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

Good afternoon, ladies and gentlemen. This is Vikash Jalan, Vice President, Investor Relations and Strategic Planning for IVL. I welcome you all to Indorama Ventures' first quarter briefing. Joining me today in our earnings call, our group CEO, Mr. Aloke Lohia; along with Indorama management team, Mr. D. K. Agarwal, CEO; Mr. Sanjay Ahuja, CFO; Mr. Udey Gil, Chief Strategy Officer; and Mr. Roberto Bettini, Chief HRO. Before we begin, a quick disclaimer that this presentation is being recorded, and a replay will be available on our website after the meeting. The presentation contains forward-looking statements, and they are based on our analysis and available industry data and views at this point in time. So let me take this opportunity to play a video. We have just published our annual report for 2020. We encourage you to have a look, and this video will also tell you more about our vision, mission and values. [Presentation]

Thank you. [Operator Instructions] So with that, I would invite Mr. Lohia to take us through -- and start the presentation.

Thank you very much, Vikash. Good afternoon to everyone who can join our call today. The last 1.5 years has brought about tremendous changes in our world and in our industries. We navigated through unchartered waters and have emerged with renewed confidence and deep understanding of our businesses. 2021 has further proven that the pandemic made no structural damage to our industries. Our production volumes were higher by 5% quarter-on-quarter, and 11% year-on-year, to 3.7 million tons in first quarter of 2021. Our core EBITDA of USD 369 million, registered a growth of 45% quarter-on-quarter and 21% year-on-year. Positive contract adjustments and inventory gains reported an EBITDA of USD 483 million. Our reported EPS of THB 1.04 compared very well against THB 0.20 in fourth quarter and THB 0.07 in first quarter 2020. The positive sentiments are driven by the vaccine rollout which in many countries is just beginning, promising further growth to come. Aided by government stimulus programs in the U.S., it seems it is driving on all cylinders. And China, which was the first to emerge from the -- with strong demand -- if Europe unites in stimulating its economy then the global demand will revert to its pre-pandemic growth rate, and [indiscernible] will have to catch up. For IVL, this positive global sentiment has resulted in strong demand for all of our key products and strong margins even carrying forward into the second quarter, driven, at first, by recovery in China, and now seen very visibly in the United States. The global inventory levels are tight, and combined with supply chain shocks, are leading to margin increases for all commodity products, supporting the increase in crude oil prices. All of this translates into stronger-than-anticipated earnings in first half of 2021. IVL's regionally integrated business model is our unique advantage portfolio provides us with superior margins, taking advantage of U.S. shale gas and our global integrated footprint has proven beneficial to the various supply chain disruptions seen in this quarter. Notably, the Vortex and the Suez Canal blockage. Having access to our own raw materials has allowed us to operate at higher rates and thereby reliably serve our customers and improve our supply chain resilience. Our company-wide cost and business transformation is on track. Project Olympus is at USD 67 million during the first quarter and is on track for our 2021 target of USD 287 million. Our recent leadership reorganization into 16 distinct business verticals within 3 business segments headed by us, Chief Operating Officer are all under 1 global CEO, Mr. D.K. Agarwal and they have demonstrated deftness and agility in keeping our supply chains functioning with minimal disturbances to cater to strong customer demand while newly implemented enabling functions provide them best-in-class support. Our next era is off to an excellent start with secured growth platforms, which is managed by the talented team bench of that -- of executives. And our systems are providing the infrastructure which we leverage on our scale across our 3 segments of combined PET, IOD and fibers. This can be seen through 3 key themes. Our platform, which is our businesses, and they were put to a severe test during the pandemic. And we have emerged resilient. In fact, with record sales volume in 2020 and now in first quarter 2021. We have a leadership in all our 3 distinct business segments that each have attractive growth opportunities. The sustainability aspect of our core business is well accepted, and its secularity is well proven, and it is a leader in all sorts of plastics. Our second theme is our people. We have spent the last year restructuring our organization, making sure we have the right leadership in the right place, preparing for the next generation to lead our businesses. Today, we have an agile and lean structure with empowered teams to enhance their 16 verticals and take ownership of delivery by leveraging on experts and enabling functions of digital and information technology, which I adopted as centers of excellence. The infrastructure, the third theme, began our transformation journey in early 2020 with the launch of Project Olympus and 1 global ERP with the global shared services based out of India. We are strengthening and developing world-class systems in order to provide our people with the tools that will enable us the use of algorithms and machine learning, which will lead to superior interactions with our customers and provide