.A. as well as the integration of Huntsman assets in the U.S., Asia and Australia. We expect operational startup of the cracker and completion of the Spindletop asset acquisition in first quarter 2020. Our Fibers at vertical will add 30 kilo ton per annum of capacity across U.S., Europe and Asia with the acquisition of Sinterama. I will continue to make significant investments, including its key businesses in a disciplined manner.

Next slide. As discussed, one of the key areas of investment in the coming years will be recycling. We believe that PET is a future of sustainable packaging for the 3 key reasons. It has a distinctively lower carbon footprint. It is 100% recyclable. And it is a reflection of cost versus competing packaging materials such as glass and aluminum. Therefore, we are working with leader -- leading consumer brands to help them fulfill their commitment to better plastic waste management and participate in the circular economy. We are proud to be partners with Coca-Cola as well as they strive to become a 50% of the PET packaging to be fully recyclable by 2030.

This heads-up start in recycling gives IVL a distinct advantage in our relationship with our customers as we help them redefine and be cutting-edge in the evolving packaging needs.

In fact, the increased focus on plastic sustainability is already providing positive substitution opportunities for PET, as shown on this page, given its inherent recyclable nature. Through technical advancements and innovation, PET has been able to gain share from HDP, polypropylene, polystyrene and paper-based packaging. For example, Danone in Argentina has revamped its packaging for yogurt to PET, in line with its transition to the circular economy. We remain confident that as people become more aware of the recyclability of plastic products, the uses and applications will only continue to increase.

As plastics recycling and circular economy models become increasingly prevalent, IVL is spearheading this transition. We currently have 10 plants up and running that so far have recycled more than 46 billion PET bottles. We continue to invest in and maintain our leadership position in the recycling space, not only because it is the right thing to do from a sustainability perspective, but because it also makes good business sense. Our committed CapEx of approximately USD 1 billion into recycling is projected to generate positive EBITDA and returns above Indorama's cost of capital. I will remain fully committed to recycling and believe it will be a strong contributor to Indorama's future growth.

In closing, I'll provide some comments on Indorama's future outlook and what you can expect from our company as we move forward in 2020. Our objective in the next 5 years is to double EBITDA by 2023. This objective remains unchanged. To this end, we have a number of strategic priorities, both at the corporate level and in each of our key segments that we see as priorities in 2020.

At the corporate level, we continue to implement a number of programs around cost management such as global shared services and indirect procurement. In addition to driving operational excellence, for example, via predictive maintenance, we also continue to focus on working capital management as well as reinforce our customer-centric culture, ensuring we'd continuously focus on the needs of our key customers. At the segment level, we continue to expand our recycling footprint, and we'll complete the Corpus Christi project for our Integrated PET business.

Our Integrated Oxides and Derivatives segment remains focused on closing the Huntsman asset acquisition, ensuring we capture the identified synergies and start our Lake Charles gas cracker in first quarter 2020.

Our Fibers segment is extracting synergies in Mobility, Lifestyle and Hygiene verticals, which also focuses on organic growth and innovation.

Finally, we will pause on doing any major acquisitions over the next 12 months, as our management focuses on delivering these strategic priorities. Going forward towards our objective of doubling EBITDA, we have an allocated headroom of approximately USD 3 billion as good bolt-on opportunities arise.

We have published a list of the events that we'll be presenting in over the next 3 months. And we'd also like you to make a note in your diaries that we would like to have our next Capital Markets Day on the 4th of February. We recently concluded a management meet in end of October, where we reviewed each of our businesses in great detail. And we have set good internal targets, which the teams are going to come back with. And therefore, we believe we will have a lot more to share with you on 4th Feb 2020.

Finally, as the last slide, I encourage all of you to see what one of our strategic partners, Coca-Cola, and the CEO, James Quincey, said recently about the future of global circular economy and the importance of PET and plastics.

Thank you. I hope you appreciate our frankness and -- about IVL's challenges while also recognizing our unique strengths and strong competitive position in the industry. IVL remains a strong and vibrant business, and I and the entire management team remains bullish about our future. Thank you very much for your time.

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Questions and Answers

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [1]

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Thank you. In case you have any questions, please feel free to ask.

