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

Good morning, everybody. This is Vikash Jalan, I'm Vice President, Indorama Ventures. Welcome all at our fourth quarter 2021 and full year 2021 financial results. Today, joining me, Mr. D.K. Agarwal, our CEO and Group CFO, to take us through the results. A quick disclaimer that this meeting is being recorded and a transcript and the recording of this event will be available after the meeting on our website. And we have made some forward-looking statements. There might be some slides which have some forward-looking statements. So of course, these are based on our views and facts at this point in time. We recently had our Capital Markets Day on 10th of February 2022. Many of you had attended that event. And if you could not make it, the recording is available on our website. I encourage all of you to please go and have a look at talks about our strategy and road map and our vision also up to 2030. So with that, I would request to play a small video. And after that, request Mr. Agarwal to take us through the presentation. Thank you. [Presentation]

Well, a very good day to our viewers. Today, I'm joined by Mr. D.K. Agarwal, the CEO of IVL and also more recently, the CFO as well. Very good day to you, sir.

Very good morning.

Well, let's kick off by talking about the full year 2021 result, which was a record. So it's an outstanding performance. Please take us through some of the key drivers of that result.

Well, Stuart, I'm very pleased with the results of '21. This has been 2 years since pandemic. And what really drives the product lens, which we have, the portfolio which we have -- we test the lives of the people, we serve them. This is not a discretionary expenditure, this is a necessity. As the pandemic started, we never thought that the demand will be so stronger. I mean '21 resulted into a record year, strong margin across all of our product portfolio. The very good margins, even if there is a supply chain disruption, which we could not unlock full value. Crude oil was rising, which gives us an advantage. And I think the management agility, which is the most important because management was very reactive to the circumstances. And we are going for a reported EBITDA of $2 billion in a year of pandemic and a core EBITDA of nearly $1.73 billion and a net profit of THB 26 billion, which translates into earnings per share of THB 4.5. I'm very excited about my product portfolio. Similarly, the geographical distribution, the footprint which we have, is very important. As we sell to customers in different geographies, supply chain disruption made it possible that we could serve our customers better in those regions. We could price the product and the other alternatives which they have. Although we had a very strong headwind of energy cost, which nearly costed us $170 million in 2021, and I think the countries have still not opened up fully. We -- the Lifestyle Fibers didn't unlock their full value because main shopping street was not open. The crude has just started moving up. So a lot to come still.

So you mentioned a lot of forces in there, which were perhaps macroeconomic or outside of our control. But there are a lot of things that are within our control. For example, over the 2 years, we continue to pace with this vast suite of transformation projects. What kind of a role do they play in that result?

Absolutely. This we started in '19, and we said people, platform and systems are the key things. We focused on people. We empower the people to run their businesses. We put a very strong management information system where we can monitor their returns on a unit-wise. We drive Olympus program to bring the Olympus excellence, operational excellence, the commercial excellence, organized to perform. And I'm very pleased to report that, that has gone deep rooted in the organization. We talked about $600 million to be unlocked in 2023. And today, when we built our business plan for '24, I'm very happy to know that we are talking of $640 million getting unlocked. So it's a combination of good market conditions and improving the cost structure across the portfolio. I think we need to remember that we bought a lot of legacy assets. And entire synergy benefit was not unlocked. And this transformation in the systems is going great. We are rolling out the SAP HANA 4. The release 1 has been already ruled out. Digitalization and all these enabling functions will make us more smarter and more analytical decision-making, which will ultimately translate into the bottom line. So fantastic transformation which has gone through.

So Mr. Agarwal, the record result as good as it is, is a point in time, and that point in time is now passed, and we're already into 2022. So what does that result signify for IVL's longer-term journey?