enhanced services and intimacy. Our 16 integrated business verticals have strong linkages and provide support to one another. We grew thoughtfully and systematically, building up the scale developed in the PET business as our core. We expanded with the intention to build our downstream businesses to create more added value and our upstream businesses to capture cost advantages. Through the unique integrated model, IVL has delivered leadership position within all of our 3 business segments. Combined PET, in which IVL is a world leader, and also within that, on recycled PET. As you all know, PET is a preferred sustainable packaging material. Our enlarged IOD segment with the Spindletop acquisition, is today, a leading position in the IOD segment being the second largest producer of ethylene oxide and the third largest producer of ethoxylates in the United States. Our strengthened IOD platform brings us further avenues of growth, notably in downstream HVA space. Our third segment of fibers includes hygiene fibers and 50% of premium diapers made globally use IVL fibers. The second vertical within fibers is mobility, in which 1 out of 4 airbags across the world are made from IVL, and the last vertical within fibers is Lifestyles. And this one has IVL's key advantage, as its local production and proximity to customers as well as using the same raw materials as our PET value chain. IVL today has unique portfolio comprised of high value-add and commodity product parts. The HVA segment makes up about 40% of IVL's EBITDA which, over the long term, has provided premium margins and low variability. The commodity segments can be split into 2 parts and together, they represent 60% of IVL's EBITDA. And at the same -- one part of that is that it provides us a significant alpha to benchmark margins set in China. And the other part being, that half of the commodity fibers is made from shale gas, which is an advantaged feedstock. Next, please. Within the HVA products, represented a significant and growing part of IVL portfolio, driven superior margins to commodity products. HVA consistently provides IVL with higher and stable growth. HVA products are seen across our 3 business segments and provide us market leadership in key product areas. Next, please. On the commodity portfolio, although the commodity margins are fixed in China, but IVL's commodity spreads, although this fluctuated with the Chinese volatility, our spreads have consistently been higher than China at approximately $33 premium and represents about half of our total commodity portfolio. Next, please. Almost -- half of the commodity portfolio, which has been benefiting from the shale gas feedstock in North America, which has an extremely advantaged cost base and that gives the region and edge of our Asian peers. Asian-integrated margins are based on naphtha feedstock, while IVL's raw material has been able to create integration using the advantage shale gas components of ethane, butane and methanol. With the acquisition -- on the upper right-hand side, you can see the proxy between Mix-Xylene and MTBE, which happened with the acquisition of Spindletop's MTBE assets in the U.S. IVL has a unique position in North America between the selling of MTBE and the buying of Mix-Xylenes as feedstock for paraxylene and PIA. We have been able to create a natural hedge and the volumes for Mix-Xylene purchase and MTBE sales are approximately the same at about 700,000 tons. MTBE and Mix-Xylene, both being gasoline-blended components, have very similar price points with over 90% correlation and therefore act as a proxy for one another. In this, I feel the unique virtual integration across the value chain from shale gas through to PET. Over time, this integration results in an additional average premium of around USD 185 per ton of PET over the Asian industry spreads. So, what I've explained over the last 3 slides is that we have the HVA portfolio, then we have the commodity portfolio, which is linked to price to China. And then the third commodity portfolio, which is linked to the [ value ] of shale gas. Next please. Sustainability is on the top of everyone's mind and at the heart of IVL as well. We are progressing on our carbon-neutral journey, and we have an intention to make our carbon-neutral targets known within the next 2 years. We believe that IVL's focus on emissions, on sustainability will be the key differentiator for IVL going forward. I will list 5-pronged approach towards carbon neutrality. One, getting into green projects, upgrading systems at our plants, improving efficiency and lowering our carbon footprint. Secondly, investing in renewable energy, and the target is to get to 25% of our energy consumption made from renewable energy by 2030. Expanding our PET recycling footprint, the advantage being that PET being 100% recyclable, PET is fully circular and is unique to other plastics. It remains as a preferred polymer due to the low cost per serving versus other packaging materials and the lower carbon footprint. The PET recycling industry is challenged on the supply side, and as collection improves, recycling rates for PET will improve. Fourthly, to get to a carbon-neutral status, including what we have recently announced as our zero carbon PET can be offset particularly by investing in forestry and water conservation projects. And finally, leveraging our new green technologies for lower carbon footprint. So IVL is in a unique position as a largest PET producer to be the leading sustainable player by leveraging on our scale to support our customers' sustainable targets. Vikash, are we showing a video here, or?