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Komsun Suksumrun, Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst [2]

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This is Komsun from Phatra. I have a few questions to ask. Number one is the -- what is your opportunity cost for cracker delay? I understand in the U.S., the cracker margin has been pretty good. So if the U.S. cracker in Lake Charles is not delayed, what would be the incremental EBITDA that will be accrued in Q2 and in Q3?

Secondly, within the U.S. MEG, even if IVL plan return to normal, the EBITDA is still lower. That is because of the spread only. I can imagine. Is that division -- entire EBITDA is coming from only EO/EG -- EO? MEG is not making any money. Is that a correct assumption? And would you want to lower run rate? Or do you have a commitment to deliver MEG to other customer?

And the third one is the -- can you make comments on profit contributions from other associates?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [3]

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Thank you, Khun Komsun. So on this slide, as you can see, this is the evolution of the adder for ethylene in the U.S., the spot adder and the 50-50 spot NTP adder. So as you mentioned, the adder in recent months has gone up to the same levels at 2016 and 2017. So the opportunity gain is that, at the moment, if you go back to the IVOG, IVOL -- right, so here, we saw that in quarter 3, our core EO EBITDA per ton dropped from $443 million to $297 million. So this drop was because we were buying the ethylene in the market. And this was a tight period, especially after 1 of the large producers of ethylene had a force majeure. So there was a market tightness in ethylene in the U.S. So that was a negative impact on our business in the U.S., apart from the unplanned shutdowns.

So the way I like to look at our Integrated Oxides and Derivative business is that before the Huntsman deal, in my mind, we could generate $200 million to $300 million of EBITDA from our IVOL cracker and our IVOG site. IVOG site last year delivered us $240 million of EBITDA. So in that year, when the spot prices were low, IVOL would have delivered $60 million, $70 million of EBITDA. So combined EBITDA would have been $300 million approximately. But that was a good MEG year. So when you extract the MEG profitability, the EBITDA generation from those assets would be $200 million. So therefore, in my mind, our legacy assets would generate $200 million to $300 million EBITDA, and the Huntsman assets would generate $350 million to $450 million of EBITDA. So on a combined basis, in my mind, we should be generating USD 600 million to USD 700 million of EBITDA on a normal operating year because the cracker margins may benefit the downstream margins. So on a combined basis, $600 million to $700 million EBITDA. Just on a pure-play IVOL, to date, maybe -- today, it was operating. It could make $100 million EBITDA. Last year, when the spot was very low, it probably would have made $60 million, $70 million of EBITDA.

So on the MEG, we have no plans to reduce the volume because, as you know, we are also the largest buyer of MEG in the world. And the extra MEG that comes from the Huntsman transaction, that is all committed MEG. And most of that MEG is on a tolling basis. So if you go to the Huntsman slide, so you can see over here, for the Huntsman company, the drop in EBITDA in quarter 3 from MEG is from $19 million to $12 million.

So yes, a drop, but not as significant as you would find in IVL because the downside is protected because of the tolling.

So collectively, now, we have these 3 assets, which are all interdependent. We have gained good operating capabilities. We are hopeful that we'll have synergy benefits in our cost on the G&A, on the procurement and also on the reliability front. Because with the Huntsman comes a team which has been operating a cracker and EO business for many decades. So I think we as we complete -- as we close that acquisition in the first quarter 2020, probably in the very beginning of the first quarter and as you deep dive, then when we meet on the 4th of Feb for the Capital Markets Day, we may have more information to share with you based on extra deep dive that we do between now and then.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [4]

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(inaudible)

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [5]

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Yes. So Mr. Agarwal reminds me that, in the third quarter, MEG did not contribute to EBITDA only because of the high-cost ethylene. We are on spot ethylene and ethylene spiked.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [6]

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And it still contributes (inaudible) because 0 EBITDA does not mean that it doesn't contribute throughout the fixed stores. So third quarter was because of the high-cost ethylene. That is the reason, and it should get normalized. So still it's worth producing glycol, but we maximize the purified EO production.

I don't know whether you heard one of our competitor had a problem in the EO. And recently, the EO demand has increased. So this EO, there was an accident in the U.S. for the third quarter.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [7]

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Sorry, your other question was on the joint ventures. You mentioned the associates, right?

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Unidentified Company Representative, [8]

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Do you want me to answer that, Vikash?