Absolutely. So when we made the acquisitions, we became the largest player of Combined PET. We went into shale gas. We bought many fiber units. The key focus was that creating a product portfolio, which is the daily lives of people, which grows in multiple of GDP. That was very important, that it grows in addition to the GDP and we have the right cost structure. These last 2 years have given us such a strong confidence to us in our business model, which we have built across the talent which we have. I have no doubt that going forward, more values will get unlocked. As you know, the world is ever changing. And we will roll out different products which we have. And then innovation will be another area. And Oxiteno is a fantastic acquisition, in this case, because this gives us a footprint in Brazil, access to the biofeedstock, a very interesting market. We expect to close by 31st March of this deal, and that rolls out into our profitability. So I think our portfolio is very good in the business. And there will be, of course, opportunities of bolt-on acquisitions.

So let's bring it back into the near term a little bit. So you mentioned some of the key drivers of the record results in our first question. How many of those are already evident in the first couple of months of 2022? So what do you see the short-term outlook for this financial year?

Very good. In 2021, we could not unlock the entire [ valley ]. A few reasons. We have a big presence in the Western market. The Western market contracts were locked in 2020 for '21, where the supply chain disruption did not start. In '22, now we have significant margin improvement in the Combined PET as we have reset the contracts. As I'm sitting with you in end of February, we have a good visibility of the first quarter. I think 2022 will have a significant improvement in the profitability versus 2021. Remember that as we are going into '22, the supply chain disruption still continues as likely to continue for the whole year. The product is short, particularly in the PET segment. And you look at the crude oil. Crude oil is nearly $100 a barrel. And what does it mean for IVL? We have a shale gas play. We basically price our product based on the oil alternative while we have ethane as a feedstock and that becomes an arbitrage between gas and oil. And Lake Charles. I think we had a substantial delay in the Lake Charles, so which is now running at 70% capacity. The value of Lake Charles profitability will get unlocked in '22. And then you have Oxiteno, 9 months operations coming from 1st April, which is running at $200 million EBITDA run rate for the year. So you add up 3 months -- 9 months of Oxiteno, fantastic improved profitability in Combined PET and Lake Charles and overall market sentiments. And the world is opening up with all the vaccinations rolled out. So '22 will be a very exciting year. I think first quarter will be a fantastic quarter for us as there's a clear visibility on the first quarter results.

Well, Mr. Agarwal, you clearly had a very good 2021. Congratulations to you, sir. And here's all the best for a very good 2022. Thank you for joining us here today.

Thank you very much. Thank you for attending the fourth quarter '21 and the full year '21. I'm very happy to report that I achieved a record EBITDA of nearly $1.98 billion and a core EBITDA of $1.74 billion in 2021. As you saw, this is a substantial growth year-on-year for both reported and core basis. Reported EBITDA grew 111% and core EBITDA grew 55%. And as I mentioned in the recorded video, thanks to the volume growth of 5% and higher spreads in all of our businesses. However, higher energy and acetic acid cost along with the lag losses in the higher raw material prices in our hygiene fiber business, verticals negatively impacted the performance. If you look at reported net profit for the year in terms of Thai baht was THB 26.3 billion and core net profit, as you know, we exclude the inventory gain loss when we look at the core net profit, was THB 21.9 million. Both were significantly higher over the last year. The company achieved a reported EPS of THB 4.55 per share and core EPS of 3.76 for the year 2021. And core return on capital employed was 12% for the full year. Looking at the fourth quarter, especially, company achieved a reported EBITDA of THB 471 million and a core EBITDA of THB 462 million, both higher quarter-on-quarter and year-on-year. Fourth quarter '21 particularly saw higher energy prices. As you know, in fourth quarter, the energy prices were very high, which we were able to mitigate with a strong business performance and partially pass on to our customers. As mentioned earlier, 2021 benefited from strong demand across all our product portfolio, higher polyester value chain margin due to market tightness. From supply