Indorama Ventures Public Company Limited (IVL) Earnings Call Transcript & Summary

Good day, and welcome to the IVL FY 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to D.K. Agarwal. Please go ahead, sir.

Good evening, everybody. This is Vikash Jalan. The results briefing is being recorded. The slides for today's presentation can be found on our website. I'd like to remind you, the participants, that the presentation includes some forward-looking statements, which are subject to risks and uncertainties and based on certain assumptions at this point in time. Participants and readers are therefore encouraged to refer to the disclaimer on Slide #2 of today's presentation. A replay of this call will be available on our website. We'll be covering 3 topics today. I would like to request that you reserve your questions to the end of the presentation. Now I'd like to invite Mr. D.K. Agarwal to take you through the presentation.

Yes. Good evening. I think this is the first analyst presentation on the conference call. So thanks for joining us. What are the 2019 key takeaways? As you can see, our volume grew by 18%, mainly driven by inorganic growth since consolidation and acquisition. The company had a very strong operating cash flow of $1.3 billion in '19 versus $1 billion in '18, which shows the cash flow visibility, given the lower working capital requirement because of lower prices and also due to better working capital management. And you know the reported EBITDA is only $930 million. So whatever inventory loss is a noncash item. However, as you can see, core EBITDA declined by 20%, $1.1 billion versus $1.4 billion in '18. As you know, 2018 witnessed some interruption in the supplies because of M&G, and we've had record margins. So there was a sharp decline in the industry-wide spreads, particularly in PET, paraxylene, MEG, IPA and Lifestyle fibers, which affected us in the core EBITDA. The transformative deal of Huntsman acquisition, leveraging on low-cost shell gas of $2 billion was completed in January 2020. We are in process of integrating those assets, and we are very excited about this acquisition. This actually diversified the product risk for IVL, not depending only on PET. The other important thing which is happening, as you know, the PET is the most preferred packaging material. However, as we are concentrating on recycling, the new investments are happening in our recycling assets. Now as we mentioned in the Capital Day, these recycling investments are going to yield about 12% to 15% ROCE on as we move forward and also protects in our PET business. So this is complementary to us and actually differentiating us against our other competitors. Next slide. This will be very important to understand what went well and what went wrong in 2019. As you could see, the volume grew, leveraging on our geographical footprint and product portfolio. Very strong operating cash flow, as you saw, $1.3 billion, and acquisition -- and the largest acquisition of IVL was completed. And we are in process of integration, and we think they will be able to unlock the synergy quicker than what we have mentioned, about $40 million. We also saw a $350 million Olympus cost transformation plan, which has been deeply calculated by 2023. A tracker will be done. And we will keep reporting you quarterly how the savings are coming against those $350 million. The dividend has been proposed at THB 1.225. This is subject to the Annual General Meeting approval based on the 30% of the net profit. TRIS has reaffirmed AA- rating after the acquisition of Huntsman because we did have a meeting with them. So based on the present diversity of the earning debt, they have reaffirmed AA- as a rating, which shows the balance sheet strength. We also refinanced perpetual debentures at 200 basis points lower coupon, which basically reduces our interest burden. And the establishment of IVL recycling group, which is working very hard to create this recycling assets globally and helping us to leverage the -- our virgin resin. What could have gone better? As I mentioned, the major bottleneck has been the industry spreads when we had '18 peak, and we have been telling you about the pyrazoline and MEG. So pyrazoline and MEG went down significantly as well as PET and IPA, where we made a lot of money in previous years. Because of the overcapacity, IPA tested lower margins, similarly in the Lifestyle fibers. The Lifestyle fibers because of the trade barrier actions, there was pre-buying before the trade barrier actions resulted in the -- particularly in the fourth quarter, a lot of unwinding of inventory and lower margins. The inventory losses of $200 million, which is a noncash item, as I mentioned, that operating cash flow is still higher than -- significantly higher than core EBITDA and $400 million higher than reported EBITDA, this inventory loss of $200 million, which has actually affected our reported EPS. We also lost some money, and a significant money, $148 million due to the turnaround, extended turnaround of our glycol plant. And