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [9]

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(inaudible)

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Unidentified Company Representative, [10]

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So on the joint ventures, we have had -- as you know, joint ventures are not many left. We are now consolidating India and Indonesia. Joint ventures are only in our Fibers business in hygiene, 20% partner in our automotive sector in PSP, and then there is a -- in Fiber visions, there is a 50% marketing partner.

So in most of these, I think you can see that in our financial statements, we made a 4.8 million loss in Q3 and 10 million overall for the year.

And then for the noncontrolling interests, those would have the Egypt and the India, where we have -- where we -- it used to be a joint venture before. Partner is 50% but we consolidate, so they come in the noncontrolling interest. Here, there is a -- you see a loss simply because of the inventory losses, which have occurred during this period. Otherwise, these businesses, the India business is doing quite well.

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Unidentified Analyst, [11]

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I have 3 questions to ask. First one is on the page on Huntsman. I'm not sure whether you have told us already what explained the improvement from $47 million to $96 million year-on-year in that first graph on the left. If you have explained that, sorry, I might have missed it, and I appreciate you could explain it again, which contribute to it.

The second question is on the startup, the cracker. Notice that you mentioned now this time in the first quarter of 2020. Just want to understand and want to have some confidence as to like how confident are you that this time round will be real and what have made it delay so much. And I noticed that the cost has gone up to $1 billion. And will it stop there? Or anything else that will make it increase further from there?

The last question is on the waterfall graphs. I noticed that you have one -- every graph will have some cost improvement in that. So can you explain as to what it is there, like, in that cost improvement? And is this something that we can expect more in the future?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [12]

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So I'll answer on the cracker and on the cost improvement, and Mr. Agarwal can answer on the Huntsman. So on the cost, I believe -- I've asked Vikash to have a look at it, make a deep dive. And again, at the next presentation, we'll give you more color around each of these waterfall items. So post this meeting Vikash is preparing that information to share with you as you require.

I believe most of the cost improvements have come from volume growth, rather than efficiency growth. The focus for me now, and we debated this largely last month, is how can we make a more productive, more efficient gain using Industry 4.0 tools and focus into our DNA of cost improvement.

So largely, I'm just making off-the-cuff remark that most of the cost improvements over here could be volume-led rather than in-house. But they're going to look -- going forward, this has been -- this is mandate at the moment to our management that we are going to be very particular, very focused on gaining on our scale.

Vikash is also reminding me that the cost -- cost through mix….

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [13]

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Mix as well, [the results.]

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [14]

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Okay. So some of the cost improvements could be like if you buy in Egypt, Egypt is a low-cost manufacturing country, so that could be a part of the cost. That's what you're saying. Okay.

So what I'm recognizing is that we have a lot more to do on the cost through internal means, and that's where the focus is. Like I say, our focus at the moment, we are taking a pause on growth, inorganic growth, and focusing more on internal efficiencies.

On the cracker, how can we give you more comfort that we are nearly now ready to start up? So what we did, we had, let's say, inadequate provisioning in our capital budgets for the cracker. What we did earlier this year was we enhanced the team. We have added more management at the local level at Louisiana with a better understanding of the operating environment in Louisiana. But unfortunately, during the trials in May and June, we had a lot of -- we flared a lot of our product. And since then, we have done all the modeling on whether our flare was adequate, whether it was within the control or not. So currently, we are working with LDEQ, which is a Louisiana development body. And I believe from the reports we have of our team that LDEQ is now comfortable with our data. We have made lots of changes. That's part of the reason why our CapEx has gone up, we are adding extra boiler. So part of the cost increase is so that we can take it out of flare and the pollution matter. So all that we believe is fixed now. We are just waiting for the green signal from the authorities to start it up.

Our management team which is, as I said, enhanced, we believe that we would now be within the norms. So the cracker should be starting up anytime soon, very soon. But we are seeing commercial production from first quarter 2020. So that's as honest as I can be about that.

I know it brings us a lot to spend $1 billion on that cracker, which you thought would have cost half of what it actually is going to cost us. A lot of that cost increase is also because of standing charges. So some equipment-related sub-standing charges, some announcements.