chain disruptions, rising crude oil resulted in a return of shale gas advantage, leading to significant improvement in IOD segment performance. As you know, the crude has started going up and it's above $100 a barrel, so 2022 will have much more advantage. Company also experienced a lot of headwinds during the year, including the polar vortex during first quarter '21 and record high energy costs. This high energy costs led to an additional cost of $190 million in '21 versus 2020. As we talked about Project Olympus that delivered $291 million, during the year we identified much more internal projects and have increased ambition in excess of $650 million in racking EBITDA uplift by 2024, as shown to you during our Capital Market Day. A very important disciplined capital allocation reduced our leverage by 20 basis points during the year with a reduction in debt and increase in retained earnings in our equities. So that was a 2021 key takeaways. Let's move to the next slide. While year 2021 was on an interesting year as we talked, we saw a lot of tailwinds, supporting our businesses and also faced headwinds which capped our full potential performance of the business. Let us talk about tailwind first. We saw spreads recovered to pre-pandemic levels across businesses because of very strong demand and supply chain disturbances, robust demand fueled by economic recovery, high freight -- container freights driving up import parity and IVL margins in the Western markets for the spot business only -- portions only, as we have mentioned, the contracts are still unlocked in 2022. The Project Olympus delivered marginally better than our budgets. And one of the most strategic development we saw on our customer engagement, customer preference for IVL improved due to our local footprints and growth ECG (sic) [ ESG ] and sustainability aspirations. We had a significant headwinds. COVID was there. The entire demand of carry PET wasn't there. We had a very strong headwind of high energy costs in Europe and Asia, which negatively impacted on our performance. We spent $190 million higher energy costs in '21 versus '20. In further quarter itself -- in fourth quarter itself, this impact was $106 million. And that's why you can see that fourth quarter in spite of higher margin was -- got impacted. Surge in prices of chemicals and additives, especially acetic acid because of the disruption in the supply chain, costed us $70 million over 2020. Natural calamities like polar vortex and unplanned outage impacted volumes, loss of 5%. Slow recovery of auto sector, as we have been talking, driven by semiconductor shortage, impacted our airbag yarn OEM business in the Mobility Fibers, while the replacement fiber (sic) [ tires ] remained strong. Inflation in developed market led to increase in overhead and fixed costs. Inflation has certainly kicked in and we paid higher cost for employee costs, and we also factored in 2022 for this. Let's move to the next slide. I think this is the most important slide when we talk of the resiliency of the portfolio and which I talked in the video. Resiliency of Hygiene business were tested very well in last 2 years of pandemic. When pandemic started, IVL's strategy of global manufacturing footprint, integration of key raw materials and end products serving daily necessities in hygiene, health and safety applications are well appreciated by our customers. This is clearly visible in our volume, which grew year-on-year in 2020 and then again, in 2021. So you saw no relationship with the GDP. GDP was negative in '20. Our growth was positive. 61% of our revenue come from food and beverage packaging application which continued to grow around 3% to 4% per annum, our money spinning PET business. The next big segment was home, personal care and hygiene space, whereas revenue were 12% and saw a spike in sustained growth around 3% per annum. Our new growth engine, Surfactants business serves this segment, as you know. Actually, as you know, the agricultural economy is also pretty strong where the surfactants go. And with rebound of oil, again, the surfactant demands for oil application is going up. Oxiteno acquisition is very timely, addition to this segment of application and should bring more strength to our product offering. Around 20% of our revenue that goes into automotive, apparel, oil and gas and housing and construction were impacted negatively in 2020 due to emergence of COVID and panic created by it. I'm happy to inform that all these segments have shown a V-type recovery and have returned back to the pre-pandemic level. So this shows you the resiliency of the portfolio. Next slide, please? Well, 2021 was a -- next slide, please? was also a year of creating new milestone for our platform, people and processes or system. Our platform got stronger with the