we also, as you remember, we converted one of the PET line into IPA, and IPA wasn't contributing significantly to the bottom line, so we are now switching back as a swing line to avoid these losses. So if these losses would not have happened, our profitability would have better by $148 million. The Lake Charles cracker also got delayed January -- to January 2020. So we are expecting it to contribute $75 million to $80 million in 2019. Now it has run at the commercial operations, and it is operating at 90%. Well, as our earnings reported in Thai baht, which strengthened 4% versus 2018, affecting our EPS in Thai baht. As now Thai baht recent -- recently, it will get benefit in the coming quarters. So if we summarize 2019, production was 12.3 million tons, 18% growth. Revenue kicked in by 6% up, $11.4 billion. The volume growth was primarily in integrated PET packaging, fibers and specialty chemicals, but there was a decline in integrated oxides because of expenditure now. The PET and MEG prices dropped by 29% and 61% year-on-year, respectively. The core EBITDA was down by 1 point -- to $1.1 billion, which is 20% drop, and in Thai baht terms, which is THB 25.6 billion. As I mentioned, the strong operating cash flow, which is testimony of the earnings potential and the cash flow potential, went up by 33% to $1.3 billion, reflecting lower working capital requirement and efficiency in the working capital. However, as you can see that the core EPS significantly declined from THB 4.43 to THB 1.96. The net debt-to-equity before Huntsman acquisition went up by 12 basis points from 0.87 to 0.99. So this gives you a highlight about 2019. We'll go to the next slide. Now let's deep dive into fourth quarter results, what exactly happened fourth quarter. Fourth quarter was one of the most difficult quarters, which we faced in terms of spreads. However, as you can see, the production was up by 2% to 2.9 million tons. The revenue was $2.6 billion, down by 8% because of lower prices in the entire value chain. And the core EBITDA was $201 million, which dropped by 37% because industry spreads along the value chain reached the historic low, which are unsustainable. However, as you can see, the operating cash flow, in spite of $201 million core EBITDA, was $265 million, an improvement of 6%, giving nearly core EPS as 0. The net working capital days were reduced by 6 days. The net debt to equity went up 12 basis points, as told in the last slide, by 12 basis points to 0.99. So fourth quarter was one of the worst quarters for us. And if you look at the business segment-wise, as you can see, the green, which shows integrated PET, the decline is primarily due to the spreads -- industry spread, some integrated PET and paraxylene going down. Our effect of paraxylene is limited as we only produce paraxylene in United States. We are a big buyer of paraxylene. Similarly, that shows the effect of the glycol spreads, which are significantly lower. As you know, the naphtha crackers today are operating below cash cost. And although we stand to gain the cost of the cheap ethylene in America. However, this is a very difficult time for the olefin sector. The yellow line, which shows the fibers, the fourth quarter decline is primarily due to last time, which I mentioned that because of prebuying before the trade barriers, the margins in fourth quarters were squeezed. The light blue are showing the specialty chemicals, where we had a significant drop because of the IPA prices. We have taken some strategic steps in IPA for streamline between PTIP and tooling to reduce those losses and turning into better profits. Also, I would like to remind here, our listeners, that NDC runs in a different quarter. So the fourth quarter was a planned shutdown. So there was no contribution of NDC here. The dark blue, which represents the packaging, actually had better results, as you can see both volumes and margin growth. Now if you look at the -- year, YTD, for the whole year is $1.147 billion versus $1.44 billion, a drop of 20% year-on-year. You see a graph there, marking of $148 million, which was an avoidable loss, which is resulted from IVOG TAR, the turnaround, the unplanned shutdown and the conversion of IPA line into PTA line. So if you would have not had these events, then it should remain $1.295 billion versus $1.441 million. So that gives you a snapshot what exactly. And the green line, you can see that is still the integrated PET. So we'll now deep dive into other sector by sector. Let's understand the integrated PET spreads. As you can see, this graph very clearly shows that we are in a low point in the chemical cycle. In the second quarter, third quarter, the integrated PET spread jumped up because of the interruption of supplies, particularly M&G and JBF. And as you can see, fourth quarter was on the bottom of the cycle where it significantly dropped. Just to give you the numbers, then the drop between 2018 to '19 was nearly $66. Now you see in January, that is turning back. So this is actually a good sign that there is an improvement