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Edited Transcript of IVL.BK earnings conference call or presentation 8-Aug-19 10:59am GMT

Q2 2019 Indorama Ventures PCL Earnings Presentation

Bangkok Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Indorama Ventures PCL earnings conference call or presentation Thursday, August 8, 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

* Deepak Rasiklal Parikh

Indorama Ventures Public Company Limited - Chief Strategy Officer

* Dilip Kumar Agarwal

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

* Robinder Singh

Indorama Ventures Public Company Limited - SVP

* Sanjay Ahuja

Indorama Ventures Public Company Limited - CFO & Executive Director

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Presentation

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Robinder Singh, Indorama Ventures Public Company Limited - SVP [1]

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Good afternoon and thank you for coming again for what was earlier originally just the 2Q results. But as you saw from the email that we sent out last night, it's an extended session and for all good reasons.

So firstly, you heard -- I'm sure you've seen our disclosure of IVL's largest-ever acquisition in its history. It's a huge -- it's a game changer. And that's why we have used that word because it is genuinely a very, very new business, an extension partly of what we used to do in the olefin segment, and you'll also see that we have redefined that segment, but it's a very interesting play as we go downstream. So that's the first and foremost part of what we want to share with you today because it is genuinely something we are excited about, and we are hoping you will share the same excitement with us once we've been through the presentation.

So the first presentation we'll do today is on the Huntsman acquisition. We'll then follow it up where I want -- would love Mr. Lohia to summarize, really, where does this fit in into our longer-term strategy, why are we doing this, how we're doing this, but also what it means to us as we go forward. So a bit of it is a repeat of what you saw in the Capital Markets Day, but you'll see how it fits into what the promise was then and how we're living up to that promise and getting towards that journey. So that's the second part. And lastly, of course, we will also talk about the 2Q performance, and then we'll take it from there.

Please, all of you, join us after the session for cocktails thereafter. So with that, I'm going to hand over to Mr. Lohia. Please?

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

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Good afternoon. Thank you very much for being here with us for -- as Robinder said, to the 2Q '19 Analyst Conference but has become an extended confidence.

D.K. Agarwal, who you know, the CEO of our Integrated PET and Integrated Oxides segment, he will lead this presentation. What I'll just say are a few words on what happened earlier, how did it happen, why did it happen.

So in the last 6 months, as you know, originally, in the year beginning, we redefined our 3 segments into 5. And clearly, at that time, we had in mind that we wanted to grow our Integrated Oxides, which was then called olefins, into a much larger business. As the year progressed, our understanding of this business improved. But at the same time, this was a very large transaction for IVL. We have never made a transaction of more than $1 billion. So when this transaction was being discussed, it was something that we were very concerned with, that is from all the trade wars point of view, from the global macro standpoint, are we doing the right thing by making this large bet on this particular business? So it took us longer than it would normally take us to make a decision. But then, we looked at all the boxes that we needed to cross. And as we went about with our due diligence, understanding our businesses, understanding the synergy with our existing business, we could check every box. What we got over here was a very competitive asset out of the Gulf Coast where the raw material costs are the cheapest. We've got an integrated site with more than 2,000 acres of land, which can be further developed in the future going forward.

We had a synergy with our Lake Charles cracker and our Clear Lake oxides business because Port Neches and Huntsman also has a similar cracker and oxides business. Even more attractively, we got the EOD business, the ethylene oxide derivatives business, which we have been pursuing for the last 5 years. And it's a business that is a sought out business. It's a business which is much higher value-added than even PEO. It's a business that we could not grow in the last 5 years or even attempt because we were restricted on the land in Clear Lake. In Clear Lake, we have operated on a site which is managed by Celanese. So we did not have the footprint to increase or add equipment over there.

So we also then tried to understand what is a propylene oxide business, where does this take us going forward? This has a totally new dimension to IVL, but it's on the same site as Port Neches. So at Port Neches, at that last site, there is the EODs and there is propylene oxide and oxyfuel business. So all in the same land, managed by the same group of people, broadens our capability. And managing the oxides business improves the way we can run our EHS, improves the reliability that our customers would have now with multiple sites.

As you know, our EO business goes up and down. Every time there's a catalyst change, for some reason, the restart is always longer than planned. But now with multiple ethylene oxide plants, we will have that more reliability factor for our customers. And hopefully, we'll also have a broader expertise on how to manage these assets.

So as we checked each box without even the current economic environment would allow us to buy this business at a fair value compared to if we had to buy this business in an environment which was extremely good.

So IVL's portfolio today, we have a $9 billion balance sheet, and we had $1.5 billion of EBITDA. So our current business is -- our current business is 6x EBITDA. This business that we are acquiring before synergies is at 5.7x. The synergy benefits -- and this is the largest synergy benefits we have seen in any of our previous acquisitions. So we have $100 million of synergy benefits in this. If you were to apply those synergy benefits, then the purchase multiple goes even below.

So as we check every box, as we made the reliability studies, as we made the integrated studies, we realized that for the seller, this wasn't something that they were selling because this was in the downturn. The seller wanted to deploy this capital towards his core business, which is polyurethane and derivatives. So it made sense that he wanted to exit this business, which was his only site to make surfactants, for IVL getting into EODs was a desired area to get into. And that's how we landed up with this.

So with those opening remarks, I am going to hand over to D.K. to take you through this prepared presentation. Thank you.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [3]

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Thank you, Mr. Lohia.

Of course, this deal is a very transformative deal, and I will walk you through this complete deal. Why it is transformative? It is the size of the deal, but also the uniqueness of the opportunity. I think -- I mean there are many people coming in -- diversification of the product range and the end markets that we saw.

As you see this slide here, you'll see some phases here. These are the 5 verticals. If you -- our 2018 EBITDA was $1.44 billion. And if we add the Huntsman's 2018 EBITDA, this becomes $1.8 billion, increasing the EBITDA percentage from 13% to 14%. This business is split into 2, Integrated Oxides and Derivatives, which Mr. Lohia explained to you, cracker, EO plant, EO derivatives, ethanolamines, LAB and specialty chemicals includes oxyfuel. So this acquisition is certainly a game changer for growth of our unique Integrated Oxides and Derivative and Specialty Chemical segment and is in line with our stated growth strategy as highlighted in our 2019 Capital Market Day.

Our Integrated PET, Integrated Oxide and Derivatives segment earlier called olefins. So we renamed this. Of course, we are putting propylene

Oxide -- we are putting ethylene oxide here.

Fibers and Packaging segment provides visible and stable earning and cash flow due to high level of integration, downstream value-added products portfolio and long-lasting customer relationships in a high-growth market. One of the largest integrated EO derivative producer located strategically in the feedstock advantage, US Gulf Coast. I think I've been repeatedly telling you that how the U.S. is advantaged. Today, ethane is $0.13 a gallon. This means cost of ethylene is only $0.05. This was $100, $90 to $100. And that's the advantage of U.S. gas. So you're rightly located. You're having integrated assets at the right place. This complements with our existing Integrated Oxide business, which caters to the purified EO, you know that we control 42% of the merchant market and a clean glycol business and resultant entry into new market segments.

This also includes a very important business, which is a very high-growth business, about polyurethane. So we are getting 240,000 tons of propylene

Oxide and 730 kt of oxyfuel. What is oxyfuel? Oxyfuel is octane booster. And how are you going to make this fuel in Americas? You're going to make from butane and methanol. Methanol is made from gas. Gas is $2.12 a million BTU. Forward price of methanol is $1 a gallon. So you can imagine what sort of value can be unleashed here.

This also includes one of the most cost-competitive technology. We are owning the technology, and we'll show you the -- how cost competitive this technology is. We are getting the exclusive global license and the right to sublicense. We'll be free to license this technology around the world, excluding Guangzhou Province in China, which is retained by them, propylene oxide technology that gives IVL unique opportunity to grow this business globally. So this is a new vertical, which we'll be able to grow.

On a pro forma basis, as I just mentioned, the acquisition increases our EBITDA by 25% based on 2018 from USD 1.44 billion to $1.8 billion. Based on this acquisition, the EBITDA margin of the consolidated entity increases from 13% to 14%. Now the bulk of our businesses are very steady margin businesses and cyclicity only remains in the Specialty business, particularly IVL. We made no money in IPA and I will walk you through that what is the change in the IPA situation.

What are we getting here? That's very important. Mr. Lohia mentioned land worth 2,000 acres. You can imagine Map Ta Phut integrated facility, a much -- 2,000 acres of land with infrastructure, deep jetty with 12 meters draft. This was -- big vessels can come in. So Port Neches is the most important site here. So what you got here, integrated EO/EG 600,000, which benefits from favorable U.S. shale gas economics, which I've just mentioned.

Downstream, we didn't have downstream. So we are talking of 550,000 tons of high value-added surfactants and ethanolamines; 180,000 tons of linear alkyl benzene, LAB, which uses paraffin and benzene for the manufacture of detergents; 240,000 of propylene oxide, as I just mentioned, serving high-growth polyurethane business, which is growing at the rate of 5%, predominantly used in the home, automotive, the cold storages, insulation, construction, car seats. So -- have many applications. 730,000 of oxyfuel MTBE, a premium gasoline blank that helps to improve emission and increase vehicle efficiency. So this is MTBE oxyfuel, which is the octane booster for the premium gasoline.

We also got integrated EO surfactant site in Australia. Australia is not a big market, but developed market, and we get the economics of the U.S. ethylene there. And high-growth market of India. So India is only surfactants, an opportunity to grow into this fast-developing country. The Port Neches facility, which I just mentioned, is a strategic industrial supersite. As I mentioned, it's a super site and comes with highly developed infrastructure, including captive power plant. So when you make captive power with a gas price of $2. 12 a million BTU, you can imagine what competitiveness it has. Deepwater jetty, capable of handling large vessels served by extensive network of feedstock and product pipeline. It's very important that you must have pipelines, so you can get your ethane, propylene cost competitively.

This slide shows you -- the blue, what is the existing operations. So you can see that the integrated olefin will become 720,000, including our cracker in Lake Charles plus the new cracker. The EO/PO will be 1.3 million tons, and the downstream is 1.38 billion -- million tons. You are also getting propylene glycol here, as you see, 66,000 tons; ethylene glycol of 765; and the markets which they serve.