acquisition of Carbonlite Recycling assets in the U.S.A. and Oxiteno acquisition in America. Oxiteno deal is near to the completion, and we expect the closing of the transaction by the end of March 2022. The second important dimension, Project Olympus, our company-wide business-wide, geographical-wide, highly diversified and bottom of transformation project led to a cultural change in the company. Every site and senior managers are now the project owners under the Project Olympus to extract efficiency gain and meet the targets set by the company. Our balance sheet improved deleveraging by 20 basis points. After we announced the acquisition of Oxiteno deal, we had a meeting with our local agencies and appreciated with upgrade on our rating from A (sic) [ AA ] with a stable outlook. IVL is recognized for leading the industry's sustainability drive, and we continue to expand our leadership position through substantial investment into sustainability and circularity. And as you know, the highlights of '21 were launch of Deja Carbon Neutral PET, first time in the industry; Dallas acquisition of Recycling Assets; Greenfield Recycling Assets in Indonesia; formation of decarbonization SOP and introduction of internal carbon price; and we were also recognized and awarded platinum medal by EcoVadis Sustainability Assessment as highest award, ranking IVL in the top 1% of the companies assessed worldwide. So I think the journey continues, and you saw the number of achievements in '21. Let's move to the next slide. This talks about Project Olympus a little bit. We rolled out in 2019. Project Olympus delivered in the last 2 years, have reinforced the confidence of our management and motivated them to dig even deeper and find internal projects for higher efficiency gains. Efficiency gains have built up in the KPIs of the managers, where they are motivated and rewarded on the successful delivery. The beauty of the transformation project is to expand diversity across businesses, geographies and functions with over 2,400 internal projects and initiatives. We expect to touch the milestone of $500 million run rate efficiency gain in year 2022. Our new ERP S/4 HANA rollout, as I mentioned in the recorded video, completed and will enable our managers to use system and make meaningful benchmark to extract value from our 124 operating sites globally. We are operating on many different IT systems, SAP/HANA 4 will unlock this value of synergy. Next slide, please? Well, our Chief Sustainability Officer, Yash, has been working very hard on this ambition of sustainability. There are 5 core strategies. Our operational eco-efficiencies and reduced Scope 1 emission, upgrading in efficiencies in our existing sites and expected payback of 5 years on such investments. Enhancing renewable energy consumption and reduce the Scope 2 emissions. This is through on-site ownership and power purchase agreements. Coal phaseout strategy and then switching to natural gas or carbon bio mass. Carbon capture utilization and storage, we shall work with industrial hubs to use pipelines to store carbon that we shall capture. We're also looking at project, if we can convert into a value-added product like ethylene carbonate in the United States. Green hydrogen in Portugal, we are working for a project, although it is a very small project, through partnership and available subsidy. So that makes us confident for our target for 2025 as well as the 2030 vision roll out, which we did. Next slide? Our journey of recycling continues. Company is confident in achieving its 2025 target to bail input of 750,000 tons. We expect that we shall be able to meet this target comfortably. You know that we announced in our Capital Market Day, doubling that capacity. We recently added another milestone by partnering with French company Carbios, to set up a bio-enzymatic decomposable recycling [ filler ]. So here depolymerized by enzymatic reaction. It is going to be one of a kind project and supported by the French government with subsidies for setting up this facility. It will open up new avenues for IVL in addition to the mechanical recycling, where you can see 600,000 tons is committed. IVL added 9 new sites in the last 2 years despite pandemic. This shows our resiliency and commitment to the pledge we made to the Ellen MacArthur Foundation. All brand owners are supporting this initiative and we are excited for the growth that the business continues to offer for future and profitable manner. And we still have not unlocked the value in terms of return, and you will see that this will roll up in the future years. Thanks. Well, this is an important slide. We continue to invest in people and systems with sustainable growth mindset. It cuts across all strategy, deployment, tools and practices, people and culture. We are working