Yes. We can play the video now. [Presentation]

Thank you. We have to get out of this virtual mode soon, so that we can be in front of each other and we can make better presentations. In any case, this carbon-neutral Deja PET is something that can become a very big deal for IVL. We are starting this in the U.S. at our Decatur location. We have 2 locations in Europe, which could supply the similar material, 1 location in Brazil and our plant in Rayong. So we have 5 sites globally, which could get into carbon-neutral Deja PET. And these are the ways that we believe that IVL will differentiate against the competition by our regional presence, by our integrated business model, by our HVA and commodity-linked businesses, with our shale gas advantage and our leadership in sustainability. With that, let me pass it on to Mr. D. K. Agarwal to take you through the business slides.

Thank you, Mr. Lohia. So let us walk through the first quarter '21 business results. As you can see, we recorded a Core EBITDA of USD 369 million versus fourth quarter of USD 255 million. This is a 21% year-on-year growth and 45% quarter-on-quarter. And as you know, the reported EBITDA is about USD 483 million, which includes inventory gain. The USD 369 million is after, as you know, the loss due to Polar Vortex, which is nearly about $31 million. And so IOD did not do that great, as you can see in the bar, impacted by that. However, the PET has been very strong at USD 260 million due to very strong demand as well as better margin. And also, we also we got the gain in PET, as I mentioned, in IOD. You can see a strong recovery in the fiber business, too, which is USD 72 million. This is because of the strong mobility and lifestyle demand. However, our hygiene business was affected because of the lag loss of USD 9 million to USD 10 million, which you will see in the subsequent slide. We see a very strong demand continuing in the second quarter as we step in. There are some force majeures by some of our competitors, and we are seeing -- we think that the second quarter will be much, much better than this as the first quarter got affected due to various events. Let's go to the next slide. Now if we go to the fiber business, you can see fiber segments really made a positive start to 2021, with strong volumes and demand across all 3 verticals due to recovery in polyester fiber demand, increase in light vehicle sales driven by China and continued strong demand for hygiene fiber, achieving an increased overall average operating rate of 87%. As you know, the sale of automobiles is still affected due to shortage of semiconductors, but we are seeing very strong in the mobility side. Our Chinese plant is running at full capacity, and we are contemplating how to further grow the mobility section. The higher freight rates positively impacts the sales price in our respective domestic market. So this translated into a fiber EBITDA growth of 23%, as you can see on quarter-on-quarter, and 19% year-on-year. In this segment, if we look at the reported EBITDA, we achieved a reported EBITDA of USD 85 million. If it goes segment-wise, Lifestyle fibers, EBITDA grew 52% quarter-on-quarter, as you can see, the USD 37 million there and 87% year-on-year, driven by strong global demand for polyester fiber coming from replenishment of pipeline inventory to support the pent-up consumer demand as well as improved spreads coming from strong domestic market in India and Indonesia. So we saw a very strong recovery in the Fibers business. If we come to the Hygiene business, as you can see, the Hygiene business, the impact was -- because of the lag impact of USD 9 million, which impacted -- so if you normalize the Hygiene business, it would have been USD 28 million. So we are seeing very positive vibes in the Fiber business. This will remain strong going forward. In Mobility, if you look sequentially, the core EBITDA grew 6% quarter-on-quarter and 33% year-on-year, driven by the recovery in volumes starting from quarter 4. Notably, strong demand seen in the tire segment as well as improved margin, as I mentioned to you about our operation rate. The global light-vehicle cycle sales are expected to remain strong, except for the semiconductors issue, which I mentioned. In the Hygiene, as I mentioned, core EBITDA remained flat quarter-on-quarter and declined 34% year-on-year due to delay in pass-through of [ profit in ] price, and this is purely because of lag. So if you add the lag impact basically, USD 19 plus USD 9 is USD 28 million. And this will not be there in the second quarter, which will improve the second quarter result. Underlying demand for hygiene fiber continues to remain very strong across all regions with consumer heightened sensitivity to health and safety. And our Olympus project, as we committed USD 600 million across IVL, we are on the journey of that. We delivered USD 34 million saving from Project Olympus during this quarter, with a focus on operation sales and other excellence initiatives. So that's, as you can see, a very strong recovery in Fiber. If you come to the Combined PET, combined PET as you can see, is at USD 260 million, which is nearly a 35% year-on-year growth in the first quarter and 47% quarter-on-quarter. In core EBITDA, as you can see, in the Fiber business -- at this integrated PET is very strong. You can see the Specialty Chemical went from USD 30 million to USD 33 million, and Packaging remained strong at USD 22 million. The global demand for PET, as Mr. Lohia was mentioning, has risen significantly from the flat demand of 2020 and coupled with container shortage and feedstock availability issues, has resulted in tightness along the entire value chain and across all markets. As we are geographically diversified, we continue to get the benefit of this global presence. And as you know, the freights are not easing up. The freight are still very, very high. European PET industry has seen major disruption due to several declared force majeures and the North American PET and PET industry is facing acute acetic acid and MEG shortage, highlighting the advantage of IVL-integrated model. So as we speak, one of our competitors announced force majeures in Mexico, one of our competitors in Europe as having mechanical issues, and is on 40% allocation. As you can see, our down strip value-added products of Recycling and Packaging continue to see strong demand. If we see the second quarter, I think second quarter, we are expecting it to remain pretty strong because of the better margins as well as the improved operating rate. As you know, the first quarter was also impacted due to the other disruptions and the raw material shortage, particularly in the West market. In the Project Olympus, we continue to deliver about -- as the USD 17 million in the Project Olympus savings. And if you see the core return on capital employed, it's about 19%, a significant improvement. Now this is in spite of some lag loss in the PET because in PET, we are basically presold in Asia, so that doesn't get reflected into the core EBITDA. But as you can see in the reported EBITDA was much stronger in the PET business. Let's go to the next business. This is a business where we got the maximum effect, Integrated Oxides segment grew 187% but declined 27% year-on-year. The major impact which came from Polar Vortex in the U.S. Gulf Coast in February negatively affecting volumes. However, management was very agile in the disruption and successfully restarted old plants with majority ramping up to full operating rates. As you can see, the commodity portion of our IOD segment experienced better price increases across the product portfolio this quarter, driven by increase in the crude oil prices, improved demand as well as supply tightness due to the Polar Vortex. Additionally, the rise in crude oil price through -- brought back IVL's shale gas advantage, as Mr. Lohia was explaining, in North America improves the spread further across our IOD portfolio. But if you look at the second quarter, we are seeing our MTBE as the gasoline demand is improving and the butane prices are coming up, a strong recovery in the MTBE spread similarly on the MEG side. And the second quarter will see the full operations of this IOD section. If you look at the Asia integrated images, spreads also benefited from global supply tightness and a strong demand coming from polyester fiber, PET and anti-freeze section, while increase in crude oil prices resulted in improved shale gas advantage, hence, significant increase in U.S. integrated MEG spreads. IVL will capture the full benefit of the shale gas advantage coming from a retained to MEG integration once IVOL, the Louisiana cracker comes back on the stream in mid-2021. As you know, our breakdown of the IVOL is covered on the insurance policy. We have realized about USD 14 million to USD 15 million gain in this quarter, but a substantial portion of that will come in the second quarter and the future third quarter as it is realized. As you know, this is accounted based on cash basis. As I was mentioning, with rising benchmark prices coming from increased prices of China's key feedstock naphtha and increasing gasoline demand, U.S. MTBE spreads improved from the lows seen in 2020, the upcoming driving season and seasonal price decline of our key feedstock, butane should further improve the MTBE demand. And as we speak, we are at around USD 0.80 per gallon, which is a significant improvement over the first quarter and the spreads in the summer months. The demand for downstream market is actually very, very strong as I speak today, our asset utilization is very high because of the Polar Vortex, there was a disruption in the supplies and that is showing a very strong demand and the price increase, which will also get reflected in the second quarter earning of the Integrated Surfactants business. So IOD segment, on the Project Olympus side, delivered USD 16 million savings in this quarter. So as you can see, the core OC was negative is not reflective of the real potential of the business, and you will see the results of this IOD section in the second quarter. Let's move to the next slide. So that wraps up the business presentation. I hand over to Sanjay for taking over the finance and then we'll take your questions later on. Thank you.

