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

Good afternoon, ladies and gentlemen. This is Vikash Jalan, Vice, Investor Relations for IVL. I welcome you to Indorama Ventures quarterly results for third quarter '20. Joining me today in our earnings call, Group CEO, Mr. Aloke Lohia; along with the executive team members, Mr. D. K. Agarwal, CEO; Mr. Udey Gil, Online, CEO of Fibers; Mr. Sanjay Ahuja, CFO; and Dr. Deepak Parikh, our Chief Strategy Officer. As a reminder, this results meeting is being recorded. The slides for today's presentation can be found on our website. I'd like to remind the participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties and our view at this point in time. Participants and readers are therefore encouraged to refer to the disclaimer on this page, Slide #2 of today's presentation. A replay of this call will be available on the Indorama Ventures website. Let me quickly run you to the agenda for today. Mr. Aloke Lohia, our group CEO, will begin with the third quarter highlights and sharing with you our progress on Project Olympus. Ms. D. K. Agarwal, CEO, will go through the business results; Mr. Sanjay Ahuja, our CFO, will then take you through the finance section. Mr. Lohia with close some remarks about the key takeaways and the outlook. I'd like to request all of you that you send your questions to me by text message option on our page, and we'll respond to it at the end of the prepared presentation. Now I'd like to turn the call over to Mr. Lohia.

Thank you very much, Vikash. Good afternoon, ladies and gentlemen. Welcome to IVL's third quarter results call. I would like to start by sharing with you the comments on our -- from the COVID. COVID-19 has affected a number of our employees and their family members. We are taking care of all of them. We have had strong waves of COVID pandemic to face, particularly in Southern Europe, Southeast Asia, and Latin America, and some South Asian countries such as India and Indonesia. With good support from our management and our colleagues around the world, we've been able to keep our manufacturing at all of our 120 sites continued their production and especially due to the detailed and careful planning by our site leaders and employees in each country. All our plants had strong supporting staff, some working from plant, others remotely, though shifted our planned turnaround into local needs. We had almost no impact on our supply chain, which enabled us to receive raw materials on time and deliver finished goods to customers. We have continued to have our staff work-from-home as much as possible for all non manufacturing roles, with less than 25% folks in office at any given time, including headquarters in Bangkok. Strong work-from-home cultures has been enabled and are employees to be very highly effective and take care of both technical and commercial business. Obviously, our employees and our societies and our communities around our businesses have had a huge societal impact. We've encouraged use of our site leaders to engage in the respective communities for education, support and leadership above and beyond the call of duty. We via our IVL foundation continue to support and assist in many committees around the world, including our employers and their families. Our global leadership emergency team, consisting of our top 30 leaders, continually meet, shared, plan and adjust activities as needed in the past 8 months. This is core to our COVID crisis management. The end result being with the great adaptability, nimbleness and agility, our IVL team has managed our customers, production and overall business with passion and great care to demonstrate growth of 9% volume year-on-year in the face of one of the worst crisis of our time to the humanity around the world. We are fully engaged with laser sharp eyes to combat this better. We are constantly monitoring and adjusting our clients and activities for customer success at IVL. Coming to the key takeaways for 2020 and for the quarter, I'm very pleased to report that IVL delivered our record sales volume during third quarter 2020. Our third quarter volume was 3.6 million tons, up by 7% quarter-on-quarter and 18% year-on-year. This was in spite of the COVID-19 pandemic and the national calamities faced by our USGC operations. Considering these are short-lived events, indicating that you should expect continued improvements in our volumes going forward. The strong volumes are a strong indication of the demand visibility of our products. Nevertheless, we were significantly impacted in reported earnings due to several events, which we will share in the business sections. Our recently large segment of IODs faced the strongest headwinds in earnings. Margins sequentially improved, but declined year-on-year and year-to-date due to the reduced shale gas advantage versus naphtha and with the collapse of oil demand and prices. The MTBE and MEG verticals were hit at this year. We will discuss this more in the business section. Combined PET, as expected, was resilient in 2020. With margin erosion in PX and PTA, which was mostly offset by volume rates and margins increase in PIA and Packaging. Better value and PTA demand in margins were greatly impacted by the shutdown of retail trade, which impacted the fiber industry. This, as you know, fiber demand of PTA and paraxylene, represents more than 70% of the total PTA. The approximate 10% drop in fiber demand rather than the usual 5% growth, disproportionally hurt Asian integrated peers, but a relatively muted impact on IVL. For fibers, our Mobility vertical was impacted as travel industry came to a halt, impacting tire and car sales. On the flip side, hygiene was positively impacted due to the spike in demand and some strong spot price gains. Overall, what I want to share is that the earnings impact this year are not structural, but predominantly COVID-related and are expanding to improve as consumer demand returns. I want to highlight some positive progress made on inventory management and cash flow management. During 2020, I'm pleased to share, we have, on purpose, reduced our working capital. While this transformation and operating discipline led to a onetime noncash loss, at the same time, our cash cycle days reduced by 6 days, releasing significant blockers of wording capital. Sanjay Ahuja will add more color to this in his section. Coming to the most sustainable and future ready reforms that we have taken in our maiden transformation journey, Project Olympus. Let's discusses on the next slide. In order to get IVL future-ready, we want to be much more agile, nimble, standardized and become a truly one integrated IVL. In that respect, I have shared our 5 strategic pillars during the Capital Market Day earlier in the year. We are relentlessly staying focused on these priorities and have supporting programs that go with that. This combined with the organization design for speed and with one ERP, will help our business and function leaders in the decision-making process, taking advantage of the labor arbitrage along with the standardization of accounting and finance organization. We have recruited and enabled cross-segment functional leaders in sustainability, digital, Lean 6 Sigma and EHS, to leverage on technology and global best practices. We are very much focused on tightly integrating these programs so that we can support the two big projects, asset full potential and full potential plan that ultimately ties to the P&L over delivery of around $600M in sustainable EBITDA by 2023. And to deliver all this we have put together the transformation management office to oversee the entire program and reporting directly to the executive board members. We have been working with some of the world’s leading firms for these different projects to validate and rigor test the operating team’s initiatives. This approach has allowed from bottom up and buy in from the segment owners based on deep outcomes through brainstorming with leading domain experts. We are merging all of our 17 different ERPs into 1 system. This will be one of the cornerstones, in terms of efficiency enhancement as we will have a single source of truth for everything. We kicked off this project in March of this year when COVID came into full swing but we did not falter and came up with new innovative ways to work with Accenture and SAP and we have already completed 7 months in our 39 months journey. Our initial earnings improvement target of Project Olympus was set at $350M. As we started this journey and after taking a deeper analysis across our businesses, we feel confident that we have more gains here and have identified several more initiatives in multiple areas, hence I am pleased to share that our new target is raised to $582M in earnings improvement by 2023. As part of our transformation journey, we have spent a lot of time this year with various world class partners to take a deep dive into our businesses on Project Olympus. We have identified over 2000 initiatives to deliver the incremental EBITDA, you see here on this slide. These initiatives are all being tracked and project managed through a software we have from one of our partners. What we have done here for you is to show it from two different perspectives. On the top left chart, we have it broken down by businesses and key initiatives. On the left bottom chart, we have it broken by each functions. In terms of timing of when we will achieve these incremental EBITDA, you can see on the right hand side chart here that for this year we are achieving 15% over our original target of $76M. Next year the program will be in full swing and will deliver $176M of incremental savings. I hope this gives you a good flavor of the deep level of granularity we have gone into our transformation program that will give us structural cost improvement as well as commercial, operational, and organizational excellence. At our next Capital Markets Day when we have more time I will share will you more details on our full transformation program. Sustainability is at the core of all we do. Our genuine efforts are embedded in our daily activities. We are genuinely focused and relentlessly driving towards our outlined 2025 sustainability targets. We have recently tied up a $300M blue/green long term financing with IFC led consortium, which is another testimony to our strong commitment and endorsement to our sustainability program. I am pleased of our progress on sustainability over the last few years. One of the key areas that we are focusing during the last few months is to leverage renewable energy in several of our operations. I hope to share more news on this in coming quarters. At IVL, we are strongly committed to sustainability and that is also reflected in my son, Yash, taking up the role of Chief Sustainability Officer to step up our activities on this front. Thank you. I would now like to pass on to Mr. Agarwal, who will take you through the business sections. Thank you.