So the new portfolio significantly enhances, IVL integrated oxide and derivative portfolio with unique level of downstream integration, thus differentiated in -- from otherwise crowded polyolefins market. When we talk of polyolefins market, we talk of polyethylene and polypropylene, which, as you know, is very, very cyclical. This enables IVL to leverage its existing portfolio already benefiting from US Gulf Coast feedstock advantages, adds incremental volume, enhances its EO capacity and a new pure chain for growth and most importantly, add significant downstream capacities that help capture the entire value chain. This means you capture the entire value chain from ethane right up to end products, surfactants, and address high-growth daily use oriented end markets.

The cost of surfactants in this country will be the cheapest as compared to anywhere in the world. In fact, over 90% of the end product will be sold to sectors that address the consumer-oriented industries, as Ms. Lohia mentioned, not to the construction as 90% goes to the consumer-oriented necessities. This includes the home and personal care category, where IVL is already present through its fiber solutions. It also includes the high-growth, sustainable, recyclable polyester value chain. PET, as you know, is highly recyclable. Ms. Lohia will also cover in his 2023 presentation the investments which we are doing. It's a preferred polymer because it is recyclable. Including PET and fibers, we'll become a key supplier -- this is a new vertical which we are opening, a high-growth polyurethane market, which goes into furniture, consumer durable, among others.

And lastly, we enter into providing solution for the agriculture industries like herbicides and coatings. And you can see on the right-hand side, all the end products, which it will be going.

This is an interesting slide. Here, we are trying to compare an EBITDA margin of typical petrochemical companies, which manufactures olefins, which manufactures aromatics. So why IVL is distinct? So I just want you to separate this from a typical petchem companies, which predominantly is only olefins and aromatics. And you know that what is the percent margin situations of the commodity olefins and aromatics. So what makes IVL distinct from other typical petrochemical companies is the combination of the portfolio and the end market that it serves. So you can see that EBITDA percentage margin for a typical petchem is cyclical while IVL remains steady. That distinction is evident from the graph on the left that shows you that this portfolio allows IVL to achieve a steady and more visible earning growth or multiple figure of time as proposed to the more volatile peak and trough-oriented. This is what happens in the petrochemical when more crackers get built as you are today seeing in the olefin chain, when the capacity gaps lumped up. Here, we are in a totally different business. More cyclical earnings from the typical petrochemical companies, which has aromatics, polyolefins and refinery. As you know, the refinery margins are also volatile.

The acquisition of Huntsman's asset will further strengthen this unique feature as we strengthen existing business and add to end markets that are less cyclical in nature. As a growth company, which pursues prudent financial practices, this uniqueness provides IVL the predictability of cash flow. I'll walk you through the second quarter results that how strong are the cash flows. So any inventory losses doesn't affect the cash profit because this is just a noncash item, so you will see how strong are the cash flows, managing our financial obligation and paying out dividends, which we give you on a quarterly basis.

Let's see what is the landscape. With this acquisition, we've become the second largest ethylene oxide producer in the U.S. This acquisition, along with our existing EO assets, makes us the second largest fuel producer in the U.S. Gulf Coast, giving us leading portfolio diversification ranging from purified EO, I just mentioned, 40% market share, glycols, ethanolamines and surfactants. This is in line with our downstream strategy, capturing the full value chain margin in a highly advantaged feedstock situation. And this advantage is going to remain, as you can see, from various investments, which has been made in the Gulf Coast.

Multiple manufacturing locations. Because as sometimes when you only have 1 EO plant, you struggle about the reliability of supply. Now we'll have multiple manufacturing locations, we'll improve supply reliability for our customers. I will still as a net ethylene buyer -- as you just saw that our captive ethylene availability is just too short. So we will be still buying ethylene and propylene. And you can see, this is a very competitive cost base for being a buyer of ethylene in today's market situation. The additional energy capacity, which was being marketed by them as more as a -- to the traders, will be used for capital consumption, as we are short in Americas, for our PET portfolio in Americas capturing the value chain synergies. So we'll unlock all those synergy values, which Mr. Lohia mentioned.

On the right-hand side graph, you can see the EO derivatives contribution margin that a typical glycol, and this is over the last 5 years, makes per ton of EO, the lowest contribution. The merchant PO sales, as you know, PO cannot be transported, is 1.3x of the glycol margin. Now what we are getting the Huntsman's surfactants, gets 2x the margin of the EO. And the new project which we are planning, based on our -- one of the facilities in Dayton will be 3.5x of this. And you can see in this graph, this EO consumption is broken into 4 parts. The green is glycol, which is 42%, which today has the trough of the earning, and I will explain you that today, glycol is at the -- below the cash cost of naphtha integrated production; and 26% is purified EO and 32% surfactants. So you can swing the facility to take the benefit of the market. So the glycol is very strong. Like it was in 2018, you can choose to make more glycol. So this flexibility is very important.

What are we doing here? We were not in EO derivative business. We are expanding into a high-margin EO derivative business, which you just saw on the earlier slide that how much is the margin per ton of EO. The addressable market is about $80 billion. EO derivates are predominantly used in the high-growth, consumer-oriented industries, including home and personal care, like your shampoos; agrochemicals, detergents; agrochemicals like herbicides; and the fuel and lubricant markets. It is also used in the drilling of shale oil and gas. As you can see, the growth in this market is over 5% CAGR over the next 5 years. And this facility is one of the most cost-competitive globally because of the U.S. shale gas advantage and due to integration of the site. This, when you take the benefit of the integration.

This acquisition also comes with a large R&D platform. You give customs -- customer solutions with 269 patents and further 191 patents pending approval. This will create a pipeline of innovative new solutions for our customers and consequently earning enhancement.

The specialties surfactant manufacturing facility, as I just said, Port Neches is one, another facility is in Dayton, having in Texas, having a capacity of 36,000 tons. Now this is unique. They make 300 SKUs at that site, leverages on the R&D capability, serving high value-added niche-customized solution. So you get the R&D, you get the flexible facility, which will be converted into a larger facility at Port Neches. IVL plans to unlock further value by investing into a state-of-art special surfactant facility, that's what I mentioned to you in Port Neches, capturing even high margins. So you're getting into a very, very interesting business here.

Now let's go to propylene oxide. This is totally new. There are 2 plants of propylene oxide in Thailand. One is the joint venture of Dow and Siam Cement, another PTTGC, but they are from hydrogen peroxide technology, which is capital-intensive. Here, as you see, the bottom graph, this is one of the most cost-competitive technology. Why it is most cost-competitive technology? Because TBA, which comes as a byproduct, and you convert into MTBE, oxyfuel, from the gas. So propylene oxide is a very new segment for us. It is used in high-growth polyurethane business. As you see on the right-hand side bottom corner, the addressable market is about $80 billion, which is growing because we're benefiting from megatrend of increased urbanization and consumption growth. So this acquisition includes a state-of-art 250,000 propylene oxide facility, employing the most cost-competitive technology, which we'll -- also getting the exclusive global license and the right to sublicense proprietary propylene oxide technology. As I said, we'll be the -- having this technology, and we can unleash the value by licensing or putting JVs, if required.

Over 50% of the world's propylene oxide -- now I want you to concentrate on the graph below, highly competitive PO production cost. World's 50% of the PO is made from chlorohydrin. And chlorohydrin technology was invented by Dow in 1910. And that sets the floor because when you produce a particular product by different technology, what establishes the floor price is the cost of production of the most expensive technology, which is capital-intensive and high-operating cost. The cost of production from these technologies establishes the floor pricing, thereby protecting the business margin. And that's why you can see -- and this is the average of 5 years historical data collected from IHS, and that's the basis of which. Again, interestingly, 60% of our PO output is on a sold-under-margin basis, that we get a fixed margin already.

So what we need to unleash values on the 40% are the merchant business and the MTBE. So propylene oxide is a very, very interesting business, globally growing. I did not mention to you, the acquisition cost of this asset is $2 billion. The replacement cost to build this facility in Gulf Coast along with infrastructure will be in excess of $4.5 billion. And $2 billion includes our working capital of $180 million. So basically, you are paying $1.8 billion for assets.

Let's talk of oxyfuel, MTBE. MTBE and oxyfuel is a superior gasoline component for boosting the octane content as well as reducing emission. MTBE, this is the octane booster, is normally traded at a premium of $50 to $100 per ton of premium gasoline. The MTBE price has a coefficient of correlationship. Those who have interest in the statistics, that's 98% of the gasoline price. The total global market for MTBE and ETBE, MTBE you add methanol; and ETB, you add ethanol. And that's what is the differentiation. It's 23 million tons. The MTBE is not a small market. Growing at 3% CAGR, the majority of that is manufactured at high-cost, on-purpose sites. I just mentioned to you Dow is one of the largest producer, and they make chlor-alkali. And that's why the cost of production of that technology, as you can see in the graph, was higher.

U.S. banned actually use of MTBE because of toxicity, which was replaced by ethanols. In America, it is -- ethanol is added. But you know the ethanol is pretty expensive because ethanol competes with the food. However, future ethanol blending is limited due to feedstock availability as it competes with food versus fuel priority. So we think the MTBE market globally -- and normally, this MTBE, which is produced in the U.S., is exported to Latin America, Mexico, Venezuela, all these countries, and there are others -- like China is a big consumer of MTBE. The production of MTBE, if required, can be converted to ETBE. This means, you replace methanol by ethanol by switching methanol with ethanol feedstock with a very marginal investment. So we also have a flexibility to convert into ETBE.

So if we go to the next slide, these all-end products are favorable industry end-market dynamics. It's very important. You are not in sunset industry. You are in a sunrise industry, a growing industry. Agrochemicals growing at 6%; fuels and lubricants growing 3%; home and personal care, in line of GDP of the world, 3%; oil and gas, 6%; and polyurethane, as I just mentioned, 5%.

So the Huntsman asset offers a stellar and sustainable solution for the specific and ever-changing needs of their customer in a variety of consumer and industrial markets. This complements IVL's offering to high-growth markets like, today, as we know, home and personal care, I mean fibers business, agrochemicals is a new mobility, fuel additives and intermediate chemicals for polythene manufacturers, all of which are growing at between 1.5 to 2x GDP.

Polyurethane, as I mentioned, is extensively used in diverse end markets, such as construction, automotive, consumer durables, home furnishing, and thereby is a high-growth opportunity for IVL. Propylene oxide, internationally, is 14 million ton business, just to make you understand that.