to set up organizations that can independently drive the functions and businesses under the culture and value for IVL. These leaders are empowered, motivated and incentivized to work towards our VISION 2030, which we published our Capital Market Day on 10th February 2022. And as you might have noticed, that we recently -- Board has recently approved an ESOP scheme to keep a long-term engagement and LTI scheme. Next, please. Now let's go to the 2021 business and financial results. If we can go to the next slide, please? So the total volume is 14.8 million ton, a growth of 5%. Revenue was up by 38% to $14.6 billion. As you know, revenues linked to the crude oil prices. The core EBITDA went up to $1.743 billion, 55% year-on-year. Reported EBITDA close to $2 billion, 111%. And if you see in Thai baht terms, it's THB 63.4 billion. Our core EPS, THB 3.76 per share, THB 2.48 greater than year-on-year and reported EPS of 4.55%. The growth, as I mentioned, in reported EBITDA was driven by improved core performance and higher inventory gains, however, got negatively impacted by higher energy costs of $190 million. Next slide, please? If you look at the fourth quarter specifically, fourth quarter result was another testimony for the underlying strength of our business. As you know, fourth quarter is normally weak. Revenue grew 46%, sales volume grew 3%, and core EBITDA grew 72% and core EPS grew to [ THB 61 billion ] year-on-year. Reported EBITDA grew 81% to $471 million. Quarterly, particularly, you saw excellent performance in our joint ventures in India and Egypt, so you will have to reduce the minority part when you take the net EPS. However, please note that the fourth quarter was particularly impacted with high energy cost of $106 million, as I mentioned, over the average price of last year 2020. So I'm very pleased with the fourth quarter '21 results which shows very strong margins in spite of a very strong headwind of energy cost. Let's move to the next slide, please. This is an important slide to show you the volume growth, how sequentially '20, '21, '22 and which shows the resiliency of our product portfolio. We have seen all-around growth in '21 in our sales volume in all of our 3 segments and 3 continents of Asia, Europe and Americas. We see this growth rate continue since 2020 as well in all 3 segments as well, as all 3 continents. We have given you some ideas of volume growth of 12% of -- from 14.8 million [ tons ] to [ 10.6 million tons ]. In Combined PET, strong volume in 2021 are underpinned by robust demand across the portfolio, good progress on asset full potential product and reliability issues. Last year, we had this Brazil fire incident under Project Olympus and some growth from normalization of COVID impact. In IOD segment, volume upside from IVOL start-up, the Lake Charles start-up. More ethylene will be available for captive consumption, normalization of natural calamities like polar vortex and 9 months performance of Oxiteno is expected to be captured once we complete the deal by end of March 22. In fiber segments, uplift comes from an investment coming onstream and full potential plan benefit under the Project Olympus. Our first quarter of 2022 is already showing a strength quarter-on-quarter on volumes as well as margin. We are very excited by the stronger business outlook of '22, and first quarter is expected to show good growth, which will further improve with the consolidation of Oxiteno performance starting from second quarter once we complete the deal by end of March. So that slide shows you the volume expected growth in '22. Next slide, please. Now let's deep dive into the results. All 3 segments delivered a strong performance in '21 and led to record results with core EBITDA of $1.743 billion as well as a record production of 14.7 million tons. Strong demand across our product portfolio, higher polyester chain margin due to market tightness from supply chain disruption. That's what resulted into improved profitability. Rising crude oil resulted in a return of shale gas advantage, leading to significantly improved IOD performance, as you can see how the IOD has resulted in $377 million EBITDA. Higher energy costs impacted us $106 million in fourth quarter year-on-year and $58 million quarter-on-quarter, if you look at the energy impact. And the Project Olympus delivered $291 million efficiency gain during 2021. So this shows you what has been our consolidated results of IVL in core EBITDA terms. If you go to the next slide, which talks about reported EBITDA. So if you look at the results on a reported basis, we even see better performance because we had [ an ] inventory gain. Naturally, inventory gain will come up as the crude oil has started moving up. 2021 delivered record results with reported EBITDA of $1.982 billion. We