Thank you, Mr. Agarwal, and good afternoon, everyone. I sincerely hope you all are staying safe. I'll cover the Q1 financial highlights in the next 3, 4 slides. Our sales volume grew 9% year-on-year to 3.7 billion tons. On a quarter-on-quarter basis, it was 2% increase. We lost some volumes due to the Polar Vortex in the U.S. in February, which impacted our IOD segment volumes as well as due to some unplanned shutdowns. And -- but for these lost volumes due to natural calamity and shutdown, we would have reported at 8% to 9% growth in sales volume on quarter-on-quarter basis also. Now revenue increase, what you see here is 19% quarter-on-quarter, while volume was 2%. That reflects almost USD 150 per ton price movement due to increase in the crude prices. Core EBITDA is USD 369 million, registering a growth of 45% quarter-on-quarter and 21% year-on-year. The reported EBITDA of USD 483 million coming from higher core EBITDA, the positive contract adjustments as well as the inventory gains. Reported EPS of our -- reported EPS of THB 1.04 compared with THB 0.2 in 4Q '20 as well as THB 0.07 in first quarter '20. We see strength in our business continuing beyond first quarter '21 and expect to be more rewarding for us in the rest of the year, and that will show up in our next quarter results also. I do want to mention here that our reported EBITDA presentation in this quarter in the MD&A has been modified so that it ties into our financial statements. This was based on our feedback which we got from some of our analyst colleagues as well as Bloomberg on how they wanted to see more clarity and tidying up to the financial statement. So you will see that in our outlook, and appreciate that change. Let's move on. So the year 2020 has been -- has seen a relentless focus on working capital optimization, and this working capital optimization demonstrates our people capabilities, process facility. We have benchmarked ourselves in the industry and [ land ] in the first quartile. That said, we will continue this focus on working capital in 2021 and beyond. As you can see, our ability to convert 100% of our EBITDA into operating cash flow has been our strength, and it enhances our strength -- our ability to provide growth capital to business, reward our shareholders and also deliver it faster. And having said that, our conversion for first quarter for 2021 was around 55% of core EBITDA, reflecting some working capital blockage due to increase in selling prices, but you will see that normalization in Q2 onwards. On the liquidity and CapEx. With the liquidity of around USD 2.2 billion in March 2021 and an operating cash flow of around USD 201 million in 1Q '21, IVL is well-positioned. During this quarter, net debt reduced with the positive free cash flows. Our net operating debt to equity has improved to 1.17x from 1.35x a year ago. And our strong balance sheet, our rating information from [ Chris ] last year, September, our sustainability focus has helped us to diversify our debt profile as well as lower our costs. We refinanced USD 1.3 billion debt post-Spindletop acquisition in 2020. USD 300 million of this came from our blue loans from IFC [ABBG] with a tenor of 9 years. This will be used to fund our investments in the Recycling Business and help IVL do its part in reducing ocean pollution from plastics. Earlier that year, we also tapped around USD 255 million from the Tokyo and India loan market. 2020 also saw a successfully-issued Thai Baht-denominated debentures of THB 9 billion, with an average maturity of 7 years. The compounding impact of this refinancing activities that our debt is now spread over 10 years, and our cost of financing is down to 3.14%. Around 70% of the debt carries fixed costs. Strong liquidity in the form of cash and unutilized cash, are USD 2.2 billion, which I mentioned earlier, will continue to be maintained. Our budget plan for 2023 has some modest CapEx and had around USD 350 million per year in reliability CapEx, balance being in growth and transformation CapEx, USD 1 billion in 2021 to be specific. For the first quarter though, we had a growth CapEx of USD 97 million, which included USD 47 million of the transforming CapEx, which is Project Olympus-related, plus a liability CapEx of USD 44 million. Next slide. This is the slide on Project Olympus. Our company-wide cost and business optimization program, which is Project Olympus, is well on track and delivered an efficiency gain of USD 67 million in first quarter 2021 on a run rate basis, incremental basis it was USD 46 million. This includes initiatives we had taken in 2020 and some new initiative we have taken in this quarter. Efficiency gains have come from all 3 segments and across various levers. Sales and operational excellence provided majority of these gains. Our Fiber segment has contributed the most in this program. Some examples in each segment. In Fibers, we had some better product pricing in hygiene vertical with our customers, shifting low-margin products to higher-margin products, better negotiations on key feedstock procurement. And these all are sustainable, and that's why we are here. They are here to stay with us. Similarly, in Combined PET -- for Combined PET example, there was a modification in certain equipment in PET vertical to achieve higher operating rates. There were better utilities, contract negotiation, operational efficiencies throughout, concerning better discounts in built-on in catalyst purchases. In IOD, an example is a negotiation of ethylene contract as well as some headcount optimization. So we are well on track to deliver USD 287 million in 2021 of which USD 92 million efficiency gains are the ones which were delivered in 2020 and the balance in 2021, out of which, as I said, USD 46 million has been covered in Q1. We've already embarked on one ERP project. And before that, maybe I should also mention that some of you have asked previously, where does it show up in financial statements? So out of the total USD 139 million achieved so far, USD 92 million plus USD 46 million, USD 92 million in 2020, and USD 46 million in this quarter, around USD 5 million to USD 6 million comes from SG&A, and the balance comes from cost of goods sold. We've already embarked on one ERP project, we went live on GBS, developed some new 6 enabling functions of corporate communication, ESS, business continuity, digital Lean Six Sigma and ERM. We continue to engage leading external experts to bring the tools and practices that will provide effective ways to execute this -- a lot of initiative, enabling IVL business to achieve their full potential. This covers my side, and I'll request Mr. Lohia to do a wrap up. Thank you.

Thank you, D.K. and thank you, Sanjay. So on the last prepared slide, the key takeaways are basically -- I think IVL is going to set a new record in 2021, and we are expecting a volume increase of 12% in 2021, with the growth coming from all the 3 segments and all the regions. Our business and mix have improved since December 2020 with higher crude oil prices and increased demand. Our Combined PET segment provides strong cash flow visibility and expect to outperform in 2021 as the vaccination rollouts happen and on-the-go demand emerges. We remain committed to our sustainability and ESG targets, and we believe that our sustainability goals would create a key differentiator for IVL. Management setups our empowered leaders fully on top of Project Olympus and on our ERP implementation, which is both going in full swing and on target. So 2021 is expected to set a new earnings benchmark for the company with growth coming from all the 3 business segments. And we are making good progress towards our 2023 target to double our EBITDA to USD 2.3 billion to USD 2.4 billion. Thank you.

Thank you, Mr. Lohia.

And so we have got one question from the conference line. I can see you raised your hand. Do you want to unmute and ask your question, Mr. [ Thompson ]?

Yes. Thank you, Mr. Lohia for the presentation. Really insightful. I have a few questions to ask D.K. Number one is, what would be the integrated EG EBITDA if IVOL U.S. cracker will open, and without the impact of the winter storm yearly? And the second one is, what would be the integrated EG EBITDA looking like with the current traction in the second quarter? And would you be able to capture the low ethane cost in the U.S. in the second quarter? Or still because of the cracker hasn't opened yet, so you not fully capture that benefit. And the third one is the -- any color on propylene oxide EBITDA in the first quarter will be very helpful for us to gauge the potential turnaround of MTBE?