Thank you Mr. Lohia. This side shows the residency of the saints of IVL. As you can see, IVL has proven resilient, delivering record sales volume across all the segment and region, which was mainly driven by our Combined PET segment as demand for F&B packaging continue to be strong in the new -- sorry, for the inconvenience. Let me repeat as you can see this slide is very important, which shows the resiliency of the volume, sales volume in this pandemic. As mentioned earlier, IVL has proven resident, delivering record sales volume across all segments in the region, which was mainly driven by our Combined PET segment as demand for F&B packaging continued to be strong. We also saw new demands coming for sanitizers as well as the face mask. You can see 2.7 million tons was sold in quarter 3, and we are projecting equal volume in the fourth quarter. IOD volume remain stable even with the impact from hurricane Laura and lightning strike. This has got normalized now. And in the fourth quarter, you can see our volume will go to 0.6 million tones. That's indicating that we have a lot of further upside in this business. For Fibers, the Hygiene vertical continued to deliver solid sales volume because of face masks and disinfected wipes, while Lifestyle and Mobility experienced sharp recovery from the second quarter, which was severely impacted by COVID-19 pandemic. As you can see, 47% growth in the volume in third quarter, and we are seeing even better volume in the fourth quarter. In the next quarter, despite seasonally softer demand, we expect that Combined PET will continue to deliver strong sales volume as post-pandemic demand pattern shows that PET bottles have become the favored choice over other beverage packaging and we believe this trend will continue. So we are in a very soon spot. We expect volume gain in IODs as the impact from the Hurricane eases and Fibers volume as I just mentioned will recover further as the economic recovery strengthen. So this shows you a strong resiliency of the business. Now let's go to the next slide, which gives the EBITDA. As Mr. Lohia mentioned, we delivered core EBITDA of $251 million this quarter, driven by strong volumes and stable margins in PET though partially offset by very poor PTA, paraxylene and Fibers margins. Please note that on the right hand side you can see, 9 months '20, IVL should have achieved an additional EBITDA of $203 million, I repeat $203 million, if adjusted for $51 million PO/MTBE turnaround in first quarter 2020, which happens once in 5 years. Natural calamities of lightning strike and Hurricane Laura, which impacted us negatively by $52 million. So you're seeing that $52 million bubble shows. So if we would have added $52 million, we would rather than $303 million in this quarter. And one time liquidation impact of $101 million. What this liquidation impact is that we liquidated the inventories of high cost. So basically, our production was lower than sales, and that suffered the losses. As you can see PET business remains robust in first 9 month of the year, supported by higher volume and stable spreads, although partially offset by reduced premium in western markets in 2020 against last year due to lower import parity. [indiscernible] This was caused by steep decline in crude oil prices and raw material margins because we have less protection. Our PX and PTA business was impacted by, as Mr. Lohia mentioned by the polyester fiber industry, which is the largest consumer of PTA, nearly 70%. Corona-driven high-street lockdown impacted the overall retail clothing and furnishing demand, thus polyester fiber demand, which typically would have grown by 5% is expected to be down by nearly 10%, or the slow recovery. This caused a collapse in PX and PTA demand, which resulted in historic low margins. As you know, that -- the resulting margins just collapsed. IODs underlying performance you can see sequentially improved quarter-on-quarter as crude oil demand picked up, though performance was still lower year-on-year from reduced shale gas advantage versus naphtha, as demand for oil remained relatively depressed. In Q3, fiber business recovery was driven by Mobility and Lifestyle verticals, compared to Q2, with renewed demand as the demand came back. Hygiene performance normalized from the spike in Q2, but EBITDA remained strong year-on-year with better margins and a better demand and margin. Our cost improved significantly. Now this was the most important part that our cost improved significantly on a YTD basis versus 9 months of 2019, with Olympus Program, weak currencies in emerging markets, and lower utility prices. Our variable costs improved by $78 million, fixed cost by $66 million, and Olympus delivered $64 million incremental EBITDA already this year. So this was a significant gain in the variable cost, fixed cost and others. Now let's go to the major business, which is a Combined PET, the star performance. As you can see, the Combined PET delivered highest sales volume this year in last quarter. You can see sales was up 4% quarter-on-quarter and 7% year-on-year. As mentioned earlier PET business remained strong due to higher volume and stable spreads, although our premium in western protected markets dropped compared to last year, due to drop in import parity. The premium, expected to recover back with increased crude oil prices and enhanced local sales. PTA and paraxylene business, as I mentioned, were severely impacted in the first 9 months due to lower demand in polyester fiber segment resulting from pandemic COVID-19. Just to give you an example, PTA Asian benchmark industry spreads dropped to $83 in first 9 months versus $154 per ton last year. Now this is the impact on the PTA alone. PX and PIA business in quarter 3 was also impacted due to higher Mix-Xylene prices, resulting from disruption in Mix-Xylene production facilities in United States due to Hurricane. o that hurt us in the Mix-Xylene cost. Combined PET liquidated inventories in dropping market and booked a liquidation impact of $78 million onetime in EBITDA when compared to same period last year though benefited in operating cash flow. I just talked to you about this liquidation loss. On the other hand, Packaging business remained pretty strong, although normalized after peak in second quarter. So you can see throughout this pandemic our Combined PET business, the flagship business in IVL's portfolio, remained the star performer, with robust EBITDA and ROCE. We are a clear leader in PET through our geographically diverse footprint, strong product portfolio, deeper customer intimacy, and our recycling leadership. So this action will continue to perform strongly. Let's go to the next slide. Well, recycling is a very important part of our journey. PET has undoubtedly come out as preferred polymer in times of pandemic for hygiene, safety reasons, and recyclability. It is likely to actually replace some other polymers. We remain committed to our 2025 recycling target of creating a capacity of 750,000, and providing a single stop solution to our customers as we engage with various brand owners. On this endeavor, we recently acquired recycling asset in Poland in Europe. And to just remind that rPET continues to enjoy premium over virgin with increased demand. So recycling will be a very important vertical and will create a strong horse going forward as we integrate it. Let's go to the IOD section. Here, as I mentioned earlier, our performance is shown in 4 verticals: integrated glycol, integrated purified, new MTP and sulfate, which also includes UA, LAB and others. As mentioned earlier, IODs EBITDA shown here on the far right is based on an adjusted basis for IOD business, adding back one-time extraordinary impact of $52 million impact from Hurricane Laura and lightning strike at Port Neches and Lake Charles operations. As you know, this was natural calamity. Port Neches suffered from production losses due to preemptive shutdown of the facility before Hurricane Laura, and interrupted power supply for the extended period post Hurricane. So we shut down in anticipation, we will never know where the Hurricane will go. And then all the power interruption was there. Now Port Neches is now back to normal operations. Lake Charles unfortunately, operations were impacted both by lightning and Hurricane Laura. Lake Charles cracker is expected to be back online in the first quarter of next year. Damages are covered under comprehensive insurance coverage, including loss of profit. For PO/MTBE business, MTBE spreads improved by $61 in Q3, as crude oil demand and prices picked up quarter-on-quarter. However, spreads were significantly lower at $141 in third quarter versus an average of $358 in 2019, due to lower shale gas advantage, poor gasoline demand, and lower MTBE premium over gasoline. So the MTB business somewhat significantly. On the other hand, US MEG integrated margin for 2020 remained depressed due to reduced shale gas advantage over naphtha, as Mr. Lohia mentioned. MEG prices remained depressed due to lower demand from fiber sector. We expect this margin to improve with increase in crude oil prices, better demand, and higher olefin margins, diverting ethylene from glycols to polymers. As you must be noting that polymer margins are improving, people are diverting ethylene to polymers, and that is supporting our glycol business. On the other hand, the integrated EO and Surfactants continued to perform strongly, with profitability improved slightly quarter-on-quarter as oilfield demand improved. Demand in home and personal care remained strong due to increased hygiene awareness. So this was the IOD segment. Let's go to the Fiber segment. Next slide, please. In Fibers, as you know our product offerings are to the global brands, and we are among the leading global suppliers. We had a suite of products that serve a variety of applications, where some are essentials and non-durables, like hygiene fibers and Lifestyle fibers, and others are high performance like Mobility, which is linked to global GDP and auto manufacturing. If you really look at what happened in the business, our Hygiene fibers remained strong in demand and margins, with its essential nature of applications during times of pandemic. As you can see, second quarter, we recorded a $47 million of EBITDA. Disinfecting wipes, personal hygiene awareness for face masks, and Personal Protective Equipment were driving the major part of the growth and margins. Mobility division suffered in second quarter due to lower operating rates caused by poor demand for replacement tires, reduced sales of light vehicles sales, and shutdown of facilities due to the pandemic. But if you see on the third quarter, high operating rates has improved with partial recovery of demand. You can see clearly that Mobility is improving. We expect improving trend in fourth quarter with increased sales of light vehicles. So we are seeing a recovery in the Mobility, and this will continue in the fourth quarter. On the other side, Lifestyle was impacted in-line after softer demand in global market on account of poor retail sales due to lockdown, deferment of purchases by consumers, and supply chain disruption. Here, we are seeing a V-shape recovery as with easing of lockdown as witnessed in Chinese domestic market. And you can clearly see here third quarter registered an EBITDA of $13 million versus a loss of $1 million in quarter 2, and we are seeing a continuous recovery in this business vertical with revival of demand. Our focus in Fiber, as Mr. Lohia covered, remains cost excellence through Project Olympus, product innovation and cost management, and similarly, the working capital and inventory management. Actually, fourth quarter, our performance in Fiber business should be better than third quarter. The outlook for 2021 remains strong, with improved performance in all the verticals. So I think that's about the business. Now I will hand over to Sanjay, who will go on the finance part, and then we'll take questions, and we hand over the presentation. Thank you.