If we go to the next slide. So what does this acquisition translates into? This provides better solution for customers, our knowledge bank which we get, improved reliability and broader reach. This acquisition adds significant value to our integrated oxide and derivative business, both in terms of product enhancement and also the end markets that we will serve. But the most valuable assets which we get is experienced people who will join 1,200 people in the IVL family on completion of the highly experienced people in this industry. And never negate that because that's what has made IVL successful today. The combined experience of the newly talent acquired will also strengthen operational excellence of our existing asset, cracker and glycol plant. And as you might have seen Mr. Lohia's press release, he said we are -- he's thrilled to welcome new colleagues and their added competency, which empowers our collective potential to grow continuously. So there's the manpower, R&D talent which you get.

What are the synergies we are targeting here? As you know, any U.S.-based company has a lot of the SG&A. A lot of procurement leverages we believe will be large buyers of methanol, isobutane, paraffin, ethylene, propylene. So this acquisition increases our procurement leverages. And also because MEG will be captively consumed in a number of important product stream and will unleash SG&A and corporate overhead synergies by integrating IVL's existing large presence in the U.S. with the acquired assets. Those who might have followed the Huntsmans, they talk of $35 million strand in SG&A, and that's what the synergy benefits comes in.

We have concrete plans to expand further the downstream specialty surfactant business with the 70,000 -- and actually, Huntsman, they had many verticals of the business, polyurethane downstream, textile effects. They could not allocate the capital for this particular business, so we plan to allocate the capital by enhancing purified EO into a value-added product line. The capability of Dayton facility coupled with the unique R&D, which is coming in, an intellectual property will be a meaningful contributor to the enhanced EBITDA target, as you saw. Especially, the surfactant contributes 3.5x margin per ton of EO. The technical knowledge of the Huntsman team being acquired will help broaden our existing capabilities, running large integrated EO facility.

If we go to the next slide, this gives you how our IVL assets -- blue is IVL assets, red is the Huntsman assets, and the potential for further integration. So we will still remain a buyer of benzene, natural paraffin. We buy 500,000, 400,000 tons of polypropylene for our fiber business. So this new integrated portfolio significantly enhances IVL chemical portfolio, increases the level of integration and establishes a meaningful presence in the higher-margin, high-growth downstream business. This acquisition will open up growth opportunities and new verticals of surfactants, ethanolamines and propylene oxide value chain in a very cost-competitive advantage. And that's very important. You may have assets, but are you in the right place? This also enhances our chemical footprint in high-growth countries, such as India. They recently put up a plant in India for the surfactants. So this will also give us -- that you can use this R&D and provide custom solutions to -- in those countries and also in Australia where we are getting the economics of U.S. shale gas. R&D capability and product diversity will be leveraged globally to further grow the business. So you can see how consolidated this -- and this is a business which gets well integrated.

Let's talk about the transaction highlights. This transaction has certainly broadened IVL's expertise in operational excellence, global scale, differentiated formulations, technology and geographical reach for EO derivatives and specialty chemicals. These are 2 verticals you saw. The purchase price, as Mr. Lohia mentioned, is $2 billion, and up to $75 million -- $76 million, to be precise, in deferred pension obligation where the cash flow will come later on gives the EV/EBITDA multiple of 5.7x. And this is in line with our IFRS accounting policy. This is the largest acquisition, of course, in the history of IVL after we did an acquisition in 2011 in the same field of integrated oxide in Texas. So incidentally, it's happened to be in the same field. This is one of the top acquisitions by a Thai company in the last decade. The acquisition is profitable, resilient and growth business, and I just mentioned to you, at 50% of its replacement costs. So when you have a high-growth business and you buy the assets at lower than replacement costs, the margins catch up to the replacement margins.

This is another milestone IVL's grow journey towards integrated EO and specialty chemicals. The deal is earning accretive within the first full year of operation. Synergy, that, in fact, will also boost EBITDA contribution, about EUR 100 million annually from these assets by 2023. When we complete our projects, we unleash all the benefits. On a pro forma basis, as you saw, it's 25% to IVL EBITDA.

Well, there are always questions, can you make this successful? And the testimony is the history of IVL. As IVL, we've grown the company. If we then go to the next slide. And this is a great slide that our approach, how we make it successfully retain the management, the right talent to work -- and we are very proud that we have retained the management around the world, a very strong corporate governance and operational autonomy, we do it. But we do leverage on our procurement, and our commitments are long term. We made many acquisitions from private equity companies, which were starved off capital, we give long-term year growth and provide investments, and that's what our culture is.

So over the years, we have successfully completed and integrated more than 40 companies into our fold. Equally important, IVL grows as an organization and benefits from the rich experience, capabilities and technologies that come with this acquisition. So consequently, we have a perfect blend of what we call in-house capabilities and the best-of-class capabilities that come to us through these acquisitions, the talent bank which you got. This leads to the creation of the global company. Today, this company is $13 billion. With $2 billion revenue growth, we're already, on a pro forma basis, $15 billion. Shared passion and the goal to constantly excel and do the best in everything what we do.

So thank you very much. This was the acquisition about Huntsman. Now Mr. Lohia will walk you through -- and then I think we'll take the Q&A.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [4]

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Yes. Thank you, D.K.

So I have a big deck over here. This is 50 slides, so I won't go through all of them. You know this company pretty well, so I'll assume some of those slides I don't have to go through. This is not a prepared script, so I'm going to speak through the slides as they come across. After this deck, we also have the quarter 2 deck. We have shortened the quarter 2 deck so that we can go through it quicker.

So let me start over here. Can we go to Slide 14? So this is what IVL is today. This is updated for Q2 '19. As you all know, we have a global reach. We are truly local, 90% of our sales are to domestic markets. We have a balanced footprint in 3 geographies, and we have a competitive landscape where 13% of our MEG and 13% of our PX is captively produced, and the remaining is bought in the open market.

Go back to Slide 9. This one shows the story of inventory gain and loss. All of you understand this that the inventory gain/loss accounting treatments does not impact the cash flow of the company. We had a super good inventory gain last year. And now we have a very bad inventory loss this year, which basically impacts our EPS year-on-year.

Go to the previous page. This is important. In line with the inventory slide, our cash flow has increased by 39% this year over last year, so first half '19 versus first half '18. And this is very important because I think the importance of the business and the prudence of the financial profile lies in the cash generation.

Let's go to Slide 18. We'll be hand -- giving you this entire deck. This is our entire 2023 strategy with all backup information. But I'll take you through the important slides as I feel important.

So this is, let's say, our integrated PET platform, which has PTA and PET in there. The volatility, you can see, is generally linked to paraxylene. So we are countercyclical to paraxylene as quite visibly seen over here over the last year, in particular, and even historically.

The next slide. This one talks about the Integrated Oxides business and Derivative business. This includes Huntsman assets. And as you can see over here, the volatility of the business for IVL, the red line in the bottom, is quite steady. This is pro forma consolidation between Huntsman and IVL assets, whereas for other value chains, it is more volatile.

We go to the next slide, please. On the last slide later on, I'll show you the evolution year-on-year, but our target has always been to double our EBITDA every 5 years. So that is a goal we are trying to -- that is a goal we are on track to achieve. With all the committed CapExes, we have $5 billion of CapExes that are now earmarked or committed between the period of '19 to '23. I'll walk you through that later, but that will increase our production from 10 million tons to 18 million tons, increase our revenue to close to EUR 20 billion. The EBITDA per ton will not change. The product mix will change. The geographic mix will change. We have taken conservative EBITDAs in all the businesses. But with the geographic mix and the product mix, we would be, with this $5 billion investment, achieving close to 85% of our target of doubling EBITDA. We would still have more than $2 billion of headroom to invest over the next 5 years.

Slide 23, please. So quickly on this. Basically, 2018 EBITDA was $1.4 billion. The Huntsman asset provides $363 million. Then all the organic investments, which is Lake Charles, Corpus Christi, consolidation of Indonesia PTA, consolidation of India PET, various brownfield projects, all that provide a certain amount of EBITDA. And the black box over there is the GAAP required to reach $3 billion of EBITDA or doubling EBITDA. So that is undefined and is mentioned as M&A inorganic.

Let's go to Slide 27. IVL has always taken a very prudent approach to funding itself. In my letter to the team for Integrated Oxides, I mentioned to them the 3 golden periods of 5 years each over the last 15 years. We started off in mid-2000s as a PET company with the aim to be one of the leaders in PET. In the second 5-year period of 2008 to 2012, we actually were the largest PET company, but not only the largest PET company, but also Integrated PET company. During that period, we also started making investments in HVA businesses, and our fibers portfolio was practically born during that period, which gave us the opportunity to grow in alternative businesses, not only rely on Integrated PET.

The last period of 5 years, let's say, 2013 to 2018, during this period, we have mushroomed, we have grown our EBITDAs, we have grown our integration and we have gone even more global. Throughout this period, we have improved or maintained our operating cash flow and improved our financial ratios. Going forward, these graphs basically show you the $5 billion of committed CapEx or allocated CapEx and what that would do to our net operating debt and what that means in terms of operating cash flows generated. So both are healthy, especially because 90% of IVL's portfolio is aimed towards the necessities businesses. 90% of our portfolio caters to everyday needs. 10% of portfolio can get impacted by global GDP linkage, but 90% of the portfolio is quite visibly achievable. What happens -- there is cyclicity in the entire 100% of the portfolio. The 90% portfolio cyclicity comes from surplus capacity. 10% of our portfolio is dependent on demand side. So in this present moment, under the trade war scenario and maybe a slower growth scenario, the 10% of our portfolio may get impacted like in the automotive business, and we are seeing some headwinds in the automotive-related businesses. But 90% of our portfolio continues to perform and the testament to that was our operating cash flow that we showed you earlier.

Next slide, please. These are the committed CapExes. So these are the 5 segments that we have. Each of those segments have the Brownfield CapExes. On top of that, in the Integrated PET, we have the Indonesian PTA consolidation that took place earlier this year, the Corpus Christi PTA-PET project, which is under construction. This is delayed in our opinion. We expected this to start up in the third quarter of next year, at least 1 PET line. We believe it's going to get delayed by a quarter, so for our financial numbers, we're showing that as starting to capitalize that in first quarter 2021. And then the entire project of Corpus Christi will get capitalized between '21 and '22. India JV consolidation, we have a PET JV in India, and that is now consolidated into IVL. The biggest of the $5 billion investment is -- I mean biggest is Huntsman $2 billion, but the second biggest investment is we have now allocated $1 billion towards our recycling platform.