in the margin. Paraxylene spreads, we have been telling you about the paraxylene. As you can see, more capacity has got built up in China, significantly squeezing the paraxylene. And today, paraxylene economics has gone below cash costs, and rationalization is happening. And this is because of buildup of the capacity in China. And you can see the MEG on the right-hand side, where the MEG industry specs has significantly come down. As I just mentioned, naphtha crackers are running below cash cost, and that becomes a challenge. However, we are protected, to some extent, because of the lower ethylene cost. So what will be our aim is to, of course, deliver superior stakeholder returns compared to our peers through the cycle. You can see glycol margins are also turning back, paraxylene also. So these are not a sustainable margins. Fourth quarter earnings quite significantly hit because of the lower margin in the entire value chain. Let's look at the bridge of fourth quarter '18 to fourth quarter '19. Fourth quarter '18 had $318 million EBITDA versus now we are having $201 million EBITDA. $148 million were lost in the spreads, and you can see this is all driven by the industry. However, we could recover part of this $22 million by better premium. Premium means that we are able to do better than industry because of our mix where we sell in the premium markets and the domestic markets. And the projects yielded $16 million, basically, which is the India consolidation. We have the Germany, UTT Germany; Indo-Rama Synthetics; packaging, Bevpack. The IVL spreads are in line with the industry spreads, which are at historic lows. Slide number. Sorry. The slide number of this was Slide #12 -- 11. Yes. Now if we go to next slide, Slide 12, which gives you the operating cash flow in $1 billion, which shows the visibility. Let's not look at 1 year but look at it 5 years continuously, so, which is $0.7 billion, $0.7 billion. And in 2019, it's $1.3 billion. And if you calculate in per ton, it has been going up $107 per ton, and that has been the major focus for our teams to improve the working capital as well as the net -- lower prices have also helped. And so to offset the lower spreads, the management's focus as we presented to you in our GMT, cost savings, we are going to roll up the $350 million Olympus project. We're working very hard towards this. This will add to the bottom line. Keep recycling growth strategy because recycling growth into the future growth engine. We are seeing very good indication of PET. There are no worries. Indian market, as I said, grew by 20%. And globally, there is a growth, and there's more buildup of capacity outside China. And IVL has a unique position in each domestic market, like Brazil, we have 60% market share; Europe, we have 38% market share. So we'll be able to leverage that position. If you go to the next slide, 13, now this is the fourth quarter '19 results of integrated PET of -- versus '18. We can see $114 million versus $171 million. You will see at the bottom of the chart, paraxylene contributed $14 million fourth quarter positive EBITDA. And it created a negative EBITDA of minus $15 million, and that shows you how bad is the paraxylene. So that was a swing of $29 million. And today, paraxylene is currently below 10 years average. And both lower spreads for PET and PTA. And you can see, 34% year-on-year drop was primarily due to the margin and less due to the volume, while organic volume growth drop is 10%. If you look at YTD on integrated PET, the results were $754 million versus $791 million. And if you see right side, there's a $62 million impact because of unplanned shutdown and the conversion of line. So the integrated PET still remains a very strong business. As you can see, the core ROCE was 15% still at this cycle of the bad cycle. What is our strategy as we presented against this lower spread, this cost saving initiative under the Olympus program of $350 million? Out of $110 million, we'll roll out in integrated PET, recycling, leadership business, leveraging the PET but also creating return on recycling investments and always retaining the premium position in domestic market. Let me remind you that when we sell more in domestic market, our land spread goes up. So that is the strategy to counter against this low cycle. Next, Slide 14 gives you the IVL's recycling strategy. As you know, we committed by 2025, 750,000 tons of recycling to the Ellen MacArthur Foundation. And we have a target of 12% to 14% ROCE. The need of recycling more is stronger in West market, particularly Europe and United States and Mexico, where we have 25% of the portfolio in the West. You can see here Procter & Gamble, who's come up with a -- you might have tracked this, that P&G's partnership with IBM to supply rPET in selected hair care products, including Pantene, Herbal Essence and in Head & Shoulders in certain regions. This is an indication that single-use plastic is converting from HDP to PET, and this is a good indication that some conversions are happening. And P&G's