expect further inventory gain in '22, as I mentioned, because of rising crude oil prices. However, if you see operating cash flow got impacted due to nearly $848 million deployment in working capital with high prices and volumes, however, partially recovered from new inventory gains. That's why you see the operating cash flow being lower. Year 2022, as I mentioned, is expected to be even more stronger year with higher volumes and robust margin. We should be able to fully capture the benefit from these set of integrated PET contracts, as I mentioned, in the West at higher spreads, which has already concluded, most of them, and you will see that coming results in the first quarter. IVOL cracker is running since November '21 and contributes in 2022 for the first full year. Oxiteno consolidation is expected to start from April 22, once we complete the deal by end of March. So that you can say that what '22 will translate into. Let's move to the next slide. So now let's look at the Combined PET, which is the most important business for us where the reported -- where the core EBITDA improved from $794 million to $1.1 billion, a 39% year-on-year growth, while very strong margins in the PET, low pipeline inventory and supply chain disruption helped improve performance. Production disruption in Brazil and lower fixed contracts of 2021, as I said were earlier set in 2020, kept the performance. Now this value will get unlocked in '22 as the new contract kicks in. However, this is now regularized and '22 is expected to benefit from this resetting of the contracts. Fourth quarter '21, as you can see, experienced headwinds from higher energy costs of $74 million versus fourth quarter '20 and $41 million versus third quarter '21. So these results are in spite of the high energy costs, which we suffered of $41 million in the fourth quarter. Specialty Chemical performance, as you can see there, improved the performance from $71 million to $123 million for the full year, with better PIA margins and also to -- in the specialty polymer. And in terms of Olympus, it delivered $83 million Olympus efficiency gain and the EBITDA per ton, which is one of very important yardstick for us, improved from $78 million to $103 million -- $78 per ton to $103 per ton. So very strong result in Combined PET. Let's go to the next slide. This slide we showed you in basically the -- in the Capital Market Day, we wanted to emphasize what is the IVL geographical model results and versus the benchmark. IVL spreads are higher than Asian industry benchmarks due to our global footprint and integration into key feedstock, PTA puts us in an advanced geographic. This helps us to operate more reliably and sustainability to [ others ]. And you can see that '22, we expect these margins to further improve -- the spreads to further improve. Our Western portfolio, below, if you see, constitutes nearly 76% -- in terms of 76% in terms of Western EBITDA as a share, market share of the total EBITDA, while the volume is 63%. So nearly our Western market constitutes 2/3 of the business, and this part of the business will benefit more in '22 with the reset of the contracts. So just wanted to reemphasize on this slide than what Combined PET profitability results from this higher premium, which our management's agility translates into the bottom line. Next, so you people always have a question what is it actually like to remain '22? We expect volume from 10.7 million to 12 million tons because of certain debottlenecking, better reliability, Brazil's fire, Brazil's insurance claim is not counted yet, so that will be counted on a cash basis. So we expect core return on capital to employ from 19.1%. I can't give you the exact numbers, but the arrow can tell you that what is the direction into this. And the recycled part on the right on the top, if you see, recycle will start contributing. It marginally contributed in '21. We are seeing recycled PET at a very higher prices versus the virgin prices. So all that will translate with better reliability into a better profitability. So this gives you directionally what 2022 will result in the Combined PET, a very strong vertical for IVL. Next, please. Now let's go into IOD business. All 3 verticals of IOD improved. As you can see, we improved from $115 million to $377 million, which is 228% year-on-year growth. '20 was not a great year at all because of very low crude oil prices, a lot of loss of production due to natural events. It is the first year we are able to show you the strength of Huntsman acquisition, as 2020 was impacted by many external factors, including COVID-led collapse of crude oil prices, eroding the shale gas advantage. Upstream benefited. Now as you can see, moved from $30 million to $99 million, which is basically ethylene earning, could not capture full