As you know, there's a lot of attention to plastics. Fortunately, for us, PET being the most recyclable. And in PET, there is certain infrastructure available for recycling. All our customers are in touch with us and demanding that we improve and increase the recycling content in our PET. We have now made a separate vertical within Integrated PET and all our recycling assets lies in that now, with a separate team going about building more recycling capability. And we're allocating a budget of $1 billion to recycling so that by 2025, when the brand owners want 25% content in the Packaging, IVL would be able to deliver them. IVL is the largest PET company in the world. So all the brand owners are talking to us on whether we understand the importance. They're wanting to keep the PET as a main packaging choice. We also see more plastic packaging diverting towards PET packaging. So that is good news for us. We just have to ensure that we can deliver 25% recycling content.

So by 2023, about 60% of our PET would have -- is there a slide on that? I think there is a slide on that. 34. Okay, so this one shows you the Integrated PET. This is a picture for 2023. This shows you our MEG, our PTA, our paraxylene. As you can see, most of our paraxylene and MEG is procured from outside. In the bottom left, we have now put 1 million tons of flakes. So of the 7.2 million tons of polymer that we will make, 1 million tons of that would have recycle content. That means, on the bottom right -- I can't see it exactly -- 3.2 million tons of PET would have 25% content. And 2.9 million tons of PET would still be virgin PET. As you know, there are going to be certain markets like Thailand, for instance; or India, for instance; these markets do not allow bottle-to-bottle recycling. So as those legislations take place, as FDA approval is gained for the bottle-to-bottle recycling, we will keep increasing our recycling footprint. But our first target is to go to 1 million tons of flakes, which will give us 3.2 million tons of recycled PET.

The recycling is in all 3 forms: chemical recycling, mechanical recycling. From the mechanical recycling, there will be 2 types of end product: one will be 100% palette of recycled content, and one will be a palette with 25% recycled palette. We have all these technologies already. And therefore, we have to just grow these technologies. The challenge in recycling in the circular economy is going to be the collection of the waste. But we believe, and after speaking to many of our stakeholders, we believe that the deposit scheme will become much more viable globally. And with the deposit scheme, the availability of good clean bottles would drive the total collection of PET bottles from currently 60% to probably 80%, 85%. So as the collection rate of bottles improve and clean bottles are available, the cost to recycle will also go down. So it seems to be something that's going in the right direction. It is in the direction that IVL is. It does not disrupt anything at the IVL front. Actually, it helps IVL gain more recognition and improve its profitability being, I would say, probably the most involved company in recycled or recycled plastics or recycled PET.

So with that, let me now come to some closing slides. I won't go through each and every slide, but let me go to Slide 31. This is based on our business plan. These business plans are based on sensitivity. We are not taking the entire profitability that we believe is -- we're not taking the entire potential. We're sensitizing that. And based on that, we'll get a certain amount of operating cash flow against that $5 billion have been committed CapEx. And that still leaves a room of $2.5 billion for future cash flows -- future CapExes. The model is that this is based on a net debt equity of 0.8x.

Let's go to the last slide, Slide 50. Sorry I'm rushing all of you, but I'll -- we'll give you this whole deck. There's lots of information in here, and we can help you go through that information at a later stage, but I value your time and we still have the quarter 2 results to go through.

Next one. Okay. So this one is not that complicated. The left 2 bars represent our current production, 10.4 million tons in 5 segments as well in 3 geographies. And against that, we got EBITDA of $1.4 billion last year. That EBITDA is growing, like I mentioned, at one point, to close to 85% of our goal based on the $5 billion investment. The $5 billion of investment on the right -- most right-hand shows you the production growing from 10 million to 18 million, in 3 geographies and -- actually 5 verticals and 3 geographies. I can't see the 5 verticals, somehow, but -- maybe we'll clear that up when we give you this slide.

Now what you will see on the center right chart that the individual core EBITDA for each segment is, only for the PET is steady, but for the others are lower than what we achieved in 2018. But the combined impact of the core EBITDA on IVL goes back to where we were in 2018. So 2019 is a dip. And then year-on-year, it improves with the geographic mix, with the product mix, and goes very near to what it was at the end of last year -- for the year 2018. And based on that and the production, our core EBITDA would get to 85% of goal of $3 billion. The remaining 15% of the goal, for that we have another $2-plus billion of CapEx in hand. Plus depending on the margin evolvement and production evolvement, we will see where we go. But we're pretty close to achieving our goal. So today, this is something after Spindletop, we have a clear direction where we're going. We know that we've a goal in reach. We're on the right track. So that makes it very exciting for the management. And each of our businesses has the necessities portfolio in it. 90% of the businesses cater to daily necessities and that gives us a visibility of earnings.

So let me stop here. Based on the Q&A, we may need to go through other slides. We have a lot of data in there. Like I said, it's 50 slides, so we'll share that with you. So let's go through the quarter 2 presentation. Thank you.

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [5]

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Well, thank you, Mr. Lohia. Let me walk you through the second quarter financial results. You can display. Next slide. Yes, go ahead.

So second quarter achieved a revenue of USD $2.9 billion, core EBITDA margin was 12%. We achieved a core EBITDA of $361 million. Actually, this would have been higher by $33 million, but we had the impact of 1 month of glycol extended shutdown, EO-EG. And as Mr. Lohia mentioned, we had the specialty polymer plant in Auriga shutdown, and one of the plant in India got starved of PTA because the supplier had some issues. So that resulted in $361 million core EBITDA. Second quarter core EPS is about THB 0.85. I think the operating cash flow is critical. As Mr. Lohia was mentioning, a strong operating cash flow of $385 million in excess of core EBITDA, so you might -- guys must be thinking, the reported EBITDA was lower by $90 million, so how this cash could generated? All the inventory gain losses are actually noncash because they released the working capital substantially. And that's what translates. In LTM basis, our net operating cash flow is $1.17 billion. And of course, the better working capital management also translated into operating cash flow.

Next slide. So if you see second quarter, the total production of 3.1 million tons, growth of 24% year-on-year and 6% quarter-on-quarter, with contribution from newly acquired assets in 2018, we consolidated the PET business in India, consolidation of PET in Indonesia and high operating rates. Though production volume offset by unplanned shutdown in U.S. specialty polymer for 70 days and MicroPet plant in India for 60 days due to shortage of PTA, leading to a volume loss of 75,000 tons. An unplanned shutdown, which got extended up to 2nd May for glycol business or the Integrated Oxide business for 32 days. Core EBITDA of $361 million, 19% quarter-on-quarter increase, as I said, impacted by $33 million because of those incidents. However, in spite of current volatile chemical sector environment, our Integrated PET fiber and packaging sector continues its stronger performance due to consistent strong demand.

And Mr. Lohia covered about the recyclability, the single-use plastic doesn't affect, actually PET is substituting some other applications, and we're investing in recycling. However, the lower feedstock of PET, MEG and IPA has also given a strong Integrated PET margin. The net debt to equity is 0.94x. Now look at this slide, which gives you the breakup. The chart is basically the snapshot of what I called earlier, our core ROCE was 12% last quarter. Second quarter '18, it was 20%. If you remember, in second quarter '18, there was a spike in the PET margin because of the 2 major players got disrupted: one was M&G, and another was JBF. So that created a very strong margin, and now it is getting normalized.

So core EBITDA per ton, as you can see, $115 versus $153 in second quarter. But if you take LTM basis, $119 versus $132. Both these were impacted due to account of extended shutdown as I mentioned in IVOG and unplanned shutdown in Auriga and MicroPet. So our business continues its strong performance in its core business of Integrated PET, Fiber and Packaging, which forms 90% of the production of IVL as a whole. These results reflects the fundamental strength of the business and ability to withstand cyclability. I think the important thing is that trade wars are not affecting us because we are regionally -- we produce regionally, we serve regionally, we don't export much. So actually, in some of the cases, we are beneficiary because of the restriction.

This slide tells you, actually, the difference between core EBITDA and reported EBITDA. As you can see in the first half of '19, resulted into 97% cash conversion of the EBITDA, while our average cash conversion ratio for the last 2 years is 79%, and that shows the strong cash flow. As our earning enhanced in line with our portfolio augmentation process business segments, we were able to generate healthy corresponding cash flows. On LTM basis, as I said, our cash flow was about $1.17 billion. This is a snapshot of our financial situation, the debt equity, because we invested heavily in the acquisitions, stands at 0.9x, which is well below the financial covenants and our internal threshold of 1.5x. So you see that LTM basis, we invested $2.3 billion, which was basically in Avgol acquisition, M&G Fibras, Invista Custom Polymer and this also includes $357 million paid for Corpus Christi as equity contribution in the 3-party joint venture, which is expected to start generating cash in 2021 -- beginning of 2021 or fourth quarter of 2020. So this is 1/3-1/3 JV, as you know, and most cost-competitive plant in United States with a integrated PET, PTA and MEG next door. So these acquisitions are highly cash generative and will further boost our cash flows and help reduce debt to lower level. As you know, our credit rating stands at AA minus.

If you look at the next slide, this gives you a snapshot by segment, region and mix. Here, just for caution, Egypt, we have reclassified from EMEA to Asia. So our core business of Integrated PET, Fiber and Packaging, which constitutes 90%, as you can see on the left bar of IVL's business performing in line with expectation. 48%, $667 million on LTM second quarter '19 comes from United States, which represents a very well-disciplined market. While EMEA, you can see $289 million versus $400 million, so what the heck happened here? And that's bode because of IPA. And I will cover that IPA, today, the profitability is very poor. But as the businesses are getting normalized, I think we'll see this coming -- IPA recovering back.

Same way, you can see, HVA from $538 million to $443 million. That's, again, impacted by weak IPA margin. However, one of the interesting things which has happened in the industry of IPA that one of the large producer of IPA has recently announced reduction of IPA production due to very poor margin. This is a much consolidated business. So he announced a production cut. This can result to the improved IPA margin in future due to lower supply as well as demand from new application comes in. So IPA is one of the big factor which has influenced our profitability.