Yes. Thank you, Thompson. I think let's split the questions into 4 parts. Number one, as you mentioned, today, United States is having very high at in crack margins. Our IVOL cracker will start by June end. But as our insurance income will start kicking in, our -- we are still working on the insurance. As you know, USD 15 million we got. But effectively, if the assets were running, I cannot give you the exact number, but it should be around USD 50 million to USD 60 million higher. And our insurance claim, which we are expecting in the second quarter is around USD 52 million. And actually, our run rate will be had. But as you know, the ethylene crack margins will come down. And as our cracker starts up, the integrated EG margins will be improving, as you rightly said, [indiscernible] cost. And particularly on the point as number of rigs are increasing, the NGL's availability is increasing. So certainly, this will benefit the situation. On your PO/MTBE question. Of course, the MTBE was not doing great. The spreads were not great. And now with the butane price coming down and the gasoline improving, and the MTBE seeing factor, what we call it a spread, is about USD 0.80 per gallon and it's an improving trend. And based on that, the impact is running about USD 30 million in excess of the first quarter. Now listen -- I'm just telling you present run rate that can be further improvement because, as you know, second quarter, third quarter, the gasoline is on peak and the butane is on the lower. So we certainly will capture the low-end cost. The cracker is expected to start in June end. We are in the third week of June. We are still addressing some of the process safety issues, but then the integrated issue, complete margins will come up. And insurance claim will be accounted in the second quarter, third quarter. And I hope I answered you. But you can see here the spreads -- the slides which you can see. These are very volatile, as you can see, the 614 was in '18 when the crude oil was substantially higher and -- which also reflects the MTBE spread over naphtha. In '21, when the crude went down, the U.S. MTBE spread went down to 152. And now as we speak, on the right-hand side, you can -- this has improved significantly. And on the right-hand side, we have the quarterly numbers, and you can see the improving trend, as you can see. Now there's no silver bullet here that we saw, it was very high earlier. But we are certainly seeing an improving trend in the MTBE spreads, and which will get reflected in the coming quarters. And propylene oxide is also very tight. As you saw many results of Covestro and polythene companies, the demand is very strong on PO. Actually, we just are still on FM because of this Vortex, we are not able to meet the demand. But as the plant operating rates improves, and which is improving, we just had a small hiccup of 4, 5 days. But now then as it comes up, we'll come out of that trend. So demand is very, very strong of propylene oxide and MTBE. I hope that answers your questions.

Let me get this straight. The insurance claim that you mentioned, USD 15 million has been recorded in Q1. And another, let's say, USD 32 million will be recorded in second quarter. And that is coming from the Q1 shutdown? But in Q2, would that be another insurance claim falling into third quarter, which means in the second quarter, you will not be able to capture the ethane - cheap ethane in second quarter?

So no, it is not only the cheap ethane. As you know, the cracker insurance claim is linked to the crack margin, as I think it's very strong, USD 0.47, USD 0.48. Our insurance claim, we are still working on it. We'll run up to at least middle of April. I mean I can give you -- still it is a subject of negotiation with the insurance company, we have a solid case. But the cumulative insurance claim can be -- net of deductibles can be around USD 75 million to USD 80 million. That's what -- the numbers we are targeting. But we cannot comment on it. We are working on it. So it's a loss profitability of IVOL, which is since August to first quarter getting recovered in -- on cash basis.

Is the problem of IVOL something that we should be worried about? It seems to be a drag on and on.

On the cracker side?

Yes.

No. Actually, as you know, this lightning event really, and then we had this exclusion, and we found some processes, safety issues. So we really need to refix all the issues. But with this now the new management, which is working very hard on it, we are very confident now that this plant will be running smoothly as soon as this starts up, which is, as I said, third week of June latest. So that's the plan. And there is no pattern, and then we'll get the full integrated margin on that. Yes.

Thank you. Komsun, I can see you raised hands. Can you please ask your question?

Okay. I have 2 questions. First one is related to the PET production. You mentioned earlier that there are a lot of disruptions that is caused by the lack of raw materials, including PTA, I believe, and acetic acid, right? Can you elaborate on that? And how many months of that happened in the first quarter? Is it like February and March? And then in second quarter, do you expect that -- was the situation continue in April? And is it still going on now? And I just want to see the momentum of the situation going into Q2. The second question is related to the schedule or shutdown of MEG. I understand that you have it for maintenance shutdown now. Is it up and running already? Or what is the schedule like?

Okay. I'll take this question. Komsun, thank you very much for asking this question. We did had loss of PET production in the first quarter. Being an integrated model, we were lucky in the second quarter because this disruption, what has happened is with our acetic acids, and what we did that we actually preponed the shutdown of our PTA plant earlier -- and the deferred -- and we made an IPA run. So our mitigation has resulted into a smaller loss in the second quarter, it's about 78 PET. But because of the competitor's issue in the United States, the material is quite short, and we have been able to get some PET surcharges from our customers, PET surcharges from our customers in April. First quarter also, we got. So we are in a much comfortable situation, and we also planned -- NDC also uses acetic acid. So we -- what we did that we -- NDC runs in campaigns. So to conserve the acetic acid, we delayed the NDC production. But overall, NDC profitability will not get impacted. So this is how we have mitigated. And this second quarter, as I mentioned to you in the first quarter, PET had a USD 260 million, but that has an impact of a -- lag impact, as I said. And this lag in fact, is quite significant because we are presold in the rising market and that runs about USD 75 million to USD 80 million. So that gets normalized in the second quarter. So we have a good visibility on how this benefit will come. Your second question was around -- IVOL shutdown. No, this plant was shut down very recently. It is scheduled to start on 18th May. It is progressing very well. Our maintenance activities are going good. And we have actually going to use a very good catalyst, which will have much higher production. So it is right on the -- at present on the scheduled shutdown period. I hope that answered your question, if you have any more...

Can you repeat again that you presold the PET? And you talked about USD 80 million, USD 85 million that will normalize. I just don't follow that part.

Yes. D.K. why don't we bring the underlying principles now?

Okay. So what happens that we have presold...