partnership, this rPET will be substituting our HDPE because if you remember, I said in the GMT that rPET is cheaper than HDPE. And our HDPE is about -- it nets us of 2,000, and -- which is also challenging to recycle. So this proves that PET remains as a preferred packaging material. And we will continue to work to educate people about the properties of PET. So we feel very strong about this business. If you go to the next slide, integrated oxides, now this is an important, where we got some big beating. As you can see, $31 million versus $50 million EBITDA in fourth quarter '19. Now if you split this earning between purified EO, which we always tell you is a fixed margin business, you see $25 million versus $25 million. But where we got the major hit was in MEG, where as you saw in the previous slide, that MEG margin significantly went down. We made only $5 million, and this is the story for all the MEG producers globally and worse for the Asian producers because there, they are facing negative EBITDAs. So the core EBITDA margins was about 33%, and ROCE still remain 14% versus 28%. If you see on YTD basis, of course, 2018 had a very good margins of MEG. So we made $232 million, and out of the $96 million came from purified EO and $136 million came from MEG. But look at what had happened in '19. The MEG -- the purified EO at $68 million and $7 million for glycol. But if you look at that $61 million, this loss was impacted due to unplanned shutdown and the catalyst change, which impacted about $61 million. So if you -- this would not have happened, this would have been $136 million. So what is the Integrated Oxides strategy? The -- as you know, we acquired Huntsman assets. We are integrating those assets. Now we'll unlock the synergy values, and there is a diversified product base now with ethoxylates, ethanolamines, linear alkyl benzene, PO/MTBE, and that's what we'll integrate. And you can see that Integrated Oxides will become a very important vertical for IVL going forward. It will be important for you to note that how these assets would have performed, the acquired assets in Huntsman watch. They've made $106 million EBITDA in fourth quarter '19 versus $81 million. And in full year '19, there would have been $378 million versus $362 million. And you can see the breakup here that glycol is $42 million, and $100 million is MTBE, and then you have HVA and derivatives is $232 million (sic) [ $235 million ]. You know that most of the HVA business is on a conversion margin basis. So this remains less impacted except for the crack margin. MEG got impacted. But again, there are certain tooling contracts, so the impact is less. And so what will be our focus on these acquired assets is realize the operational efficiency from integration and capturing the organic growth upside. We are very excited. As I mentioned to you in the last first quarter, we have propylene oxide MTBE shutdown, so that will not get reflected in the first quarter. But second quarter, we'll have the full performance of these acquired assets. The PO/MTBE shutdown is on track, and we expect to start the production on 1st March. So one of the challenging business for us has been Fiber, where $43 million EBITDA versus $64 million. And as you can see, the major impact came in the Lifestyle, where the lower margins were there. As I said, liquidation on the inventory and the pre-buying before the trade barriers. The Mobility fibers had growth in production volume. Hygiene fiber was lower in fourth quarter, but overall, grew in annual basis. This is the business where we are focusing very much on the project Olympus. A significant saving is planned by consolidation of manufacturing sites, and a significant cost saving is targeted to convert into a double-digit ROCE. And that's what we'll be focusing in this business. On a 2019 basis, for total year, it created $222 million EBITDA versus $211 million in '18. However, the ROCE remains challenged at 1%. So this is -- the fiber business is where we'll be significantly concentrating. Specialty Chemicals. As you are aware, we made significant money in IPA, and the IPA since we acquired went into the upcycle, which has resulted into a overcapacity and lower consumption, which resulted in the IPA being impacted. So as you can see, the $22 million impact in the fourth quarter is due to IPA industry splits, which went lower, particularly, as you can see, $2 million only. And for the entire year, it was only $40 million versus $158 million. And the significant impact came from IPA where $78 million EBITDA swinged into negative $19 million. So swing is $97 million. And $25 million got impacted because of unplanned shutdown in Auriga. As I mentioned, we are taking strategic steps for turnaround of the IPA. We are converting that line back into PTA or as a swing line so that we can create the maximum written out of this. And also, the margins in IPA are improving, and there is some rationalization of the high asset, high-cost asset. And we are -- will be -- we are excited that high value-added