If you look at Integrated PET, this segment, which is the cash cow is 78% of overall production and contributed to 73% of core EBITDA. Higher volume, consolidation of PET business in India, consolidation of PET in Indonesia. And as you know, the PTA margins are improving. First quarter of this year was $125. Second quarter was $183. And 2018, last year, is $149. As the capacity utilization and the concentration of the industry in China increases, we're seeing some good tailwinds in PTA margins. The higher volume. So this also we talked to you about resetting the western market contracts. So that is also getting a benefit because of that. The volume growth in this 300 kt came from startup of PET second line in Egypt, higher production in AlphaPet post debottlenecking, consolidation of one of the recycling plants. So earning from this segment could have been higher, actually, by more than $5 million if we did not have this unplanned shutdown in MicroPet due to nonavailability of PTA.

Going forward, one of the questions which you may have, expected increase of PTA and PET capacities are likely to be absorbed because the strong demand growth remains. And as you know, the China's ban on waste plastics, which is started, which created a strong demand. So we continue to see better demand for our products. The segment will also benefit from our brownfield expansions, like in Thailand. We're debottlenecking in rail; in Mexico, we're doubling the recycling capacity and further debottlenecking of Rotterdam PTA plants. And as you know, Corpus Christi, the big Project of PET which will start throwing cash in the fourth quarter of '20 or first quarter of '21.

This slide, we have a split this time, tsunami x2. So just to show you the left side is a paraxylene spread. And you can see the paraxylene spreads have started coming down rapidly. And it is just beginning because Hengli has just started the production. The imports in China just reduced by 1.5 million tons, and you will see sudden drop in the PX margin. MEG margins have suddenly disappeared because cash cost of naphtha-based MEG, they are not able to recover the cost because of the olefins' margins going down. Now what does it mean for us? On the right-hand side, you see the PTA spreads, as I just mentioned to you. PTA spreads have started improving after historical low for so many years, as investments were slowed down.

And you see the transfer into the integrated PET spreads. The yellow line indicates the industry integrated PET-PTA spread. The blue line cause basically the premium which we enjoy. And why do we enjoy the premium? Because of procurement leverage, we sell in the domestic markets, like in Thailand. You sell at a better pricing, Indonesia, India. So all these premiums, Japan because from China, there is an antidumping duty in Japan. So Japan is a very important market. So this gap keeps enhancing because of our domestic presence.

So that gives you some idea of where the industry is heading. We're still going to see a lot of paraxylene capacities coming in. And we're in unique position being a large paraxylene buyer. The other important segment, just the fibers. The segment accounts for 12% of production and contributed to 16% of our core EBITDA. Production volume in this segment increased by 22% year-on-year business and 7% on quarter-on-quarter. The operating rate was nearly 90%. The core EBITDA in this fiber segment increased to $59 million, but was lower 14% on quarter-on-quarter mainly due to difficult market conditions. And Mr. Lohia mentioned about the impact of automotive slowdown, you must have seen a lot of companies reporting about the automotive slowdown, and the -- so that has impacted this one of the HVA businesses which we had.

During Q2, fiber business integrated its 16 units. In fiber, we have mobility, hygiene and lifestyle. So we rolled out Mobility Group with over $1 billion in revenue, which basically consists of tire cord. IVL is one of the largest producer of tire cord offering from viscose, nylon, polyester, interior and airbag customers. Mobility vertical year-on-year volumes was higher by 15%, and EBITDA was higher by 40%. The hygiene business is -- basically which goes from femcare, and we have 50% in the premium diaper market secure as IVL has already positioned the local supplies, and we expect to continue our growth plans, as you saw from Mr. Lohia's presentation.

The lifestyle business, which is apparel business, is to improve its quality of earning through diversified product offering, including fast growing recycled fiber for lifestyle application. While the business continues to grow with marginal expansion with bi-component line, the new bi-component line in U.S. in 2020, and as you might have seen in MD&A, that JV with Huvis of Korea in low-melt fiber will also track for commissioning in 2020. So fiber is, again, a strong business.

Packaging is a lovely business -- boutique business, but here, we know we compete with our customers. We want to be very careful. We cannot globally expand this. This is like making preformed bottles and closures. So we go in the developing world where the growth rate of PET is in multiples. This segment accounts for 2% of our production and 5% of our core EBITDA. This segment earned EBITDA of $19 million, an increase of, as you can see, 43% year-on-year, and there is no margin enhancement or cyclity, this is a margin conversion -- straight conversion business. This all comes from volumes. An increase of 15% on quarter-on-quarter basis due to higher volume. EBITDA margin for this high-growth segment remains robust, 20%. Seen from a short term horizon, the increase in volume supported increase in demand due to seasonal summer demand, resulting in higher utilization rate. And also as you know, we acquired an asset in Egypt, which is basically Medco.

On the PET, as you know, it's 100% recyclable, low-cost and light-weight material. Nothing to talk about it. Mr. Lohia talked a lot about recycling. I think PET outstands as compared to other polymers in the single-use plastics. And as I mentioned, our Packaging business is primarily located in fast-developing countries like Nigeria, Philippines, Ghana, Thailand, where we give unique solutions to our customers. The next is that's where we got beaten up, Integrated Oxides and Derivatives, but I want to highlight here that our Integrated Oxide business as it stands today is lot purified -- 50% is purified EO business and 50% is glycol business. We got affected in the second quarter for 1 month. As you know, the plant started only on 2nd May, so this $26 million, which you're seeing would have been higher by $16 million if that extended shutdown would not have happened, so it would have been $42 million.

So Integrated Olefins segment is now renamed as Integrated Oxide. This accounts for 3% of total production and 7% of total core EBITDA. The segment earned a core EBITDA of $26 million, as I mentioned, a decline of 55%, an increase of -- on the quarter-on-quarter basis. EBITDA margin for this segment was staggering 47% because we benefited from cheaper ethylene as we're on the spot and which we're buying. As I mentioned, in my first presentation, the portfolio of the announcement of Huntsman acquisition will transform this segment significantly with incremental volumes and provides ability to enhance the portfolio with high value added, high-margin downstream ethoxylates, ethanolamines and all that and propylene oxide.

This is important to understand what's happening to the MEG. Look at 2018, the green bar shows the Asian MEG integrated spread on 0.6 of naphtha, it's $250, which is like $400 of per ton of ethylene. And you know the polyolefins are also gone down. But the blue line shows the U.S. integrated margins over ethane, so you'll see a cost-competitive advantage, and which primarily becomes because of the cheap ethylene in America. So this continues to remain in the business and I think glycol, as you can see, there's a slight going up, the line is trending because people are cutting production particularly those who are making naphtha-based production. So we're seeing some actions in Northeast Asia of cutting the production.

Well, this is the specialty chemical business which has 3: NDC, IPA and specialty polymer. This is there where we got the hit. This contributes to 1% of core EBITDA. Here, we had a very extended shutdown because of some HTM issues and the failure, which happens sometimes. And the production was only 156,000, but we acquired the Invista Germany and the start-up of IPA facility in U.S.A. As I mentioned, if this incident would not happen, the impact was $16 million. So this would have been $19 million, but it is still far below second quarter '18, and that's because of IPA.

The IPA margins remains very weak in this quarter as supplies exceeded demand. IPA made a lot of money a year back, as you remember, in excess of $200 million. So when the prices became high, more conversion happened and now you're passing through this weak time. However, one of the major IPA producer, as I said, announced the production cut. The specialty PET continues to contribute positively to the segment earning. Contribute from this segment was affected in excess of $15 million due to the shutdown. And as we showed you in Huntsman, we are going to add oxyfuel into this category and -- which is the specialty chemical, which will reinforce this sector. So this sector will become very interesting.

So what do we summarize here? I think the question in today's volatile world, what we're heading? The strength in our core business of Integrated PET, Fiber and Packaging are reflecting desired performance and is expected to remain on track for the remaining part of 2019 with respect to volume growth, higher operating rates and commensurate EBITDA contribution. So we are seeing still a strong demand in spite of very difficult market conditions, trade conditions. The low feedstock price for paraxylene has just begun. And MEG is shifting the chain margins towards PTA and PET, as you saw in the slide, and expected to be the main driver for strong performance of Integrated PET. So we will renegotiate our PX and MEG contracts going forward in the next year, so that will get translated into those benefits.

In specialty chemical business, as you saw, IPA is still we're considering as weak, but by end of this year, hopefully, are expected to recover partially. Our core EBITDA guidance, which we revised for 2019, is, of course, will be impacted because of the shortfall in the first half of 2019, but second half of '19, we expect to remain on the line. So hopefully, this covers the presentation. And now we can take your interesting questions.

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Questions and Answers

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Unidentified Analyst, [1]

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Can I ask a few questions on the acquisitions? First one is, what is -- when is the closing date for the transaction? And the second question is, what would be the interest costs for the USD 1.5 million loan? And the third question is, how many years would you go for the depreciation for a newly acquired asset?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [2]

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The closing date is expected to be in the fourth quarter of this year, so there's regulatory approvals, which is the antitrust approvals as well as the IT readiness. So that's anywhere between 3 to 5 months, I would say. The interest cost is -- it's going to be a U.S. dollar loan, LIBOR plus margin. I don't think I can give you the exact rate, but it's going to be pretty competitive and within our average finance cost, which you've seen. So we got a commitment letter from Thai relationship bank, but it's going to be a U.S. dollar loan. And depreciation is going to be our -- sorry, depreciation is going to be around 20 years straight line. But I think you should understand this asset is in U.S., so we are able to -- we are eligible for accelerated depreciation. It's going to be an asset transaction, so we get accelerated depreciation. So for tax purposes, it will be depreciated. Most of it will be depreciated 100%. Some of it is intangible, which gets depreciated over 15 years. So for the first few years, you don't pay any tax.

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Unidentified Analyst, [3]

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No tax for the acquired asset for the first few years?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [4]

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That's right.

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Unidentified Analyst, [5]

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Okay. So we can assume the income contributed from these Huntsman's assets from next year onwards, right, not for this year because the transaction could close like this fourth quarter?

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [6]

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Absolutely.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [7]

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Just to expand -- Sanjay, there will be allocation of the purchase price, right? So whatever is the machinery will be allocated based on 20 years, but we are getting the license also. So depend on the purchase allocation, the depreciation. And tax, because we're going to capitalize IVOL also and this new acquisition, which we get accelerated depreciation, so there's no tax burden in U.S. basically.