We can show the slide.

Let's show that. Okay. So you see here, USD 260 million and USD 72 million, USD 37 million. This is the core EBITDA of USD 369 million. We realized a hedge gain against the -- which we have reduced USD 15 million. And you can see here the lag gain, which is about USD 56 million, which is realized indifferent. And Fiber also, we have a polypropylene lag of 3 months. So when the price is rising, actually you're selling the finished product based on the raw material of previous 3 months. But again, this gets compensated by the inventory gains. So that's why we want to bring that principle of core EBITDA to underlying EBITDA because core EBITDA does not represent the real potential of the company because it gets translated into inventory gains. So if you recast this EBITDA of USD 369 million, taking the lag gain loss of 93% then the normalized underlying EBITDA becomes USD 473 million versus reported EBITDA of USD 483 million. We are actually going to improve in the second quarter this underlying concept which shows the real potential as in the second quarter, we will not see the lag loss. As you know, polypropylene became very short and polypropylene increased by USD 0.60 in the first quarter. Now as polypropylene is getting normalized, It is coming down rapidly. So we'll have a lag game coming up. And actually, if you see the impact of this on return on capital employed is 400 basis points. We reported you 8% and it becomes 12%. So I hope this clarifies your -- the lag impact. The lag impact is basically you are selling based on 3 months back raw material or 1 month back raw material, and you are paying for the current raw material cost which results into lower margins. When the market normalizes, you recover it back in form of a lag gain. But then you get compensated by the inventory gain. So this is why we are showing this a normalized number. I hope that answers your question because inventory acts as a hedge against those outstanding contracts.

Next is Mayank. Can you please unmute yourself and ask your question?

Yes. Can you hear me, Vikash?

Yes, please go ahead, Mayank. We can hear you.

Okay. Perfect. So firstly, sir, thank you for the presentation and a good quarter. Just a few things I wanted to kind of touch on, on the cost side as on the balance sheet side as well. So first and foremost, on the cost side, you talked about USD 18 per ton savings this quarter because of the program. So is it right to kind of think about like last -- that your total cost decline quarter-on-quarter was about USD 7, USD 8, and there was about USD 18 savings? So net-net, you would have seen an inflation in cost because of energy costs, et cetera, of close to around USD 25-odd? And that kind of negated off by the savings? Is that the right way of thinking about it?

Vikash, should I take it?

Yes.

On the overall cost, the inflation percentage that you're mentioning, what we're saying is right that on a quarter-quarter basis, it could be around USD 7 million. I can get you the rate -- the [ formally ] all the numbers. But in terms of an increase, we have seen an increase of -- as we were talking about, the freight cost. So out of the increase, USD 5 per ton is coming from freight costs as well as the higher volumes coming. So our normally operating cost, distribution costs are between USD 38 to USD 40 per ton on an overall IVL basis, which this quarter was USD 45 per ton. So USD 5 is around that distribution costs. And of course, the overall volumes were also high, around some previous quarter from a Q-on-Q basis, it was around 50,000 tons and on a year-on-year basis, was 300,000 tons.

And sir, this USD 5 freight cost were you able to pass through?

Yes. Sure. You can see the margin increase was significantly higher. So we were able to pass through this.

Okay. And second question, Sanjay, was on the debt side. You have repaid debt, as you kind of highlighted, so is it a run rate that we can kind of think about you'll be repaying now for the next 4 quarters or 3 quarters, sorry, to get to your overall reduction in debt?

Yes. I think if you remember correctly, I had mentioned about based on our estimates as well as our business plan, we expect around USD 400 million of net debt reduction this year. So we can -- I would think that I should be able to do better because of the better outlook for this year. Operating cash flows are going to be higher in the next couple of quarters. So I would stick to my target of that USD 400 million.

Okay. And just the last question was on the Deja brand. Can you just give us some details around how much production of Deja are you kind of having right now in terms of and that how much is being sold right now in the market from these 5 sites? And how has been the pricing around that?

I'll let you take that one.

Mayank, the 5 sites are not operating. At the moment, it's just Decatur where we have introduced this brand. The Deja is a global brand flywheel for all our sustainable products. So if you look at our Recycling presentation or section, the entire recycled production is called Deja. So there are different, different Deja. This one is Deja carbon-neutral. This is a new product just introduced to the market and now being commercialized, with the successful commercialization of this site. Why the site? Because this site has its own paraxylene, it has water waste. We bring our MEG by water waste from our nearby sites in Texas. So since there is a whole integrated process over here and by -- and in the U.S., you can acquire renewable electricity for the production. So we were successful and attested this carbon-neutral PET. And now this is being marketed. With the successful implementation of this, what I was saying is to be at 4 more sites where this will get ramped up: in Rotterdam, in Spain, in Brazil and in Mataura, Bangkok, in Thailand.

So, just to get a perspective here, so this carbon-neutral PET, how much is -- are you thinking in terms of your overall mix of the total Deja brand now? I think you're doing around 0.25 million tons on recycled PET right now, correct?

Yes. We have recycled PET, we have recycled fibers. And frankly, maybe Vikash, if you have the number, you can give it or you can pass it to Mayank later on. Our target is to get to 750 kilotons of recycled products, right? And it's a question of a blend. We would love to go higher than 750 kilotons. We would like to go to 1 million tons. The question is, from a mechanical recycling standpoint, can we get to 750? But together with recycled fibers, together with carbon-neutral PET and mechanical recycled product, our ambition -- our aspiration would be to go more than 750 kiloton. Where does the 750-kiloton come, is basically with the -- in the West, there is a sort of a regulatory pressure to get to 25% recycled content in the packaging. And to get to that level, all our Western companies, that means all our production of PET in the West, which is considerable, we need to get to that 750 kiloton. So the target is to be achieved by 2025, but we are not going to wait for 2025. And therefore, we are pressing the button on more and more sustainable products so that we can get there faster.

Okay. Sir, just one more, sir, follow-up on this. How has been the price premium for the carbon-neutral PET versus your normal PET in U.S.?