PET, particularly the extrusion blow molding barrier resins will have a stronger future because PET is a different polymer versus the other polymers. Slide #19. Next slide, please. This shows you the packaging business, a small part of our business but a very strong business, creating a ROCE of 20% in fourth quarter, EBITDA of 19% versus 13%. This is primarily driven by growth, as you can see, quarterly and annually. YTD, the 19% is the margin growth and 31% volume growth driving a 50% year-on-year growth from $48 million to $71 million. And this business continue to expand, and we continue to invest in these businesses in the places where we don't compete with our customers. We keep looking at different opportunities. And as you know, we operate in Nigeria, Ghana, Philippines. And this is becoming a very important business, which are very consistent for ROCE. And there are no inventory losses here because they carry very low inventories anyway. This slide tell you that if the spindle -- this is pro forma, the Slide 20 that supported the pro forma earning in tuning the Spindletop if we would have acquired in '19. There's both slides here without Spindletop and with Spindletop. So with the Spindletop, we would have created $1.525 billion EBITDA, including the pro forma results of Spindletop acquisition, the Huntsman acquisition. And fourth quarter, we would have created $307 million, which is a growth of 53% and 33%. You see a graph there of $148 million. This was the avoidable loss, not only on our sites because of shutdown on the assets but also because, as you know, there was an incident next to the Port Neches asset. TPC took a fire. So they had an impact on the MTBE plant, which was down. So anyway, this is how the IVL -- and just to give you a Spindletop performance. And the fiber consists of mobility. You will be interested to know how the spreads look like, what's the development and outlook for 2020. So if we go to the Slide 22, as you saw on the slide earlier, that we have reached to the spreads, which are not sustainable spreads and their fourth quarter at historical low and below sustainable lows, and we have seen some improvement in January. So we are at the bottom of the cycle, and there's -- the demand growth is there so there is an improvement in the spreads going to come. The demand for recycled PET is accelerating, which commands premium over virgin PET. You will be worried about coronavirus impact on our business. We have only 4% of EBITDA from China. Now this is also having a positive impact because of the disruption in the supply chain from China, particularly on the PET and Lifestyle Fibers, and we are getting increased inquiries from our outside assets. So we are able to serve our customers from outside assets like Egypt talent, and we have significant order book coming up there and better margins. So this will -- overall, will have a positive impact. Having said that, this is a serious issue globally and -- but overall, just to make you feel that what is impacted from the virus. The other important thing is Lake Charles cracker was commissioned and now operating in 90%. We have -- commercially, you will see that impact of depreciation and interest coming in, in the first quarter from 31st January, 2020. The IOD business has a significant upside as we do the Spindletop integration and we unlock the synergy values. We are also looking at some purified EO debottlenecking, which is happening faster than what we thought. So that can be unlocked on '21 on top of $40 million. Our focus will be what we presented you that to '23 on cost savings. So there are 5 basic, as we mentioned to you: cost transformation via the Olympus of $350 million, and we'll keep you updated; keep assets full potential, run assets harder. Egypt is going to run on the second line very soon; adjacency growth, as I mentioned, HVA business will have a better profitability as we move into different products. So adjacency growth, we'll look into it; recycling leadership, not only creating the recycled assets but creating return on the -- about 12% to 15%. Having said that, you saw the HR presentation in the GMT, that leadership development is a major focus for our group, IVL, as we embark on the journey of further growth. Next slide. This is the slide which we presented to you. I don't want to repeat this, but these are the 5 strategic priorities, which is getting embedded into the entire IVL system. Our vision to be a world-class chemical company, we'll go for the cost transformation; full asset potential, focusing on our core values. And you will be -- this is like coronavirus in China. We are able to serve our customers globally in Latin America, which were importing from China, serving from Mexico and Brazil. So this is the geographical diversity benefit, and local presents integration across the chain, and this will be the focus area. And this is just to reinforce our thought process. So thank you very much for listening. I think now we can take Q&A, and the operator will help in that. Thank you very much.