Okay, D.K.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [15]

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So if you see the first quarter discontinued operation is about -- third quarter is $122 million versus $79 million. As Mr. Lohia explained that the MEG portion just dropped by 7. This MEG includes integrated, including cracker portion also, whatever are clean, we captively consume. So it is 19 million to 12 million. So majority of the increase is in the other derivatives like ethoxylates, ethanolamines, LAB and particularly, PO/MTBE. As you know, MTBE market is stronger. And LTM basis is $362 million -- $360 million versus $362 million.

The C factor, which is the predominant of the MTB versus isobutene, still remains strong. In October, it was very strong. November also remains stronger. So this is -- as we explained to you earlier, this is basically gas versus liquid arbitrage. And MTBE in U.S. and Asia is very strong. So this also reflects all the downstream, $122 million of the quarter.

When you will see -- as Mr. Lohia mentioned, when you look at Huntsman, they will report 107. We are adding back 15 of the T&A, which they show as a part of EBITDA. So just again, explaining the difference you will always see. I hope that answers the question. Yes?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [16]

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It's partly T&A -- just to be even more frank, it's partly T&A cost and partly the adder that we have negotiated for the products that Huntsman will buy from this discontinued operations. So remember, we supply them EO. We supply them EO. And what was their internal pricing versus what we are going to supply, that is captured in the adjusted margin.

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Unidentified Analyst, [17]

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Sorry, D.K., I have a follow-up question on this one. Out of $96 million, how much is that -- I mean, I'm not sure whether you can answer this, but how much is that coming from MTBE? I understand in the third quarter, MTBE was very strong so that gave a boost to this number. But fourth quarter is not very good.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [18]

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One second. One second. Do you have the graph? Can you show the graph?

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Unidentified Analyst, [19]

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What about the others product things like ethoxylate? Is that better?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [20]

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I don't think we have the slide available to showcase it right here. Maybe offline, Vikash can share that with you. But primarily, the surfactants business is steady. The PO business is steady. So the entire gain is coming from the MTBE.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [21]

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Yes. While we wait for the question, we have a question online. So how much is the impact from the Israel and India acquisition? And where do we see the impact? Is it adding value? Or what is -- what the Israel and India acquisition is impacting the financials?

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Udey Paul Singh Gill, Indorama Ventures Public Company Limited - Executive Director & CEO of Fibers Business [22]

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So for Israel, maybe we can go to the fiber vertical.

So the Israel acquisition will be part of our hygiene business. And as you can see, the volume growth in the hygiene business, part of which is reflecting the Avgol acquisition. Avgol, being a listed company, we are not at liberty to share details of that. But together with the hygiene components, we can discuss that.

So the basic strength in the hygiene as well as the Avgol acquisition has led to a better performance of our hygiene segment, as can be seen over here.

On the Indian acquisition, which falls under our Lifestyle division, as you can see, the Lifestyle division's core EBITDA has dropped significantly from 111 to 50. This is both reason because of the spreads, lowering of the spreads as well as the impact from the product mix, putting India into the equation.

India is still not turnaround for IVL. IVL acquired the Indian operations, which was very short on working capital and short on raw material. In the second and third quarter of 2019, the raw material situation actually got worse in second quarter, slightly improved in the third quarter. And now Indorama management is geared up to address the raw material situation. So with the raw material situation addressed for India, the margin environment still remains weak. But with better utilization rates, we hope to be in the positive area for the Indian fiber operations. It's a tough market. It's not an easy market, but we have a good accretion value for this business. And therefore, this is an accretive acquisition as far as IVL is concerned.

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Unidentified Company Representative, [23]

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Another question is that the company has said a lot on the self-help measures going forward. So what's the target from the OpEx and CapEx perspective on the back of this?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [24]

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Yes. So as I mentioned in the last week of October, we had our global management team here. 50 of us, we spent practically the entire week discussing and we have given them -- we have understood what they had to share with us, we have given them objectives to work on. And we hope to share more details with you in the February 4 meeting with the Capital Markets Day.

At the moment, we are not in a position to give you a number how much that means for us, but it would be significant. If you go to the second last slide on initiatives. This sheet explains to you what are the initiatives that we are working on. And these are not given to you lightly. Each of these program are now into our management discussions, we are looking at that. We are talking internally about how each of these can be a value driver.