hank you, Mr. Agarwal. Let us talk about some headline numbers for this quarter. And some of these, Mr. Lohia and Mr. Agarwal alluded to in their presentations. The sales volume of 3.6 million tons was an 18% year-on-year growth. Excluding Spindletop, same-store basis, it was 3.2 million tons, which is 8% growth year-on-year. On a quarter-on-quarter basis, we've had 7% growth in volumes and this is despite Hurricane Laura impact, which shows the resilience and lockdown impact on Mobility and Lifestyle fibers tapering off. So we delivered a core EBITDA of USD 251 million in quarter 3. Adjusted for the management estimates of natural calamities of lightning strike and Hurricane Laura, the core EBITDA should have been $303 million, similar to last quarter and higher than the same period last year. With this also, the performance is well below the potential of these businesses and we expect significant improvement once the global economies come out of the COVID-19 pandemic. Our operating cash flows of $354 million in 3Q '20 made up for the lower core EBITDA. Operating cash flow for 9 months 2020 was $994 million, reflecting high sales volumes. We are now running our business with a well optimized working capital. Slide please. Core EPS has been calculated on the basis of $251 million. The depreciation and interest costs from the relevant businesses which are being hit by natural calamities has an EPS impact of 40 satang per quarter. Our should be core EPS should have therefore been higher by that much. I must talk about the reported EPS also, with IOD business IVL also booked a property damage loss of $8 million at Lake Charles due to lightning, which is shown as extraordinary item in the analysis. All losses due to Hurricane Laura and lightning are already accounted for in 3Q '20. We have been able to achieve decrease in net working capital despite higher production volumes and sales volumes. Reduction in working capital has happened for following reasons. Absolute prices of raw materials and finished goods have decreased on the back of lower crude oil price reflected in petrochemicals price, which has resulted in lower absolute requirement for working capital. So if the absolute prices have come down from the beginning of 2019 by 70%, we should require around $400 million to $500 million lower working capital. As mentioned earlier in the presentation, our finance team has been working with domain experts to support the business in optimizing their working capital requirements through analysis and assessment of requirements particularly for inventories of raw materials and finished goods. This has resulted in lower cash cycle days, and is now embedded in the system. It has now becoming a way of life in IVL rather than a head quarter push. In 3Q '20, due to Hurricane Laura, we did see some additional decrease in inventory of $20 million to $30 million which is expected to normalize in the coming quarters, as they are in full operations. The resilient business model which gives us a strong visibility of earnings and along with the optimization of working capital as explained just now, provides for healthy operating cash flows, enabling us to deleverage fast or reinvest when there is a good opportunity. Over the years this is reflected in the cash flow conversion percentage or EBITDA to cash conversion. Our global and regional treasury teams have worked admirably with our relationship banks, sharing with them the operational and financial performance on a more frequent basis during this pandemic, to take timely steps for refinancing and to increase liquidity. We continue to hold strong liquidity positions in the form of cash as well as unutilized banking lines. Our debt portfolio is structured well with evenly spread out term loan maturities and short-term loan revolvers in the west with long-term maturities. Specific to 2021 debt maturities, refinancing is in place for 50% to 60% of the amount and for the remaining balance will be in place within quarter 4 of this year. We've made significant progress towards sustainability financing or green financing. We have been able to tap the loan market for a billion dollars worth of diversified green financing and we will continue to focus on such financings in the near future. As I mentioned in the last quarterly meeting, the major part of CapEx for 2020 has been incurred in first half '20 and the second half of 2020 should throw positive free cash flow. With strong operating cash flows despite lower than expected EBITDA, we have reduced our net debt by almost $150 million in 3Q '20. The reduction of CapEx this year, by $200 million is mainly due to deferment of Corpus Christi Project and optimization of maintenance CapEx. TRIS rating has affirmed IVL credit rating to AA minus during their annual review in the last month. The outlook however, has been changed from stable to negative. TRIS appreciated the strengthening of business profile with multiple revenue and cash flow streams from 3 large and integrated businesses of Combined PET, Fibers and Integrated Oxides. The Spindletop acquisition has added downstream products for long-term value integration. However, due to various factors mentioned earlier in the presentation, the relative weaker financial performance has led to change the outlook. I believe this is a strong endorsement from TRIS, acknowledging that the management has taken the right steps in strengthening the business profile. I request Mr. Lohia to take -- present the key takeaways and outlook.