value as IVOL was offline and started in November '21. Now with IVOL already started and running at 75%, as I mentioned, that will help into the future earning. MTBE marginally improved with demand recovery, however, was capped and negative by high butane prices. So what we suffered was high butane prices in MTBE. This spread is improving now and our Capital Market Day budget presented on 10th February. The most encouraging, as you can see, the downstream improved from $172 million to $319 million. And you can see in the fourth quarter also, we delivered $98 million EBITDA, continues to show strength, which is linear alkyl benzene, purified EO, ethanolamines and propylene glycol and all the downstream surfactants. Oxiteno will add further to our downstream portfolio in '22 with new product in green chemistry. Oxiteno has a very strong innovation pipeline, and we'll unlock the synergy once this acquisition is completed. ROCE of this segment improved to 7%, still not to the double digits as we are targeting. But if you look at fourth quarter, we are at 11%, and our target is to further improve this return on capital employed in IOD business. Next, please. This is just an important slide, which gives you the shale gas advantage. With high crude on the left-hand side, you see this is the difference between the integrated margin of -- between shale gas, [ notice ] MEG spot minus ethane versus MEG spot minus naphtha. So as the crude oil goes up, this advantage keeps going up. And as you know, now the crude is further improving, so this -- although the MEG margin over naphtha is not great because of the present oversupply situation. So this is because of the advantage which we have because of shale gas. On the right-hand side, you see the MTBE margin, and I just wanted to show you here in January/February as the crude oil price is moving up, I want to remind here that in the first quarter, because in the winter weather, the butane prices are still high because that is blended in the gasoline in the United States, you can see a significant improvement in the MTBE margin. And that will certainly help us in the first quarter results and coming into the second quarter results. That -- I mean 2019 average was $358 per ton. And as we go second quarter, when the butane prices are further likely to come down, they are backwarded, we will see the benefit in MTBE, and the demand continues to remain strong. Let's move to the next slide. So what does it -- again, giving you an idea of what looks like '22? We will have a volume of 3 million tons versus 2.2. Of course, Oxiteno was 9 months volume. No polar vortex and the reliability issue and then you have Lake Charles benefit which will come. Certainly, we'll have a benefit of MTBE spreads as we just talked about it, and MEG spreads. And downstream portfolio remains as strong as we talk to demand across ag chemicals, oil chemicals, surfactants, all remains very strong. Hygiene, I mean the home and personal care is strong. So all this directionally, the return on capital employed should continue to improve with -- of course, net capital employed will go up, as you know, because of the Oxiteno acquisition. So this gives you directionally what we look at '22. Next slide. Now let's look at Fibers. Fibers improved from $195 million to $268 million, 37% year-on-year. Lifestyle volume increased as a result of improved domestic demand in markets such as India and Brazil, partially offset by the negative impact of high priced freight rates on Asian exports. Here, it works negatively because we export from Asia. But sequentially, you can see we made $38 million in fourth quarter versus $23 million in third quarter in the Lifestyle. Mobility demand for OEM market remains weak as shortage of semiconductors continues. That basically got largely offset by the resilient replacement tire markets. People are selling their secondhand cars, which are now commanding premium by changing the tires. So the replacement tires is pretty strong. Of course, Hygiene, a lot of capacity got added, found a new normal in '21, maintaining above pre-pandemic level. This was negatively impacted by a lag loss of $35 million in '21. So that's why you see -- you don't see the strong result in Hygiene. Now we are recovering this lag loss. But I'm very happy that the transformation plan is doing very well and Olympus delivered $130 million efficiency gain in 2021. And we are at nearly in '21, 5% return on capital employed. The fourth quarter is 7% return on capital employed. Next slide, please. Well, what does it look like directionally? Volume, we expect about 2 million tons. Lifestyle to benefit from improved demand, especially from consumption in emerging markets. The Indian market has opened up, Indonesia and Thailand. Mobility, we are still not expecting