So 2019 has been a disappointing year in terms of spread, much lower than our expectation at the beginning of the year. The volume growth is a good indicator that the markets for polyester and PET is still robust. What we did so far on the spreads is primarily obtain this whole thing about the paraxylene and the MEG prices lowering has impacted the sentiments and mills are buying hand to mouth.

Though the consumer demand is still the same, but the mill demand has been lower. So there has been a hand-to-mouth buying, which is impacting the spreads. And it has deteriorated much more than our expectation, frankly.

We, as a leading player in this industry, our business model is obviously built over the longer term. So we are quite resilient in that sense. We also had our strongest belief that our DNA is about excellence. And this is a good time for us to test our excellence.

So we have all these things that we are working on with our teams and we'll put meat around these words when we meet next time.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [25]

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Any more questions, please? Yes.

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Unidentified Analyst, [26]

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I have a few questions. So my first question is on specialty chemicals. I see that you have some kind of strategic review ongoing. I'm sure you are not able to share a lot of details, but can you just tell us what will this entail? That is my first question.

Second question is on the -- on fibers. Could you please share why was the utilization rate lower and EBITDA per ton was lower as well? I'm sure you have given some details, but could you please clarify more?

And also, what is the feedstock for fibers? Because again, for the same reason.

And my third question is on the good part, which is the OCF improvement versus EBITDA. So what is driving that? Can you please explain that as well.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [27]

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Vikash, why don't you answer the OCF? You have the bridge for that?

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [28]

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Yes. So our core EBITDA was $281 million, as you can see on this slide and which go up to our operating cash flow is $400 million, $405 million over there. So we had a inventory loss of $71 million, but we had a price impact. So the prices came down, so we have a cash inflow, so $99 million.

So net-net, we had some increase of cash flow from the prices. Then there was some outflow from the volumes because our volumes go up, so we had to use some cash. The major change came from the net working capital because the management has been working on a lot of initiatives. So reduce the net working capital days by operational management as well as factoring and the suppliers' financing as well. So net working capital days reduced by 3 days and each day is about $35 million to $40 million cash release, given the size of the company. So that has been a major driver and which led to an operating cash flow of $400 million in third quarter.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [29]

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So while we find the fiber number, so we can go to the specialty chemical. So on the specialty chemical, as I alluded to in my script, essentially, we were one of the participants who had a new capacity. So with too much capacity, there was a dramatic fall in the spreads globally. So the way to recover that is to bring the supply-demand balance back to equilibrium. So we are going to play our part in that without hurting our earnings. The issue is how to improve our earnings.

So that's a discussion we have had internally 2 weeks ago. But we still have to work the numbers together, and that is why we are suggesting that we'll share that plan with you in the Feb Capital Market Day. So there is a very good possibility that we have a plan that can have a very powerful impact on the IPA.

So only thing that comes to our mind on the fiber side is, essentially, we had a short shutdown in Rayong to match it with our PTA shutdown because of...

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Unidentified Company Representative, [30]

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In India, Pakistan and India operating (inaudible).

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [31]

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Okay. So the India operating rates, since we acquired India, we were not able to improve the operating rates because of lack of raw material. So that will impact the blended operating rate for fibers, plus the Rayong, the matching shutdown, together with our PTA unit. So remember, in Rayong, we produce PTA and fibers and PET collocated. Does that satisfy your question?

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Unidentified Analyst, [32]

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Yes. And can you just tell us the feedstocks that go in? Again, the breakdown?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [33]

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In the fibers, all the Lifestyle fibers are all polyester, so it's all PTA, MEG. When it comes to hygiene, primarily it's polypropylene. And remember, that's one of the synergies we have with Huntsman. So Huntsman buys a lot of propylene for the PO and we buy a lot of polypropylene for our hygiene fibers. So not in the short term but in the medium to long term, that's an area of synergy between both the fiber segment and the integrated oxide segment.

And on the mobility, it's mostly -- it's half-half. Mr. Gill can probably tell me exactly, but the tire cords are mostly polyester, but the airbags and the industrial parts are nylon. So it's both polyester and nylon. Most of the polyester is captive. Most are nylon, and the polypropylene is what we acquire.

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Unidentified Company Representative, [34]

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Any more questions, please?