This one would fetch us a slight premium because there is a slight cost increase when you go for renewable energy. So there will be compensatory role of it. But more than that, at the moment, what we are looking at is from an exploration point of view, that can we establish our leadership in sustainability. So by offering products which can only be offered by integrated sites, and we are one of the few companies -- or one of the only companies who have these 5 integrated sites to meet the domestic demands. If you start shipping the product around, then you lose the sustainability angle. So it is all very aspirational. Yash is working on this hard. And therefore, we have ramped up on our communication. So -- and then -- and this is what is getting us, let's say, a better seat at the table where we and our customers are deliberating on what are commercially viable alternatives. One of the big things that people are talking about in the olefins is chemical recycling. Now all our studies on chemical recycling has shown that on the economical model, it is not viable, at least to the extent we understand it. And we have been partners on the chemical recycling to one company in Europe and one company in North America. So chemical recycling is far away. Number one, it's nowhere near commercialization and economically, it's not the best alternative. So we are trying to work with our customers on both giving them economic solution. At the same time, a solution that, for IVL, if not creates a 5, 6-year return, at least as the 8, 10-year return.

Thank you. Sermwit, you're next.

Sure. I have a few -- a couple of housekeeping questions and another small question. So firstly, on the insurance payment of USD 15 million, can I please check where it is booked? That's my first one. And the second one is, around the extraordinary expenses on weather-related disruptions. So what kind of expenses are these? I think they are around USD 25 million, USD 30 million, if I'm not wrong. And just lastly, on the IVOG shutdown, what really caused it? I was not aware of.

So Sermwit, I'll take the first 2 questions and [indiscernible]. On the first question, you're talking about where the USD 15 million booked. Out of the USD 15 million, around USD 7 million is shown as a credit in cost of goods sold, and that is because it relates to Q1. The balance belongs to previous quarter, so it is shown in other income. Then you talked about the extraordinary expenses. Most of this is all Polar Vortex-related. Around USD 8 million, around USD 8 million to USD 9 million -- sorry, around USD 11 million to USD 12 million is on energy and utility costs, which you know that energy costs just shot up at that time. So both IVOG and IVOLs had to pay much higher cost. These are actually -- out of this USD 12 million, I'm saying USD 7 million to USD 8 million are still -- as a provision only, they are being negotiated. So we should end up lower than this number. And the balance USD 10 million to USD 12 million is higher maintenance costs which were incurred in the reliability side. So these are revenue expenses. And again, on this Polar Vortex only. And third one was on...

Yes, I can get at that. Yes. Yes. Sermwit, so as Sanjay explained, these are all Polar Vortex-related expenses as the gas prices spiked, as you know, for USD 200 million Btu for some days and electricity was very high, and the expenses -- IVOG is a scheduled turnaround, which we do every 30 months that we replaced the catalyst. So that's the schedule turnaround. There's no unplanned shutdown.

So Sermwit on the IVOG turnaround, like D.K. said, we do it every 2 years. And we had a discussion during the Vortex whether we could prepone that shutdown. But since there was a huge shortage of MEG, we made a calculation that if we were to shut down our - if we were to prepone our turnaround, then we would also lose production on the PET side, which means we would lose production on the PTA side. So our entire valuation would have got impacted. So we did restart the PET plant -- the MEG plants after the Vortex, we ran them for, let's say, 14 days and continue with the reform.

Yes. Can I check how long was the -- is the shutdown? So it starts on 18 May but when did they go off-line?

It starts from 17th or 18th May. And D.K., how long is the shutdown for?

No, no. Mr. Lohia, it is on shutdown. It is going to restart on 18th May.

So it started on 17th April or what?

25 days.

12th April.

12th April.

Okay. Sorry about that.

Got it. Perfect. And just one last thing about the earlier question regarding recycled PET and the carbon neutral PET under Deja brand. So can I just check that the 750,000 tons target by 2025, is it only recycled PET? Or is it a combination of recycled, PET carbon-neutral and everything else?

It will be carbon-neutral and recycled PET. But as I mentioned, aspiration would be -- our target is 750,000 tons, at least. But hopefully, we can get to 1 million tons because to get to the levels that are required by the West, by Europe and by North America, we should get to 1 million tons of recycled material.

Right. And to be clear, whether -- is it a situation where the regulator or whoever looks at these numbers, do they look at carbon-neutral PET as recycled PET? Or do they look at it separately? That was my question basically.

No, no, no. It is not looked at as a recycled because it is virgin -- raw -- it is virgin PET but with a zero carbon footprint. So when it comes to branding and when it comes to marketing, you could use, let's say, 25% of recycled component plus you could use another 5%, 10%, 20% of carbon-neutral PET. So from a messaging point of view and from an ecological -- from an emission standpoint, it is a very friendly PET, in combination with recycled PET. So our objective over here is not necessarily a premium product, but an advantaged product from a sustainability point of view.

Thank you, Sermwit. Yupapan, you are next.

Could you please update us on the U.S. supply situation again? Whether like -- is there any supply coming back? And what do you see in the current PET spread, if all this spike come back, whether it will soften from this level?

Yes. So as we are now in early May, and this is now the start of the season globally, I would say. So in the West, there are still FMs in place with the recent one being in Mexico. I'm not sure whether this FM is going to last from multi weeks or for maybe another week or 10 days. The shortage on acetic acid continues. So the PTA availability is also impacted, even if your plant was operating. In -- that is one part, that is on North America. In Europe, there are 3 PET producers. We are the only producer with no FM in place and [that's why I'm mad]. But the other 2 producers are both on allocation. And the biggest one -- the one of the bigger ones has a longer allocation or the longer FM, I believe. So one of them is coming out of the FM soon. One of them is still on FM. And all of this is creating a lot of scarcity of material, at least -- and when you think of the season, that is just starting. This is getting further compounded as we all know, because of the freight rates and the supply chain shocks. So what all of this means is that in the first, let's say, 5 months of this year, there has been a total depletion of the pipeline, Yupapan. Therefore, in my mind, my best estimate would be that for the next 6 months, the producers would be able to hold on to decent margins. I'm not saying first 5 months margins, but very decent margins. Or could be close to first 5 months margins because of the season, plus there will be a need to restock across the value chain. Producers have to stock, pipelines have to get filled, customers have to also go back to normal stocks. So it's going to remain tight for the most part of this year.