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Unidentified Analyst, [8]

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Okay. Congratulations on the deal. And I actually have 2 questions for Aloke. First is on capital structure of the company. I mean given that you pretty much used up your short-term ability to fund this transaction, and the world is probably going into the slowdown period and you probably will have more opportunities coming to you in the near future for more acquisitions, how would you think about financing in case that there are more opportunities in the short-term or in the next 2 years? And whether the warrants that you issue something like what you issued 4 or 5 years ago will be something that you would consider? Second question will be on the -- it's not discrepancy, but I think it's the difference in period of information disclosure on EBITDA that Huntsman give versus what you gave us, which is 2040 -- 2018 and the last 12 months. My question is, what should we use going forward? Is the last 12-month number from Huntsman better represent, what we should expect going forward in the next 12 months or so? And what explains the fluctuation in the last 2 quarters that they showed?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [9]

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Yes. So I'll ask D.K. to answer your last question. But on the capital structure, so on this slide earlier, we have taken all our investments and all the planned investments to date. So as you can see on a net -- I think the right-hand slide shows you that our net debt equity end of 2020 is going to be 1.12x. So if you remember, what we've always said is our covenants are set at 2x net debt equity. Our internal Board guideline is, in the trough earnings, we should be looking at 1.5x net debt equity. And across the period, we should be looking at 1x net debt equity. This net debt equity is very much bespoke for IVL businesses. The main thing that we need to agree is that, is IVL's businesses 90% close to consumer necessities? So does the IVL businesses face any demand disruptions? We feel that 10% of our businesses have the macro demand implications, but 90% of our businesses are consumer necessities. And therefore, we do not see much impact on the demand side.

Secondly, being a geographic business in 3 continents, we are not impacted by any of the trade war scenarios.

Thirdly, our largest segment now is in North America. And North America, at the moment, continues to be the most profitable area for IVL. So based on all those factors, our peak net debt equity is in 2020 after the Spindletop -- after Huntsman, so we're not concerned with this number. Very categorically, we are not envisaging any warrants or any equity dilution. These numbers, I believe, are after perpetual. So we have a existing perpetual, so these numbers already take care of the perpetual. So no equity dilution, no warrants, we think a strong balance sheet. We don't think the global macro conditions impact IVL's businesses to a large extent.

And with regards to future M&As, like we said, when we made some large transactions in 2016, we said for the next 18 months we will be quiet. So I think we have just made 1 large acquisition, so we would digest this one over '19 and '20. So we have a $5 billion investment budget. A lot of that -- $1 billion of that in recycling. So we'll be concentrating on M&As revolving around the recycling space, not on the -- so we won't be concentrating on M&A. We'll be concentrating on improving the earnings during this period. I won't rule out if a very exciting one comes along, but we're not actively looking at any. So the M&A are mostly going to be on the recycling space. And for which these ratios already assume $1 billion of M&A expenses in the recycling space. And as you can see, then the ratios drop down quite steeply, quite strongly.

So the main thing is now IVL is now very comfortable in where it stands. We have all our businesses interlinked in revenue, correlated and a good balance of HVA and necessities, a good balance of geographic mix. And I think on top of it, we have maybe the keenest management. So I think the management has proven itself that we can integrate with acquisitions. We have had several trips to this site to this business, and we are very comfortable with the management that is coming with this business. Do you want to talk about the second question?

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [10]

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I think your second question was around the prospects of this Q1, Q2 earning, right? Naturally, the glycol -- they make glycol and glycol was comparatively lower as you saw. But Q2 results are much improved. And by the time we expect and, particularly, if you go to LyondellBasell's website and you see the presentation, the oxyfuel is doing pretty good. And oxyfuel, as the MTBE production -- so if you annualize the Q2, then we're in track or probably meeting the 2018 or even more because 2018 had a benefit of high glycol margin, if you remember. We, ourselves, met $230 million EBITDA. And now you saw that glycol has touched its bottom, but -- and the crack margins -- in ethylene, crack margins were only $0.06 a pound. Today, the crack margins have already improved to $0.15 a pound as a spot ethylene is $0.18. So when you have a cracker of 250,000 tons, that crack margin is also helping. So Q2 is very indicative of what we are 2018. And of course, the way Huntsman reports EBITDA and we report, there is obviously methodology difference because of IFRS, different accounting. So we feel very positive about the business here.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [11]

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I don't know, if you want to say IFRS, D.K.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [12]

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From our...

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [13]

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Yes, so the way management looks at its EBITDA and the way Huntsman looks at the EBITDA is different, but we are consistently following our Integrated Oxides methodology.(inaudible).

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Unidentified Company Representative, [14]

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The mic there, please. Give him the mic.

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Unidentified Analyst, [15]

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See I don't need mic-- okay. Congratulations on things like wonderful acquisition as we learn more and more about it. And I must say that's -- I have learned a lot of new words today, EO, PO and whatnot, which I'm not very familiar with. The only word I could understand was IPA, which stands for India Pale Ale, which is a beer company. And IVL, I understand. And IPL, I understand. Congratulations (inaudible). So although this is an analyst meeting and I'm sure (inaudible) they will be asking a lot of technical questions about different things you have presented, right? And then it is amazing you have many accounting background, but you know so much about chemical industry and we haven't learned in last 15 years despite in this industry. (inaudible). So I'll just focus my question mainly on the investors' perspective. As I understand, your market cap was $7 billion, and you were generating an EBITDA last year about $1.5 billion -- around $1.4 billion. And you have made statements around a month ago that, irrespective of what the second quarter results are, you will be able at least achieve that $1.5 billion of EBITDA today -- this year. That's a statement still holds good?

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

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Is that your only question?

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Unidentified Analyst, [17]

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No. That's the first of many. And then you have made somewhere around $800 million last year in net profits. Is that correct?

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

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Net debt?

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Unidentified Analyst, [19]

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Yes. So $7 billion in the market cap, you are buying something that's $2 billion. Doing simple maths irrespective of how you will fund that and whether it's an expansion program or not. Can you exponentially look at (inaudible) debt that you will regenerate? Somewhere around 11% net profit on $2 billion next year? So we have $700 million to $800 million this year plus $200 million to $300 million. Is that achievable?

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

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Okay. So the EPS that slide on inventory gain loss, if you adjust inventory gain loss, then we are talking about the similar ratios. The EPS is based on reported earnings. And last year, can we go to that slide, please. This one, the inventory gain loss. Yes. Correct. So as you can see over here in '18, practically 3 quarters out of 4, there was an inventory gain. So the EPS of last year was positively impacted by inventory gains, reported EPS.

And this year for both the quarters, we have had huge inventory losses, which negatively impacts our EPS. So on a core EPS basis, directionally, we are on track. Okay. So we have published our new EBITDA guidance in today's MD&A. Basically, our second half EBITDA is on track of our guidance. On the first half, we have a gap against our guidance. We are likely not to achieve the guidance of $1.5 billion, mostly due to the first half gap. The first half gap was substantially because of the unplanned shutdowns and the very weak IPA margins. So isophthalic acid, not IPL. Isophthalic acid had very, very weak margins. And we have also said that, I believe in the MD&A, for the next 12 to 18 months, we expect to continue to see low EBIT -- low EBITDAs from the IPA business. We don't expect to have unplanned shutdowns. So we hope to recover some of the lost EBITDA in the second half. But if you don't believe, we'll be able to make up for the entire lost EBITDA in the first half. So that's the status as of today.

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Unidentified Analyst, [21]

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Thank you very much for your presentation and congratulations for your investment, a bit late, indeed. Few questions from me. Number one is, from this asset acquisition, did you really get a new cracker or just allocated capacities from Huntsman? And after this acquisition, what is your net long ethylene exposure? And the second question is the -- that EG in the U.S., spread really followed MEG? And the chart that you mentioned on the last one, is it really close or the same? And am I understanding correctly, out of this asset acquisition, the end product of the oxide derivative is basically EG? And the fourth one is in the presentation handout, you mentioned about the 3 years EBITDA of this asset, which has -- have been growing up. What really drive that EBITDA growth? Is it really ethane price that has been dropping in the U.S. or something else?

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [22]

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Okay. So first question is, does it have cracker? Yes, it has a full cracker of 250,000, complete cracker. Ethylene, if we can go to the slide where we have ethylene purchases, the balance 1.1 million tons, right? We'll be still a net buyer because, as you know, we'll be making about totally 1.1 million tons of -- if you exclude PO here, basically, you're making 1.15, which requires about 850,000. So we'll be still a buyer. And actually, we have a surplus 100,000-ton ethylene in IVOL, the Lake Charles plant, which will be swapped here. So that will be -- but we'll still be a net buyer for ...

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Unidentified Analyst, [23]

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If you say it's 100,000 tons of net buyers, so thereby 200,000 tons. We have a surplus of 100,000. So combined, a net buyer of 100,000.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [24]

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Yes. The second question. So that clarifies you as far as configuration is concerned. If you see -- I think remaining on this slide, you assess it mostly it is glycol, right? No, this is not true. If you can go to the next slide. So (inaudible) glycol is only -- that slide which gives the distribution. So you can see that the glycol is only 42% glycol, okay? We are making purified EO 26% on a consolidated basis. And this purified EO basis, basically, is on a fixed margin. And these margins are improving because you cannot transport purified EO and there's much -- not much capacity and 32% surfactants.

Now one of the model which this company has been following is selling through the traders. And so they -- we believe that they have not been able to unlock the full value, which they should be able to. So which we'll be able to do it. And then the specialty surfactant project, which we are planning over next 2, 3 years as you can see that 3.5x margin. So basically, not making too much glycol but converting to more EO. And there is a extra capacity of EO already for and we are not in merchant market business, 100,000 -- [100 million pounds], 45,000 tons. So we will basically change the product mix more, less to the glycol.

We buy nearly 700,000 tons glycol in Americas. So we are just a net buyer still after that. The third question was glycol's margin. I think this is very important that there are 4 plants, which came in America or coming. Lotte invested in one large integrated glycol plant (inaudible) now is going to start MEGlobal in the fourth quarter.

Formosa is building another plant in Sasol. So if you see this green line, this is the world's nearly 40% of the glycol is made -- 35% to 40% is made from naphtha-based crackers like Nan Ya and -- or even all this. So they are not making money in the green because it has gone so below, the integrated MEG margin over naphtha has dropped to $240 per ton, which has never happened in the history of -- today glycol is $530. So now you see green coming up a little bit because people are saying, no point in running if you can't recover. But the advantage of U.S. ethane, and this is based on the ethylene purchase, not on the basis of ethane.