[Operator Instructions] We will now take our first question from Suwat Sinsadok of Finansia.

I'm Suwat. Could you summarize the impact so far from the COVID-19 to your company globally based on the demand and supply impact? Could you summarize that?

So as I mentioned, our exposure in China is very limited. There's only 4%. Overall, we think the -- that's a positive EBITDA impact because we are seeing better PET margins as we are able to serve from outside. Just to remind you, China exports about 3 million tons PET, 250,000 tons, and that supply chain is interrupted. Similarly, fiber and filament is export about 1.8 million tons. And I guess, we have received the orders for all this and that -- so we will be able to actually benefit. Overall, it's difficult to quantify, but it will be positive, anywhere from $5 million to $10 million, as we speak today. As the situations change, there can be day-to-day changes. But overall, it is coming out to be, in the earning point of view, positive for us. One of our fiber plants is, of course, Mr. Gill shut down right now, but the overall impact in EBITDA is not significant, $1 million.

Okay. Second one, could you explain what exactly the extraordinary items that you have, about $34 million and $21 million -- sorry, $20 million, $34 million in the fourth quarter. There are multiples that you show in the table, but could you elaborate again? I think it's Table 6 that you show in the end.

Yes. $34 million.

Yes. So this is Vikash. So we had some acquisition and pre-operating expenses, about $7 million, and we had some onetime expenses like related to some tax adjustments, which is about $12 million. And we have taken a noncash impairment of 3 sites, partially, so one in Mexico, one in France and one in Israel. So Israel, I didn't know that there were some restructuring costs to move the site. So this is about $14 million. So there are 3 items, which made $34 million extraordinary item.

So will you have a similar expenses like this for -- related to the restructuring effort in 2020?

For restructuring...

Sanjay, why don't you answer that?

So Suwat, if you are you talking about past cost transformation, no, those are going to be taken...

Anything.

There are going to be...

Yes, yes, or anything really, restructuring or transformation or anything that you could incur extraordinary expenses like it.

So Suwat, as you heard, 3 expenses, one was on impairment. So that has been taken. It won't repeat itself. The second one was about project-related expenses. As you know, we have -- we are not doing any specific projects right now. So if you are doing some product recycling CapEx, there would be very insignificant amount of acquisition expenses. And the tax also, which Vikash mentioned, was onetime, and that has been done with.

We will now take our next question from Mayank Maheshwari of Morgan Stanley.

So sir, my first question was related to your operating expenses. Your operating expenses are still quite high, and there is quite a bit of inflation on operating expenses even in the fourth quarter. Can you just kind of talk about why that is happening? And any outlook for 2020?

[Operator Instructions]

Mayank, let me answer that. And I'll say broadly -- this is Aloke Lohia. The expenses have gone up because of the entities acquired in 2019. So from an inflationary point of view, the cost increase has been nominal. Going into 2020 and all the way to 2023, we have the $350 million cost transformation priority, and we have broken that down in the CMD. I believe it was $17 million improvement in 2020 itself out of the $350 million. So there's a very cautious effort on improving our cost structure. The teams, we have discussed during the CMD, but one of the team is also on the fiber reorganization. We have split the business into 3 separate management. And the idea behind that was that there is duplication of back-office expenses, duplication of management expenses that will get addressed. I don't think it will get addressed right in 2020, but the cautiousness around that, between the period of '20 to '23 . The biggest chunk of savings are coming from the fiber segment. Will somebody remind me, is that $140 million?

$130 million.

$130 million, sorry. $130 million of the $350 million is the savings that the fiber group has and has captured.

Mayank, just to expand on it and so linking to the revenue. The revenue did not grow much to only 2%, but quantity grew significantly, as we mentioned. That is because of the lower prices. So when you're looking at SG&A as a percentage, as Mr. Lohia mentioned, it is not due to consolidation of the India operation and other acquired assets.