Thank you, Sanjay, and thank you, D.K. I will skim through this slide since we have covered it earlier, and it has been covered in more detail by the business and the finance section. Let's go to the outlook. I, on behalf of IVL management, would like to reaffirm our views on IVL segments and global franchise.We firmly believe that crude oil recovery, and hence its price will bring back shale gas advantage. As COVID eases and retail sector opens, we expect Fibers volumes to have a strong recovery to fill pipeline inventory, and In addition to the return to normal growth. I would imagine that the strong volume growth of PET, augmented by our global teams and investments in recycling, will pull more paraxylene and PTA demand, lifting absolute prices and margins, resulting in improving premium for us in the Western hemisphere. I will continue to remain vigilant and we will not lift our foot off from the pedal on our transformation journey. We believe our global business model is advantaged across cycles, but we will not be complacent and we will continue with our growth objectives to deliver above average shareholder returns. Thank you. I'll pass it back now to Vikash.

[Operator Instructions]

Mr. Lohia, this is Naphat from Krungsri Securities. I have 3 questions. First question is on the USD 52 million loss that we booked in the third quarter so I wonder if you can give us the breakdown of the USD 52 million. I understand that there will be some coming from the insurance deductible and also the loss from operations. So this is my first question. And the second question is on the -- if you can update us on the status of your plans in Port Neches, Texas that were hit by the Hurricane because I noticed that the production volume guidance in the presentation in the fourth quarter is up only 100,000 tons quarter-on-quarter to 3.7 million tons. Because I understand that those plants are ramping up in the fourth quarter. So I wonder why the production volume increased only 100, 000 tons Q-on-Q? And the third question is on the lockdown, the second lockdown in Europe that we see today. Have you seen any impact on the polyester demand from the second lockdown? Those are my questions.

Let me answer the IOD question on the volume. As you know, we do not disclose the volume from Lake Charles better. So -- and any Lake Charles sector is going to be inactive in the first quarter of 2021. The volume increase in the fourth quarter is primarily coming from the PO/MTBE, which had 2 unplanned shutdowns because of Laura and then by Hurricane Delta. So I hope that expects to use the volume effect in IOD. On the third lockdown, I'm going to come back. I'm going to be -- ask Sanjay, to answer your question on the insurance matter. But coming back to the third lockdown, so far, we have not seen any impact -- any negative impact. We continue to ramp up our Lifestyle fibers as well as ramp-up of our Mobility filers. So keeping fingers crossed, we do not see any material impact from the lockdowns that we are hearing about in Europe. As far as PET goes, as you have noticed in the first 9 months, PET growth remains resilient. And so in terms of PET, Combined PET, actually, we see an improvement because of PRA, the isostearic acid that we produce. And half of it, 50% of isostearic acid is used in what they call coatings. 50% is used in PET. So PET demand anyway is resilient, but the coating demand did suffer in the second quarter and had partially come back in the third quarter. We expect the fourth quarter to be better for PIA. So combined PET is doing fine and Fibers is doing better in terms of volume. IOD, I explained to you that is in chap of volume in IOD mostly coming from MTP and some from MEG. I will pass it now to Sanjay to discuss about the insurance matter.

This is Sanjay. So on the insurance, if I had to break the $52 million, it is $35 million for the Spindletop assets, $17 million for the lightning impact, which came on the cracker. In terms of coverage, the $35 million is below the deductible. So that's the loss we have. On the $17 million, the deductible will be between $13 million to $14 million. So we will recover something back $3 million to $4 million in the next quarter. Going forward, in Q4 -- so as Mr. Lohia said that we've already started with the Spindletop assets so there's no further loss. Going forward, for the lightning event, we continue to lose profitability. And because the deductible has already been covered in the first $17 million, which I said $13 million to $14 million, we will incur -- I mean, we are -- we will show lower profitability, but at the same time, that amount will be recovered from the insurance company, so will on the operations. And in terms of property damage, we have reported $8 million as a property damage impairment this quarter that was a deductible. We are continuing to assess if there is anything more, then that would be again recovered back. So it will be net-net 0 in terms of property damage. Going to Q4, there was also a Hurricane Delta, which will -- which impacted PO/MTBE for some time. And that impact would be maybe $2 million or so in Q4. So Q4 will only show an impact of $2 million.

So the -- let me confirm if I hear correctly. So the $70 million lighting damage that we booked in the second quarter, the $30 million coming from the insurance deductible?