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Unidentified Analyst, [35]

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Sorry. Can I have a couple more questions? My question is specifically on PET cycle. Now we have seen -- I guess, demand is still very good, but what we have seen is that the spreads have come off quite meaningfully. And expectation was that we will see some benefit coming from PX/MEG, which hasn't come. Now are we in a phase where the competitive landscape has shifted, and we have moved from sort of a 250 to 300 mid-cycle integrated spread to 200? Is that how we should think about this? That's my -- I guess, that's my only question on PET.

And my second question, just on any potential of impairments going forward?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [36]

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So Vikash, can you put the 2 PTA and PET slides one by one? And maybe Sanjay can talk about the impairments, if any.

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [37]

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I don't think there would be any impairment as of now. This is a year where you've had some weak performances in few sectors, but otherwise, example being the IPA. We've got our payback in 2 years' time. A number of operations have done well. So based on 1 year weak performance, I don't think we would look for any impairments, but we keep looking, we keep reviewing because there are some assets where we took goodwill. So goodwill needs to be tested on a regular basis. So we work with our auditors and….

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Unidentified Analyst, [38]

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Could you tell us how many times do you do the review? Annually?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [39]

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It is done annually, but I mean, within our own, we will continue to do it very regularly. But with the auditors, it is done annually, in the Q4.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [40]

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But Sanjay, is there anything that is likely to hit us this year?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [41]

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On the top of my mind, I don't -- I can't see anything coming. I mean there could be a very few insignificant amount, but I don't think that needs to be highlighted.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [42]

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Okay. So the PTA-PET integrated margins, as you can see, in October has come off even a bit more than September. You have the Q3 numbers of IVL in front of you, which was a declining trend of Q3 month-on-month. So where is it heading? This, obviously, for us is that when we look at this, and we can expand this even historically over longer periods, but at $200 levels, this is very near a cash cost or even for many people below that cash cost. So this is probably not sustainable.

Why is it at these levels? I believe that these things -- because when we look at the demand, the demand is as good as it was. When we look at volumes, our volumes are growing. The impact is that we believe that just a pipeline shrinkage should not have led to this sort of a drop in spreads. So the drop in spreads from July at $300 to $200 now is significant. And none of the things can explain this very truly. None of the things can explain this.

For me, okay, it is a seasonally low quarter. Fourth quarter is traditionally the lowest quarter seasonality wise. There is low uptake of demand at a mill level at customers' level, but with prices where they are for paraxylene, for MEG, for oil, I don't think anybody is expecting the prices to come down any further.

So now that if people start reviewing their portfolio and their procurement policy, there's very little to lose by stocking up again, except the question is that the next demand is only going to come in March, April. So what's the rush to stock up? If you don't see prices going up, then you don't have to stock up. And that probably is putting more pressure on the producers, but volumetric growth is continuing.

On the total environment, if I was to think of it with all the pressure on recycling and all the pressure with plastic, waste management, it's going to take a very brave man now to invest in the PET value chain. So whatever investments are going on, whatever new capacities are coming on stream, these are all stuff that were approved 2 years ago, 3 years ago. I don't see many new projects getting approved now and building to capacity going forward.

So as the supply-demand -- in my mind, the demand is robust, and it will continue to grow at that 5% level, both on the fiber side and on the PET side. New capacity is coming on stream. Can you go to the new capacity? Yes. So on the new capacity, there's not too much of new capacity coming in 2020. So it's quite evenly spread 1.2, 1.3 million tons going forward, which is about 5% of existing capacity. So there's nothing which is deteriorating the market conditions.

If you go to the PTA -- on PTA. Yes, in '21, there is more capacity coming on stream than in '20. But when you put together fiber and PET, the total PTA capacity in the world would be how much? We'll take capacity globally? It's probably given over year, so the PTA capacity over year is 72 million tons. So when you're [growing at the], again, 4%, 5% of your capacity, which is in line with demand. So it's not -- it's just that these capacities are mostly at the moment still coming up in China. And you want to explain a bit?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [43]

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You see industry is separated between China and outside China. If you see the list of all these capacities which is coming in China, China, the consolidation of the industry is rapidly growing. Who are investing? Hengle who is the largest PX manufacturer and PTA. China does not export much PTA. It's only 400,000. So there's a distinct gap between the 2. So you asked whether the cost curve is changing drastically, which will reset the spread? No. And this is all Chinese market.