So sir, when you look at it from a per ton basis, if you look at the operating cost, SG&A and all, how much was the impact because of the acquisitions in your OpEx? And how much was more on the existing assets? How much was the OpEx? Can you kind of give you some breakup of what's happened because of the consolidation of India assets and others?

Mayank, I'm looking at Vikash. Can we do this off-line with you? Or do you have the number?

Yes. So Mayank, we can do off-line. But just to give you some color on this for the benefit of everybody. Our SG&A expense has gone up 20%, and our volume growth is about 18%. So our SG&A expense have gone up in line with the volumes, and we can discuss more specifics if you have any, which we can discuss within the published information. Thank you.

Okay, okay. And sir, the last thing was on the tax rate. Any guidance on tax rate for 2020?

Yes, Mayank. So tax rate, 2020, you can expect between -- so our blended tax rate, effective tax rate on will be 22%, but then we have certain incentives and all. So you can assume between 16% to 18%, that is effective tax rate. But on a current tax rate, it will be similar to what we have in this year, 2019, which will be around 10%.

I think you can call that because the cracker is getting capitalized, Huntsman assets. So all those step-ups will be available in America. So current tax rate will be significantly lower.

We will now take our next question from Paworamon of Credit Suisse.

My question is probably -- might be related to the previous one, but it's specifically related to the employee benefit expenses, which I look in the back of the note to financial statement, it has gone up like THB 4 billion year-on-year despite the falling profit. I'm not sure, you might have already answered that question that like it's just a part of new asset acquisition and what do you think will be a trend. Is this something that included in your cost transformation that you've presented in your strategy day earlier?

So Sanjay would answer on the pension.

I'll focus on the management benefit expenses. So management benefit expenses have gone up...

Is it onetime? Is it -- yes.

Probably, the management benefit expenses...

Is it onetime in nature?

Are you talking about the management benefit expenses, right?

No. I'm actually looking at the back of -- you know, like the -- in the note of financial statement in the back when you have like disclosure of like major expense by items. And yes, so I look at those. And I think it's been -- it's in note -- at the very end of the note here. So then you have the breakdown of major expenses item.

Sorry, can we have page number? Can you give the note number?

I lost it. All right. Okay. It's -- must be -- is it like on -- note 30 here? Oh, note 30, note -- yes, note 31. Yes, 31. Yes, note 31, you have a sense like with...

31?

Yes. With employee benefit expenses as part of cost of goods sold and as part of the SG&A. Yes. Just wondering whether there are some like onetime expense in this and what...

I think...

Again, this is same. But it is because of the acquisitions, which have happened, so employee benefit expenses that you see go up from 19 billion to 22 billion. And this is all because of the new volume, which is some, which is through the acquisitions.

Okay. Okay, yes. So this is pretty much like be used as a base or forecast in the future, right?

So as you know, we have -- our number of employees have gone up in the year by 4,000 or 5,000 manpower. So that's the scope, there's nothing -- yes.

Yes. So just to confirm, Khun Poom, it's not -- there's no onetime expense in there. Did you have a second question to this, Khun Poom? Or was that the only question?

No. Yes, the -- actually, it's what's asked, the first question that I have already, so no worry.

I will now take our next question from Sumedh Samant of JPMorgan.

I just have one question around the whole virus situation. So I understand that a lot of Chinese supply is disrupted. And again, as D.K. pointed out, we should start to see potentially some benefit coming to Indorama, although this is not quantifiable. But can you please elaborate why we haven't seen a significant jump in product prices? And the product prices did increase in the first few weeks, and they have now gone back to sort of 800, 810. And I'm talking about Asia PET, but can you please elaborate what is exactly happening right now?

Yes, this is Aloke. So the way we are -- we are monitoring this obviously on a daily basis. What we have seen is in February in China, the prices have come down, but the differential with Korea and with Northeast Asia and Southeast Asia has gone up. So we have seen an improvement of $11 in February over January. So although when we talk about published prices, we always talk about China prices. But when we are benchmarking our prices in different countries, we are using either a Northeast Asia price or a Southeast Asia price. And the Northeast and Southeast Asia prices are at a premium to China prices.