Coming to your ethane question, ethane is actually, in United States, is based on gas price. In United States, gas today is $2.12. If I want to buy forward gas today for 2020, I can buy at $2.40. So the frac margin, which is called as a gap between ethane and this is nearly at the fuel value. So there's a lot of ethane capacity. And actually, butane, you will be surprised that butane was the cheapest feedstock 2 months back. So ethane and butane both are cheap. So this company did not benefit much historically because cracker capacity is only 250,000 tons. And the ethane prices recently came down in the second quarter also. And they were buying ethylene more contract basis, not on a spot basis. So all those optimizations will be done.

We believe if you see glycol, how it has dropped in '18, how high it was in '18 and how it dropped to '19? So this additional capacity as it gets consumed in the market, and there is a rationalization -- people rationalize the capacity, then you will see, again, going to the replacement level. Look at like that a glycol plant, today, if you bring 1 million ton cracker or 1.5 million ton cracker cost you $3.5 billion. And a glycol plant integrated cost is $6 billion. And people have invested so much. Today, they are not making money, but that's not going to continue. I mean the investments are slowing down, and then you will have a spike coming back in the glycol. So glycol is the worst -- never seen such poor margins. But this asset has an entire portfolio. You can swing.

So our focus will be EO derivatives, EO surfactants. That is where you make the money. And -- so you will see a growth in EBITDA. And if you see 4 years surfactant EBITDA, they have been showing growth. And the PO/MTBE business will, of course, MTBE will depend on the gasoline values and the gas price. So there also as I just mentioned, second quarter, and I will strongly urge you to go to LyondellBasell's presentation, which talks about strong earning of oxyfuel. So because they are also one of the producers in -- yes, I hope I answered your all question, Komsun, or something left?

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Unidentified Analyst, [25]

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Around 3 years EBITDA that you provided, it has been increasing every year. What really drive that? And for 2019, I mean the 3 years that you've provided? And the last one is about USD 363 million, what really drive that, I mean the catalyst for drive? Is that ethane price that isn't coming down?

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [26]

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No, no, no. So $363 million, which we had -- is the 2018 EBITDA, correct? If you split that, that is predominantly surfactants, ethanolamines. It's not due to ethylene -- ethane at all because the ethane they buy very small quantity, and they also by FCCU in the feedstock. So it's more by -- and they are doing most of them are margin based. So there is no improvement in 4 years, a significant improvement. If there was ethane, then the improvement in EBITDA will be significant. So it is mostly glycol, yes, helped in 2018, which has helped it, but 2019 as just now she asked about the 2 quarters why they were poor because of the glycol, but that is getting compensated by very strong oxyfuel in the second quarter. And oxyfuel is going to remain strong in America because, as I said, this is made from butane and methanol. And methanol, as you know, is made from natural gas, most of the methanol in America. So you are having a cost structure of methanol and isobutane and making a fuel oil. So that's why it is a very cost-competitive technology. And you will see that as encouraging going forward.

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

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Let me emphasize on the MEG question. So number one, this is not predominantly a MEG business. It is predominantly a surfactants business -- downstream business. Number two, of the MEG that they make, 150 kiloton is stored at a fixed adder. And that is a very long-term contract. So that 150 kilotons of product, is that correct?

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [28]

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Yes.

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

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150 kiloton of product is at a fixed adder. And I think the remaining useful life of that adder is 13 years or 12 or 13 years. So that is number two. Number three, for IVL, we are the world's largest buyer of MEG. So we would like to have a larger hedge with our captive production of MEG. So we're not looking at the short term, we're not looking for the year or 2. But over the long term, we'll be happy to have this hedge of the remaining ethylene. So our total ethylene production would be about 600,000 tons between the 2 sites. Of the 600,000, 150,000 is allocated, 450,000 goes to IVL. IVL is in America as a buyer of -- I think a buyer of 700,000 tons. So this only meets about 70% of our captive needs. So from an integration point of view, from a long-term point of view, it's very good. And the fourth point is, this makes this site more competitive when you have a large ethylene oxide business, which caters to diverse products. It allows you to have a better cost structure. So we have, let's say, 90% of -- 80% of our ethylene produced captively, we produce all our ethylene oxide, we convert 40% into EG, 60% into more value-added products. So it's quite a good mix of products in my mind.

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Deepak Rasiklal Parikh, Indorama Ventures Public Company Limited - Chief Strategy Officer [30]

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If I had one addition to the derivatives part. So it's ethylene oxide, but converted into derivatives and as Mr. D.K. mentioned, it has much higher value than MEG. And the barrier to entry is very high. There are not too many companies in the world who has know-how to make the right derivatives of ethylene oxide to go to the end-use application. It's highly formulated and fairly technical in terms of how it goes into the market and application. Many of them go into the skincare, skin lotion. You can't just make the product just anybody can do that. So -- and as mentioned earlier, there are about good 400-plus patent portfolio that comes in. So this is one of the key reasons why we're excited about it because it's EBITDA growth driven because of the proprietary technology and the know-how that comes with it and the technical people that we're getting along with it. So it's a really much more differentiated in terms of our overall growth strategy of doubling the EBITDA that we're driving towards it. So besides the commodity and the low-cost raw material, but barrier to entry is extremely high in this type of business.

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Unidentified Analyst, [31]

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I have 3 questions. So first of all, on your guidance and impact to guidance, so when you say the guidance in second half is on track, how do you mean on track? So can you give us some number around it? And what might be your, I guess, pro forma guidance for 2020, given everything will be on track? My second question is on contracted margins for PET in 2020. How do you -- how do we see the margins coming through? Will there be more addition to margins? Or will there be compression because you have Corpus Christi coming as well as some of the Chinese PET plants must be coming through? And third question is maybe more housekeeping. What is your currency exposure? And how much is your cost in Thai baht?

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [32]

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We'll tell you the evolution of the EBITDA, which is on this last slide. So in the center left, that's our absolute EBITDA. We don't have the exact number out there, but you can see it's close to the 2018 number, that's for '19. And then you see the increase in 2020, quite a bit of that is coming from the Huntsman acquisition. So we don't have an exact number at the moment to guide you on. So it's quite indicative. But then you see Corpus Christi come in and then going forward, the less of the brownfield projects. So you had a list of the projects. There is one slide on the list of the projects that come in. We can further expand that in terms of timing, which can help you. On the spreads, we have been conservative. The spreads we are taking is based on 2017 and 2018 average spreads. I'm talking about Integrated EBITDA -- Integrated PET. 2017, 2018 average less 10%. So that's -- is that correct? So '17, '18 less 10% is the way we've built a model. Why don't you go to the slide on Integrated PET? What we may be benefiting is despite the lower spread and the 10% sensitivity, you see the 2023 number more or less at the same level as 2018. This is because of the product mix and the geographic mix. Corpus Christi plays a big part in this. Corpus Christi comes in '22, '23, fully. And as you know, our North America franchise gives us the best EBITDA in this. The '23 number also includes recycling and recycling -- I think we have a slide on the pricing on recycling. We'll go to that slide. So recycling or recycled product trades at a premium to virgin. So that also helps. So overall, the Integrated PET is getting the same EBITDA per ton, but not because that's how we are measuring it. But we are lowering it by '17, '18 average and lowering it by further 10%, but then the product mix and the geographic mix is helping.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [33]

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So the other question was on the PET margins, right? If you see in Asia -- but we don't see any impact coming because U.S. has a lot of antidumping duties around the world and Corpus Christi, we are expecting only fourth quarter, and so we don't see any impact. And historically, Asia margin has been very strong. So you can see only 2018 spike, which came -- which may not come, that's all. But you can see the stability of the margin. And we will certainly get benefited from paraxylene and MEG weakness, as you can see in the Integrated PTA-PET. Last question was on Thai baht.

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Sanjay Ahuja, Indorama Ventures Public Company Limited - CFO & Executive Director [34]

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So I think the question was on currency exposure and cost of Thai baht. So currency exposure in terms of working capital, we are mostly naturally -- natural hedged. But just to give you a flavor on -- at the end of Q2, we had around a $50 million unhedged position, which is very small in our operations. My main currency exposure comes in the long term when we fund our acquisition or subsidiaries where we have raised Thai baht bonds, and then we have funded it. So that's -- doesn't come into P&L, but it goes into translation losses, which is -- because of this Thai baht strengthening, we have been having translation losses. So equity has suffered there. We have actually reported in Q2 ForEx loss, that's specifically because we had been accumulating lot of profits in Nigeria. And we had to pay out some shareholder loans. So again because of that capital structure, we brought in some money and we suffered around $3 million ForEx loss, which is reported in the financials. Our cost of -- in Thai baht is around -- our total cost is around 3.67%, and with other financing charges comes to 4%. I'm talking about all currencies.

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Unidentified Analyst, [35]

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Yes, I have 3 questions. Let me take one step back on the presentation. Earlier, you mentioned about Huntsman asset that we acquired. I would like to know how? What is the life of the asset? How old is it? That is my first question. And second question is on the recycle business because we allocate one -- approximately 1/3 of the CapEx to be invested in the PET-PTA recycle business. And I wonder because out of the 25 million -- 28 million ton global capacity of PET, how big is the recycle capacity? That is my second question. And third question is regarding to the Slide 13 of the presentation of the game changer because you show us the products of the Huntsman asset. And lots of the application of these products linked to the global GDP. And if you can touch on the industry, I mean supply outlook of the key products?

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

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So the life of the assets, there's a continuous investment into the assets. What we did is, we hired a large international EPC company, KBR to go and do a study of the integrity of those assets. So there are no red flags as far as equipment or the life of the assets are concerned. But there's a continuous maintenance CapEx and not only maintenance CapEx, but also improvement CapExes that happen. In our DCF analysis in our budgets, we have taken all the CapExes that are required to keep these assets healthy. And as you know, in the U.S., EHS is a very big area to manage. So these assets are maintained in a very proper manner. So that is on the life of the assets.

The investment budget for -- okay, when you say 1/3, you mean of the remaining -- so $5 billion, $2 billion goes to Huntsman; $3 billion remaining, 1/3 of that, $1 billion goes to recycling. And that's a very profitable business to be in and a business that is much in demand today. So we feel very good about making this investment because as you know for IVL, 55% of our 2018 earnings came from Integrated PET. Going forward to 2023, we are expecting just a commodity or the virgin PET to become more like 20% of IVL. Another 20% of IVL would be recycled PET. And remaining 60% of IVL will be fibers, integrated oxides and specialty chemicals. So our total exposure to virgin PET would reduce by 2023 because of this investment that we are making on recycling. The current recycled content in PET is 9%. So the industry needs to move from 9% to 25% by 2025.