Outside China, no PTA plants coming except the Corpus Christi, which is delayed to 2022 and 1 JBF plant, which is struggling in India for so long for the last 2 years. So you never see this distinction between Chinese and non-Chinese market. That's a very important point, both in PET as well as PTA.

So as Mr. Lohia mentioned, this fourth quarter is a strange phenomenon. We are very hopeful. And when we do a cost curve that what is the last cost curve to meet the demand? The spread defines 155. Now when we do the whole cumulative capacity in the world and then the demand of the PTA, then it comes to 155. We saw some cycles you can see that.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [44]

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So I think we'll do a little bit more detailed breakup when we meet in February. At that time, we may have better answers to you. But at the moment, what we see are capacity increases only in line with demand increase. So that is not going to have a deteriorating effect over the longer term.

I think in an environment where the commodity prices are coming down, it's natural to buy hand to mouth, and that is putting pressure on the producers. And that is probably what is reflecting in the margins.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [45]

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There's a question on the recycling business. So what is the current portion in our portfolio? And what's the future plan?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [46]

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So this is very interesting. The recycling business is something that is really exciting for us. As you all know that PET is the most recyclable plastic out there. And definitely, this creates a great opportunity for us. As we are engaging with our customers, we also see the same amount of intent from our beverage customers.

So to the question, our current capacity is 162 kilotons, is it? And which will grow to 336 kilotons. And then with -- so these are the committed projects where we go to 326. And then we are still in the process of identifying new businesses. Our intent is to take it to 800,000 tons by '23 and 1 million tons by 2025. And this is based on mathematics that we need to supply 25% content of PET.

We make about 5 million tons of PET. So we need to go to 1 million-plus tons of recycled content in our PET. And since we are also investing in chemical recycling, the green bottle is a good example of that, which has come from marine litter, glass on through chemical recycling and we produce the chips for Coca-Cola to make that into a bottle.

So these technologies are taking shape. There's a keen interest by the whole value chain. So -- and we want to -- we want to keep our leadership on this front. And we have a dedicated group working on this every day globally.

So the advantage of IVL is that we are a global company. That is where bottle-to-bottle recycling is permitted. In most parts of Asia, as you know, food grade application for recycled PET is not allowed. So most of the recycled PET in emerging markets go into fibers. We are working with the regulators to improve that and to go into bottle-to-bottle. But in the west, that is permitted already. So we have our facilities in the west, and we are optimizing, growing these facilities.

So this is a great opportunity for us. And as I said, it is not only good for fashion, it's not only good for sustainability, but it's also good for business as that [OC] indicates over here.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [47]

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Any more questions? I've got 2 more on the online. So as part of the cost rationalization program, will IVL also look at divestment of some of the sites, which are not creating high returns?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [48]

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Yes. So IVL is not that old a company. We're only 25 years in our business. Most of the businesses that we have are acquired businesses. So all these businesses were acquired with a strategy because we want to consolidate these businesses, so I would not term them as getting -- exiting any of those businesses.

What I can see is we are going to improve the footprint of our businesses. Like we have mentioned, we are taking, for example, the fiber businesses. We have to improve the ROCE. And to improve the ROCE, we are going to consolidate our sites. We are going to use Industry 4.0 metrics. We are going to use, by this, lean six Sigma. So we have a lot of things that we are working on. And the best thing is that now that the pressure is off to acquire, we can all as a team, look into how to improve our cost.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [49]

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The second question is also related to costs, so I'll go back to the slide. So the question is that here, the cost improvement is $11 per ton. So with the low energy prices, is this $11 enough? Or there should have been more cost improvement? But I guess here, it is a mix impact as well because the business mix and the regional mix as well?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [50]

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Yes. So this is -- this $11 just shows you that there is an improvement. It doesn't show you where it's coming from. And our intention is to work with you over the next months to further deep dive into this improvement. And I think I mentioned earlier that I believe most of this improvement is volume-led or mix-led. My team's now desire is to look into this deeper on what are controllable improvements that we can do.

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Vikash Jalan, Indorama Ventures Public Company Limited - Joint VP of Strategy, ECM and Corporate Finance [51]

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Any more questions, please? Okay. If there are no more questions, we thank you very much for coming. If you have any questions, we can -- further, we can take it offline now.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [52]

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Thank you very much for joining us.

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [53]

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Thank you.