Thank you. So there -- if you have any questions, please unmute yourself, you can ask, but I've got 1 online on my WhatsApp. There are so many events and the moving pieces. So can you give us a few takeaways for the second quarter? Like how the volumes and the outlook. So can you give some color on that?

I mean, we -- I'm hesitant to give you exact number. But what I can see at the moment, we are in, let's say, in the beginning of May, we have -- we are oversold in our business. It is a season for us across IVL. So the crude oil is quite strong, which is very good for IVL generally. So apart from the additional EBITDA coming from our cracker in Louisiana, all other businesses are going to perform. And I would be surprised if the second quarter does not beat the first quarter on a reported basis, I would say.

Thank you, Mr. Lohia. [indiscernible], you have raised your hand. Can you please ask your question?

Okay. I have 2 questions. First one, could you explain a bit more on the, let's say, the demand and supply, and also the pricings of the gasoline in U.S. to your margin of the MTBE? Because I understand that you cannot sell the MTBE in the U.S. market, right? So you basically export to Mexico and Latin America market. So let's say, if the market of those Latin America had been weak, while U.S. market had been strong for the gasoline, what could happen to your MTBE margin? That's my first question.

So [indiscernible], we have done intensive research on our MTBE since the 1.5 years that we have got into this business. Can you show us some slides, Vikash? So the good news is that on MTBE, in my opinion, the gasoline demand in the U.S. matters, but not fully. Can you go to the backup side, where we have the MTBE spreads? So the price of MTBE is set by China. And the price of MTBE in the U.S. is just on import parity of the Chinese MTBE. So it's slightly above that. There's a clear trend and we have no influence on the price of MTBE. But what we know now by looking at multiyear data is the Mix-Xylene and the MTBE are closely correlated in price, very closely correlated. Now we buy the same amount of Mix-Xylene than we sell MTBE. And with better correlation -- with better synergy between our Combined PET division, which buys our Mix-Xylene and our IOD which sells the MTBE, we'll be able to synergize the purchase and sale of these to gasoline blend products to improve the -- to improve the netback that we get. As far as -- so that's one part that okay? MTBE helps combined PET, become the only producer in the world to make PET from shale gas. Remember, our MEG is coming already from shale gas, and if our paraxylene is coming from shale gas, then our PET is all made from shale gas. And there's another graph that shows the advantage between our shale gas-based PET versus China. Can you show that one? Slide 38, I believe. Right. So here, you can see this is where we have now, under PX, included our integration with MTBE. Since MTBE is a proxy for Mix-Xylene, so our raw materials become ethane, butane and methanol. Butane and ethanol are the raw materials to make MTBE. So based on that shale advantage, we have a significant advantage over naptha-based PET. And globally, you have to make your PET from the [ aromatic play, ] whereas IVL's North America franchise now is totally on the shale gas. So this is a big, big learning for us. And the price -- again, the price is set by China. Can you show me the margins in China? There's a slide. In the back up with the shale advantage and the gasoline. Yes. I think we -- yes, this one. So over here, you can see on the right-hand side, the quarterly price. So this one will help you understand that the U.S. MTBE spread which has come to 182 in the first quarter, is still based on lower crude oil and lower gasoline premium. Both of these, with the driving season also across the world in the summer season, we expect both the shale gas, U.S. advantage and Asia spreads over naptha to catch up and go to historical levels.

Okay. Second question, I -- could you, let's say, give us some color on the outlook -- demand outlook for the China market, India market and the U.S. market in the second quarter and the second half of this year?

So the India market would -- because of the huge resurgence of COVID cases in India, I would expect India to be lower than first quarter in terms of demand and -- but still higher than the second quarter of last year, and I'm only talking about India. But overall for IVL on a global context, our total production and our total demand for the -- I guess you're talking about PET. So the demand for PET is strong globally. The second quarter output would be better than the first quarter. But India itself would be most slightly lower. And [Sumat], on coming back to that MTBE in Latin America. In Latin America, the fuel octane booster is either ethanol or MTBE and ethanol is only an option for Brazil, but rest of Latin America does not have the ethanol option. So we feel quite comfortable that the demand for MTBE in Latin America -- our markets are not Brazil, but rest of Latin America, and we see those markets remaining strong.

Thank you. There are no more questions at this time. [Operator Instructions]

So basically, we are giving you 2 new learnings in this quarter, basically, the underlying principle that we are going to adopt in the rest of this year. We'll continue with the core EBITDA so that year-on-year, you can still continue it. But by the end of the year, we do away with the core EBITDA and stay with underlying EBITDA. And the reason for this underlying EBITDA was mentioned by D.K. But we -- my aspiration is that I want my numbers to be able to be tallied with our financial reporting. So by going to the underlying EBITDA, basically, I'll be taking the order book into consideration. And by taking the order book into consideration, I'll be able to mark-to-market not only by inventory, but also my presold inventory through the order book. So it will be -- it will have an order trail, and it will be simpler and easier for both management to capture and for you guys to capture. It's also part of my -- enabling my 16 verticals that they own their businesses. So they need to know what is the exposure. And by having a proper order book in front of them and the inventories, they can see whether they are long or short on exposure. And lastly, with the ERP under implementation, then it will help create a cadence so that the ERP implementation and the methodologies are uniform and standardized across IVL. And the second one was MTBE as a proxy to Mix-Xylene and our North America, which is one of our strongest franchise being totally shale-linked and we see for many years this advantage continuing.

Thank you, Mr. Lohia. There's a question from Andrew Tan of JPMorgan. So he's saying that for the second quarter, Mr. Lohia, as you said earlier, you'll be surprised if the earnings won't beat Q1 on a reported basis. Does it mean -- I think it's more like a private metric, maybe you want to repeat that, Mr. Lohia one more time because it's a specific query.

Yes. I confirm.

Thank you. Any more questions? Right. So we are on time. And so thank you very much, the presentation with the script will be on our website, the recording will be the uploaded. And all of you, please stay safe and if you have any questions, please write to us. Thank you.