So in other words, you can -- just to expand this, Sumedh, that you will see this as a premium over benchmark to the benchmark in China, and our realization will be better. And we already received orders for February, March. And actually, we are ramping up the capacity wherever we were running lower because that's where the demand is coming up, to sell to customers outside China.

Right. So when I look at the whole thing, basically, there should not be any meaningful impact to -- in terms of volumes sold for IVL.

That's correct, less. So we lose some volume. We are running a Chinese plant, our PET plant in China, I believe at what rate of discount?

80%

Is running at 80%. So we only have a 5,000 to 10,000 ton volume impact, but that is getting recovered from our plants elsewhere, such as rest of Asia, including India, and also in Europe and...

Latin America.

Turkey and Egypt and...

Everywhere.

Globally, let's say. So that is a risk mitigation going on between the supply chain. And I would think that being a global company with this footprint, we are seeing better loading at our other plants and better finalization. I would just caution all of you not to -- how do you call it?

Highlight.

Yes. Depend too much on this because, obviously, within China, the labor-intensive industries are not operating, but the less labor-intensive industries like PET plants, PTA plants, paraxylene plants are more or less operating at this high level of maybe 60% to 80%. And they may not be able to displace those products because the domestic industry is suffering. And even the export is impacted because of the logistic issues. So it's not yet determined completely that once this situation normalizes, what will happen to the inventories in China, how will they get normalized. And then maybe back in the third quarter, there may be some higher sales, let's say, assuming that things stabilized by second quarter. So I think in the first quarter and second quarter, we will be in the short-term beneficiary. In the third quarter, fourth quarter, how it all normalizes from the supply chain point of view is still to be determined.

And I think just to expand, you should not be guided by the absolute prices because crude oil came down, paraxylene came down, energy came down. It's more relative of our spread, which outside China is better. So that's what is happening.

Great. Can I quickly ask a follow-up question? So on PET, considering that there is no new acquisition coming in, so we have a similar portfolio compared to last year. How should we look at EBITDA per ton? So if we take a view that the spreads are similar to last year or maybe $20 down, how should we think about the EBITDA per ton for this year?

So you should see the core EBITDA per ton was about $81 per ton in 2019. In the integrated PET, it was roughly was $101. And of course, with the volume, as you rightly said, that there will be better operating rates because of outside assets, the Egyptian other assets, so yes. Yes. So we think that we should be able to be close to those levels, roughly. One big benefit, which is coming, which I don't know whether you are realizing, the conversion costs in America and Europe is dropping because of the energy price has been very low. The gas prices are low. So this is all benefiting in our commercial costs also.

So if we balance upside and downside risk, on the upside risk, the antidumping duty on PTA in India will be a big boost to us. That's like a $15 million boost to our earnings, and that should flow through to our bottom line.

And just to expand on this, we are a big buyer of PTA in India, as you know. India scrapped $25 per ton PTA antidumping duty, which was built in the domestic pricing. But at least, we think that $15 will get benefit to us, which on 800,000 is nearly $12 million. This was true in polymers and PET both.

It appears there are no further questions at this time. I would like to turn the call back to the host for any additional or closing remarks.

So this is Aloke. Firstly, thank you very much for joining this call this evening. The whole focus of the company has been guided to you at our CMD. Our budgets have been built on a real estate basis, I would say, without taking any particular upside from any event going forward. The current margin scenario is similar to our budgeted scenario, so we should be able to deliver on our budgets in 2020. We have not given you guidance exactly on what our budget is, but we have directionally shown you at our CMD how we are intending to grow our EBITDA from $1.1 billion to $2.5 billion by 2023. We have strategic priorities, and the whole company is focused on delivering on those 5 strategic priorities. And these 5 strategic priorities would help the company in the longer term in this entire decade to outperform the peers and deliver better results for our shareholders. So with that, thank you again for joining our call, and we look forward to seeing you again soon. Thank you.

Thank you.

Thank you.

Ladies and gentlemen, that concludes the call. Thank you for your participation. You may now disconnect. .