So yes. So I will recover $4 million from the -- this number keeps moving because of the way it is calculated. But yes, between $3 million and $4 million, I will recover from the insurance company, but will only be recorded in the quarter when insurance company gives us the letter.

And in Q4, you would book another $2 million coming from Delta Hurricane. Is that correct?

Yes. That's right.

Okay. One more question from me is on the debt repayment on Slide 19, because I see that you will be refinancing the USD 800 million next year. So I wonder if this is in your plan or you foresee some kind of a difficulty next year. That's why you are -- we are planning to refinance.

No, it is just -- this is -- as you can see, there are certain debentures here, which is normally for a growth company. We will continue refinancing, and we've already done it. So there is no -- in Q4, it has already signed off. So this money will be coming in Q4 itself, and I will be reducing my current maturities for the next year. It's a prudent step from the path.

If we have more questions, please ask now.

This is Sumedh from JPMorgan. I had a couple of questions. So first of all, regarding the extraordinary loss of around $20 million, could you please explain what that is? That is one. Secondly, could you please also give us some color on how you see PET and PTA markets going into 2021?

Thank you, Sumedh. Good afternoon to you, too. I will let Sanjay Ahuja discuss the inventory loss.

Extraordinary.

Extraordinary inventory loss. But coming back to 2021 on the PET, PTA, as I mentioned in the closing slide on the outlook for -- going forward, I can say it is good about the outlook. Yes, that is dependent on how soon the COVID restrictions will ease, which will determine how soon the retail markets will open up. But as the retail markets open up, you can understand that there will be a pipeline inventory buildup, which will require extra demand for polyester apart from the usual demand of 5%, because this year, in 2020, we lost 10% of polyester demand. So I do expect some of that to come back in next year, which will drive the paraxylene and PTA margins up. On the PET, we continue to see very sustainable growth, that is enhanced requirements for PET in food packaging, in addition, plus on-the-go PET demand, which was impacted in 2020, I would expect that to return as well. So I should be expecting a stronger growth in both PET and fiber demand, which would lead to a stronger margin and demand for paraxylene and PTA and MEG for that matter. Just to repeat, perhaps you -- on the MEG side, what happened was, in 2020, the margin for MEG in Asia were similar to the margin over naphtha in 2019. Both 2019 and 2020 margin of MEG in Asia over naphtha had come down quite a bit from the 2018 level. While the margin in 2020 did not come down? We saw the margin fall in paraxylene and in PTA, but not in MEG, that was because the naphtha prices also came down. But IVL had -- because IVL produces all this MEG in the U.S. Gulf Coast, and we are based on shale gas, we did not have the raw material advantage that the Asian naphtha players got. So for our -- for IVL, our MEG margins came down. So as the price of MEG also recovers, we will advantage that in our MEG business in the U.S. Gulf Coast. So heading back to Sanjay to discuss the inventory loss.

Sumedh, I think your question was on extraordinary losses, which is the reported. As I explained earlier, $8.5 million comes from the property damage, which we had, that's a deductible, so that is written off in this quarter. And the additional around $8.5 million to $9 million, which is related to certain pre-operating costs, a few projects earlier in the year [ pressure ] and this year, our GBS, a couple of projects, which have started, which will give us these savings, GBS, and also some acquisition expenses, which were being negotiated is the balance. What is the expectation in Q4? Against the second one, which is $8.5 million to $9 million, I will have around $4 million in Q4, and that should finish off any further expenses. And on the machinery, net-net, I should not have any expenses. If there is incurrence, I will show it as an extraordinary loss. At the same time, the insurance company will give us the money and as we shown as extraordinary income.

[Operator Instructions] While we are waiting for the question, I have one question in the chat room. What is our view and comment on the outlook under Biden's administration?

It's too early to say, Vikash. Around the key -- I think, the base policies and the Biden -- it's too early to note. The key policy that we are trying to understand as time goes is what will be his policy on the tax. As you all remember, under the previous administration, or the current administration, the taxes were lower. Biden or democrats would prefer to increase the taxes. I would also say that because of how the COVID relief costs that every country has incurred that may be also a reason for the administration, the new administration to look at increasing the taxes. But I believe it will all depend on the Senate control. If the Republicans continue to control the Senate, then I believe that it will be difficult for the Democrats to take that route, but it's too early to say. On the other side, I think the current administration, the new administration are going to have very different political narratives globally. So globally, there should be a settling time, whether it is with China or with Europe or with the rest of the world. There should be some more stability to the global economics and politics. So I'm positive in case of the new administration. And as far as IVL's business is concerned in North America, we believe that the shale gas advantage will continue to be there, the advantage shale gas will continue especially as the crude oil prices will come up. So it's just a very, very first-hand feel about what is to be expected.

[Operator Instructions] We have one question from Andrew on this insurance. So we'll post the answer on this chat room. So Andrew is are asking that how much is deductible and how much is nondeductible. Do you mind reporting us one number, $52 million? So, Andrew, we will post this response in the chat room. If you are not able to speak or if you want to post your questions in the chat room, please do that. We will take your question, and I'll ask to the management here. So there's a question about the insurance, too. What are often covered and what is not? So that's a general question that what kind of losses are covered and what kind of losses are not covered.