What was the fourth question?

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Deepak Rasiklal Parikh, Indorama Ventures Public Company Limited - Chief Strategy Officer [37]

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Application versus game changer.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [38]

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Okay. So you want to talk about that? Or maybe you want to talk about, Deepak?

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Deepak Rasiklal Parikh, Indorama Ventures Public Company Limited - Chief Strategy Officer [39]

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To share a perspective, when we say 90% of portfolio is tied with necessity. So even though, yes, you tie it -- many of those are tied with GDP. However, we'll think about it even if recession comes. You have to wash your clothes, you got to drive. So many of those are inelastic applications. And this is where we are getting into. The oxygen, it is -- D.K. described in detail, it's driving the vehicles. You may not buy new vehicle, but what you got, you got to drive. Same thing with LAB, which is one of the surfactant business we're having, is significantly going into the detergent market and also agriculture, food. As long as human, they are going to eat food. So [that] goes into herbicides and adjuvants that go into the spraying, some of the fertilizers and chemicals into the agriculture space. So those are -- what we really believe are inelastic and not tied with GDP. As long as human there, their consumption is going to happen. And that's a very strategic way that we got into some of these end-use markets. So hope this kind of gives you the idea why we call this as game changer in terms of overall strategic positioning.

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

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Ravi, you can go in the previous slide, where we had 90% mentioned. Yes, right. So you can see the end applications over here. So you also have personal care, you also have shampoos. So by and large, there may be an impact, but the impact would be very limited. It won't be like -- if there is a full blown global crisis, like in 2008, it won't have that bigger impact on IVL businesses as it would have on cyclicals. You have a question?

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Unidentified Analyst, [41]

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My question is related to the overall, let's say, the price -- the share price of any equity and over here, specifically IVL. And out of the discussions that we've had all afternoon that our end number of variables, which are affecting the price. As an investor, I'm told even the U.S.-China trade war is also impacting this price. I don't know if that's true. And that would be one of my questions. And then if it is, how is it correlating with the fact that IVL is -- all its sales are 90% domestic. So that U.S.-China trade war really doesn't, to my mind, impact IVL's performance. So that's my basic -- just wanted a little clarification on this aspect of the share pricing.

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

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So this is quite a subjective question, and I think the mood -- the investor's mood is not very buoyant at the moment. We are a PET-chem company in the eyes of the investors. Though we feel and we know that we are a unique PET-chem company, which is serving 90% necessities, which is unlike other PET-chem companies. But for the mass, he doesn't want to go into that much of understanding. For him, PET-chem is today a -- it's not a sexy business to be in. The geopolitics, the trade war is something that everybody is afraid of. And think that whether one admits it or not, it impacts every company. So that is a second thing. And generally, I think the EPS impact, the people are reading the bottom line, which is reported EPS. In 2018, we had a strong momentum from inventory gains, apart from the business. Our fundamentals on the business is the same. Even LTM basis, you see, we are making $1.4 billion of EBITDA, which was EBITDA of last year too. So as a core EBITDA, we are not suffering. What we are suffering is in the bottom line, the net profit. The net profit this year, first 6 months, we have $150 million of inventory losses -- $120 million -- and last year first half -- so this year, we have $120 million of inventory losses in the first half versus last year, we probably had $50-odd million of positive inventory gains. So $27 million positive last year -- $120 million -- the impact is $150 million on the company's EPS. So there are 2 impacts. One is related to warrant issues in '17 and '18. So that impacted our EPS per share -- EPS by about 20%. And secondly, this inventory gain/loss. So -- but this is a very subjective question how -- I don't want to say -- let me say the PET-chem. So the other PET-chem companies, which are cyclical. And in Thailand, we are the most unique PET-chem company. Not only in Thailand, probably in the world, we are the most unique PET-chem company serving necessities. But that gets lost when you hear of 9 out of 10 PET-chem companies losing money. Then you want to sell before you think.

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Unidentified Analyst, [43]

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So if I'm understanding your answer correctly, so the trade war is impacting the price. Your performance per se, I mean due to whatever cyclical and other changes, it's there, but the future and the projections are bright. So I mean this is supposed to be an analyst meet. I mean analysts are supposed to advise their investors that to find good opportunities. I find, the PE has come down from 20%, now it's below 9%. Am I right? Something like that? So I really don't understand, that part of it.

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

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Yes. I think the analysts are doing what they believe is correct. They are doing -- the analysts are doing exactly what you said. They understand the fundamentals. They are going on the structural basis. But then the investor, he has to buy the report and buy the analysis. So -- but don't worry about that. I think that's a short-term issue.

Yes, please. Do we have any other questions? Yes, go ahead, please.

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Unidentified Analyst, [45]

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I just need to follow up on PET. So I -- so on -- in 2020, so let's take an example where PX and MEG indeed comes off. But at the same time, the end product demand, I mean as we all know, is getting weaker. So is there any ability to retain the margin that you get in PET? And we have -- we are going into 2020 when there will be some PTA capacities coming through Hengli and all. So is there a concern that the Integrated PET margin compresses from where we are today? I just need to understand the dynamic here.

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

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I'm not sure where you got the data that the PET demand is slowing. Actually, everything we see is that our PET demand is increasing, and we see other polyolefins packaging converting to -- even glass converting to PET. So we see very steady growth in PET. The PET growth only gets impacted by weather patterns. So for instance, in Europe, the weather pattern in the first 6 months were not conducive to PET -- or to packaging too. So there was some impact of that. But in North America, the growth is good. In Asia, the growth is good. So there is no impact on PET demand because of the plastic issue. The cyclicity of our profitability comes from supply. It has too much of supply added like we saw in PTA between '12 and '17. That impacts our business. The PET itself has been quite a steady business over the last 10 years. And we don't see that much of new capacity coming on stream that will impact the PET margins. North America is a very large portion of our business. And in North America, there are -- it's not a fragmented market. It's a disciplined market. So those demands will continue to be there and profitable. We have added new regions like in Brazil, like in Egypt, like in India. So all these markets are high-growth markets and providing us better margins than in China, for instance. So on the PET, by itself, we don't see any issue with the margins, nor with the demand and nor with the margins.

On the PTA, we haven't had this $180 margins for a long time. So we feel uncomfortable with these margins today. But all the plants that we have seen that are under construction, they're not that many. Remember, the business of PTA caters to both fibers and PET. There's a 80-million ton market that it caters to, which is growing at 4% to 5%. So if it's growing at 4 million tons, it requires about 3 million ton plus of PTA. So if you have 3 million ton of PTA capacity coming on stream, it's -- it will just meet the new demand that gets created. So we don't feel threatened by the new PTA capacities that are coming in. We feel that the massacre of 2012 to 2017 was so severe on the industry that we don't see newcomers are going to come into this business. It will be the existing players who will expand. And since they are existing players, they'll be disciplined on how much they expand. And we are not -- for our PET business -- our Integrated PET business, we are not relying on the historical '18 margin. Like I said, we are taking '17, '18 for both PTA and PET and then further sensitizing it by another 10%. So I think we are being quite prudent in that sense. Obviously, our product mix is changing and that is helping us on the overall margin to remain where it is. So that was one of the slides that we showed you. So I'm not negative on our Integrated PET business. It's gone through a lot of pain in 2012 to 2017. I think it -- it's like IPA. IPA saw these spike margins of 2017. And then what happened? We set up extra plant, Taiwanese company set up an extra plant, a Korean company set up an extra plant, a Japanese company set up an extra plant. There's just too much of capacity built. And therefore, today, we are at 0 margin. This will -- over the next 12 to 18 months, this will normalize. It won't got to '17 levels, hopefully not. Because when it goes to those spike margins, then too much of capacity gets built. So that's what happened with PTA. PTA had fantastic margins in 2009, 2010. And that led to all these investments in 2012 to 2014. So I don't see history repeating in Integrated PET.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [47]

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I think the further important thing this graph, if you see the blue line, which indicates the PTA spread and the PET. So PTA spread has been very low, much below replacement level. And now still they are below the replacement level. So if you see Hengli and all what you talked about, Hengli is building up a plant, which will only start in third quarter next year. But they've made huge investment now, and the industry is consolidating. Actually, China domestic margin went as high as $240, China domestic margin because we don't sell in China. But this is what is the fluctuation. So as the industry consolidation is happening in China, Hengli, Rongsheng and all these have made huge investments in integrated refineries and all that, I think the market is -- has to be at replacement level. Even if it comes down, then it bounces back. So that's the way we look at it.

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

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Yes. So our view is that these integrated players, all the way to refinery, if they're not going to make adequate returns on PX and MEG, they will try to hold on to the margins in PTA and PET. And that's the area where we are active. What -- the top 3 players in China account for how much of their production?

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [49]

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56%.

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

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56.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [51]

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4 players.

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

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4 players.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [53]

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So it's a lot of concentration of the industry has taken place in China, huge concentration. Now the all old plants, nothing is completed to run. So you will see a lot of this -- benefit of this consolidation, which is very difficult in China, but that's what is happening. And one thing, remember, we have been struggling because in Europe, the PET is sold on import parity, right? Because the PTA margins were low, in Asia, we were compressing the margins in Europe. Now with the Asia integrated margin going up, import parity goes up. And as a result, it will stabilize even in Europe. So it has an impact all over the world. So we are not so worried about anything in the PET-PTA side.

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Robinder Singh, Indorama Ventures Public Company Limited - SVP [54]

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You are more than encouraged to ask more questions. If there are any, please don't hesitate. We're not limited for time. Any questions on the Huntsman acquisition, on the long-term strategy, please, avail of the opportunity to the best.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [55]

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Robinder, I think everybody is ready for a drink.

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Robinder Singh, Indorama Ventures Public Company Limited - SVP [56]

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You're absolutely right. So it's next door. While I go and try and see if they can open up some of these, but please join us in the immediate next room for cocktails, but also it's a good opportunity to mingle and ask more questions as you please. But thank you so much for attending and for your patience.

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Aloke Lohia, Indorama Ventures Public Company Limited - Vice Chairman & Group CEO [57]

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Thank you.

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Dilip Kumar Agarwal, Indorama Ventures Public Company Limited - Executive Director and CEO of Feedstock & PET Business [58]

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Thank you.