So in this case, [ union ] -- okay, I see your other question also. In this case, the coverage is for property damage as well as loss of funding, which is they call it as business interruption. Both are covered but at the same time, in an insurance policy, there is always a deductible, which is around 30 to 60 days as well as carrying some dollar threshold. So just to clarify again, the Hurricane Laura impact was only for a couple of weeks, and it was below the deductible. So the $35 million, which I'm reporting to you, is below the deductible, and we lose it as soon as onetime loss. And on the lightning impact, the loss is on account -- is more than 60 days. It is going to go actually to 180 days. So I will not be able to recover the first 60 days, which I was telling you is around $13 million to $14 million, and anything over that is going to be recovered. So in 3Q, if I have reported $17 million, I will report -- I will recover $3 million to $4 million. And going forward, in Q4, I will recover everything if there is a loss reported in Q4, which would be. So this was on the business interruption, which is coming in the P&L. There is a different number which is coming because of impairment of plant and machinery which is the property damage, the $8.5 million, and that is exactly our deductible. So I have lost this $8.5 million as an extraordinary amount. Anything further -- we are still assessing -- the plant people are still assessing. This plant will come up for operation in January. Any further loss will be recovered from the insurance company.

There are two questions. So from Macquarie, Yupapan is asking that, impact from hurricane is $35 million in the third quarter. So should I assume that this will be revert in the fourth quarter assuming spreads are at the same level? So that's the first question. And the second question is that, why PET spreads collapsed despite strong demand? So these are the 2 questions.

I will answer the PET question, and I'll request Mr. Gill -- Mr. Agarwal to answer the IOD question. So on the PET spread, actually, they have not collapsed. When we look at it on a 9-month basis over 9 months last year -- can you put up the slide? So 9 months over 9 months, actually, the slide -- actually, the margin -- not this one, the delta, not this one, either. One second. So this is a busy slide. But actually, if you see the light yellow in the graph, 9-month '19 versus 9-month '20, the industry spread, the China export spread was $131 last year, and it has been $143 this year. So there has been, what I said in my spoken speech, that we have a resilient business in PET, and for that matter also in fiber. As you can see, the light blue, light gray in the middle bar on the top, the margins in fiber also has been resilient. Where IVL has lost is on our premium. Typically, when we -- the ideal business model is a global business model. And we typically get protection on our import parity, which is a percentage of the absolute price, generally. So last year, we had $89 premium over the $131 of base margin in Asia, which equals to -- is it $59?

Yes, $59.

$57.

Which this year has reduced to $57. Now this is an interesting one. And this slide tells you a story. The total selling price is $1,119 last year versus $817 this year for IVL on a combined blended basis. So which means this is about a 30% drop in actual prices. So that has led to the import parity reduction for us in the western hemisphere, leading to the drop of $89 premium to $57 premium. That would be the main reason. And as I -- as IVL management has been understanding the COVID era in the last 9 months, we have come to some very interesting conclusions. And on this slide, part of that conclusion is mentioned. And if you don't mind, I'll take you through this a bit longer. On the left-hand side of the slide, you see the fiber demand. And what I mentioned earlier, the fiber demand has contracted by 10% in 2020. This has led to a lower need for paraxylene and PTA, where typically it would have grown, as you can see in the previous years, by roughly 5% year-on-year. So the net impact is a 15% roughly drop in demand for fibers, which is substantial for the feedstock markets, and therefore, we saw a huge decrease in paraxylene margins, as you can see in the center, year-on-year, also on PTA, on paraxylene and on MEG. As I mentioned briefly earlier, the MEG margins did not contract much in 2020 because they benefited from the naphtha price drop. Whereas the paraxylene could not benefit from that entirely. The drop of margins are much steeper than the naphtha job. Initially, what happened is because of the COVID, the crude oil prices, as you all know, has steeply come down from $60 to $40. At these levels, the absolute price of our products have come down as reflected on the slide and as reflected our import parity advantage in the West. So although on the PET side, we lost some premium, but if you're still on that same slide, and if you look at the PTA bar, you would see that our premium in PTA has gone up from $40 to $62. The reason for this is that we have some flaw pricing in our PTA in Asia. And we have some fixed deltas in the West. So all in all, on the PTA side, we expanded our premium though, the base margin, the China benchmark margin came down significantly. And this is what, when it comes to the outlook for 2021 and beyond, we believe that as the base prices go up, as the demand from polyester fiber comes back, we would go back to a normal cycle, where we should see a recovery in margins for both paraxylene, PTA, and a recovery of our premiums over the base margins because of our differentiated business model in the West. Thank you.

There's only one...

Yes, I want to have still the IOD. So you are absolutely right on the IOD side. That shift is still -- spread remains the same. We will recover in the fourth quarter, $35 million. It's a perfect understanding that if the production remains -- recovers back in the fourth quarter to the same level and the spread remains same, it will be $35 million, which will be the benefit in the fourth quarter. But just to correct that, as Mr. Lohia was mentioning, delta had some little bit impact on the October of the PO/MTBE production. But yes, that's a perfect [indiscernible] in the case of recycling.

So there are 2 questions. So one is on the chat room. So I'll take that first. Yes, Mayank, you want to ask a question first? Please go ahead.

Okay, sure. So a few questions actually from my end. Firstly, to Sanjay, on the balance sheet side. Yes. I think if you look at the past 9 months, if I'm reading this correctly, most of the debt reduction this year has primarily come in because of working capital reduction. Like so when you look at 2021 now, how much of the OCF you think should be kind of going into debt reduction?

Mayank, the first run we had on our numbers -- on our expected numbers for 2021, where we are not assuming frees in spreads in the other businesses other than normalization in IOD, around $0.5 billion is what is expected to go and reduce the net debt in -- and this is on a flat working capital.

On dollar base.

Yes. Flat working capital dollar number.

So round about 10-odd percent would be the reduction in net debt in 2021 end, roughly?

That's right. A 10 -- yes, you're right.

Okay. And secondly, I think on the working capital point that you mentioned, how sustainable do you think is this working capital cycle now? Because I think in the past, what you had seen is that as your demand kind of moves up, you start to see working capital kind of, again, going back to 37, 38 days plus. Is that something you think is not going to happen this time now going forward?

No. As I...

Let me answer.

Yes.

Mayank, this is Aloke here. Good afternoon to you. We are -- I'm being very, very diligent with our management teams on this working capital management. We have suffered immense losses in '19 and '20 on the inventory losses. And therefore, under our transformation journey under our discipline, what we have agreed with the management is that we have to manage more -- our production to demand. We are a global leader. We should be having the first light of refusal on all businesses. We are the most sustainable polyester company. We are investing good amounts of money in our sustainability platform. We have a global franchise. So there is no reason why we should not be able to keep our market share or grow our market share. So under those circumstances, we should be producing to demand rather than producing to inventory. There is a seasonal element to this, but there is a clear focus in IVL now to reduce our inventory days and to bring it to a sustainable level, which does not hurt supplies to our customers, which keeps us flexible. Since we have multiple plants in each geography, I feel we have the flexibility and reliability to meet our customer demands. And what we are aiming for now is not something that we have not achieved in the past. When I went back to the history and I saw in 2016, '17, we were operating at these levels of inventory days. Somehow, in the hype of 2018, and continued in 2019, we built a lot of inventory, which has cost us a lot of grief, I would say. I've been very transparent and honest over here. So this has become now a KPI and something that we are able to monitor very closely. I hope that answers your question.

Yes, I think very clear on that. Just one point on this cost optimization part as well. Is there a way we can kind of look at your P&L and say that this cost optimization program is actually in the works? Because I'll just give you an example. If you look at third quarter, SG&A is up more than your volume growth this quarter-on-quarter. I'm just looking at quarter-on-quarter because you can't compare Y-o-Y because of this acquisition. But quarter-on-quarter, there is a bigger increase in SG&A than the volume growth for the quarter. So where can we find really the impact of cost optimization in the P&L items?

Let me take you through the EBITDA bridge for 9 months for PET and fiber. It's coming up on our stream. So only, you would see the cost optimization. We had a saving in our conversion cost, both in the combined PET and in Fibers. In IOD, we have already put this slide into our MD&A. So I would not go back into that. But the largest chunk of PET and Fibers, as you can see over here, we have shown both Project Olympus separately and -- so which are a sustainable part. And then the conversion cost-related or short-term incentive-related or things that we don't yet believe are sustainable, we have shown under variable cost and fixed cost over here. I hope this gives you some comfort that we would be auditing our series and the Project Olympus. And we have set up a TMO. The TMO is accountable to the Executive Board members. We are clear, we are not going to play games with this. Under my watch, we are not going to play games with this.

[Operator Instructions] In the meantime, I'd take one, given the -- -- so on our 12% to 14% restacking target on return on capital employed, will you please share the key assumptions behind the return on capital employed? And how do this swing the changes in crude oil price of the described? That's number one. Number two, in 2021, where do we expect SG&A per ton to be? These are the 2 questions from Rocky Indrawan.

I'll take on that. SG&A is too early to talk about it at the end of the year when we have the Capital Market Day. We are going to share with you a lot what it is on our transformation journey. As you remember, in the beginning of this year, we, for the first time, discussed the transformation journey, the 5 strategic priorities and with a first-cut ambition to improve our EBITDA through this cost excellence and operating excellence by $350-odd million. Now with a deeper analysis of our cost programs, including a lot more rigorous testing and validation by third parties, we have not shared with you a $582-million ambition. So we have got all our budgets now very early. Normally our budgets for the next years would come in only in January. We actually have now our first-cut budgets from our businesses in end of October. The Board is now reviewing those budgets in November and December, and the final cut will be shared with you in January. I hope Vikash and the Board will pick separate dates for the Capital Market Days in January rather than in February in advance of the full year results so that we can share more time on our transformation journey. But back to the recycling question, I would like to give question to Mr. Agarwal to talk about that.

I think that's a very good question. Just to understand what we do in recycling. We basically make from Bains to flake and flake to rPET or single-pallet solutions. Today, our business is mostly around flakes. And we are adding a lot of capacity of rPET and SPS. This is what is getting done in '21. Today, this is based on a convergent margin from Bain to rPET or SPS. So there is no exposure to the movement of crude oil prices. And it's a fixed convergent margin. We're entering into multiyear agreements with our customers, the brand owners, globally because that's what they are looking for the solution. So it will be linked to a fixed conversion margin rather than exposure to any crude oil movement. So we calculate rPET price based on the Bain prices. And that assumption is taken based on 12% to 14% ROCE, which is being calculated. So it will be a multiyear-agreement strategy in this and integration right up to -- from Bain to rPET and SPS. And even if the crude oil drops, doesn't matter. If crude oil goes up, also there will be some benefit because the price of rPET will converge to virgin, but we will not get exposed to that.

Thank you, Mr. Agarwal. [Operator Instructions] So there are no further questions in the chat room. And it seems that there are no more questions. So a recording of this replay will be available on our website. And we thank all of you for joining this call. Thank you very much.

Thank you very much.

Thank you for joining us.