that OEM demand should come back strongly because semiconductor shortages there. But replacement tire demand continues to be strong. And Hygiene found the new normal for the peak of 2020, demand remained steady, and we have 2 key investments, Russian expansion, Indian expansion as well as the expansion which we did in United States, will unlock full value in '21. So -- and -- we'll continue to work on our FPP, which is expected to deliver more and more value. And that's why we think the return on capital employed will continue to improve in the Fiber business. Next slide, please. These are some of the financials what has happened. As I mentioned, our credit profile improved in '21 by rating agencies upgraded. Underlying cash flow generation, and as you can see the operating cash flow was only $1 billion versus $1.743 billion of core EBITDA. As I mentioned, $848 million was sucked by working capital due to higher absolute prices and slightly a number of days more. But we wanted to make sure that we produce more and so some days got blocked into the supply chain. Use of funds, debt equity, paid down sufficient debt, achieved net debt to equity of 1.2. We have a very strong liquidity of $2 billion in the form of cash and cash under management and unutilized credit lines. So we are -- I mean, we can take $125, $150 a barrel, doesn't bother us. Higher crude oil always benefits us. As you can see, our current rate -- tax rate was 9% in '21. We expect this to be around 12% to 13% with improved profitability. Our enabling function, the risk management in today's world of volatility is very, very important, and I'm very proud of our team that they hedged very well, is further strengthened with a dedicated organization on BCM. So while foreign exchange hedging or we talk about the commodity hedge, everything is quite strong. Next slide, please. This shows you how the cash flow got deployed. So you had a reported EBITDA of $2 billion, $800 million got sucked into net working capital, as we mentioned. Cash tax consumed $100 million. Living and operating cash flow $1.1 million. Now you don't see that money getting sucked into net working capital so much as it's factored into a lot of increase in the prices. Maintenance CapEx steady at $400 million. Finance costs, as you saw, $200 million. And cash before growth CapEx was $400 million. We made $500 million in the strategic investments in recycling, greenfield expansions and also CapEx related to Project Olympus. And net debt equity reduced from 1.4 to 1.2. So we had a net debt reduction of $200 million. Dividends of $200 million have been recommended in totality, which follows a 30% policy. And we have enough liquidity in the systems of $2 billion under the unutilized time (sic) [ lines ] and for -- watch as against any volatility in the business conditions. So that shows you the cash flow, how it looks like. Next. I think this slide we showed you after acquisition of Oxiteno will reach a debt equity of -- net debt to equity of 1.4%. But you can see that from fourth quarter '20, 1.4%, reduced to 1.2%. So we are keeping a very strong discipline as the operating cash flow gets thrown out. Fourth quarter '22 ending, we are expecting debt equity to be 1.1%. In '22 will be for $1.15 billion for Oxiteno, $150 million is in deferred payments and then company strongly deleverages with the cash flows of '23 and '24. So very strong capital discipline has been maintained by us. Next slide. What does it translate into combined IVL? We are talking of $17 million of -- 17 million ton production versus 14.7 million ton, better reliability expansions and Lake Charles, Oxiteno, all these things. All that should translate into a better EBITDA than $1.7 million. We can't give you the exact numbers, but you can calculate yourself all Olympus initiatives, we are looking at a run rate of $500 million. And our return on capital employed, we're targeting about 15% to 16% of -- a significant improvement for '21. Of course, this will be depending on how the crude oil prices move up in the future. Higher is the crude oil, better is the performance, but also increase in the capital employed in terms of working capital. And this is pretty same in '24, what we presented you at the Capital Market Day. Next slide. So just to summarize on '22 outlook. Next slide, please. So Combined PET, well, healthy demand across markets, low inventory, supply chain disruption continues. We have reset our '22 contracts for PTA and PET both and it's expected to capture the full benefit of higher freight rates. And of course, we price the product based on import parity and that will translate into a strong results for Combined PET. IOD, our business plan assumes $75 a barrel. We have today $100 Ukraine-Russia crisis. Brent prices to remain high throughout the year. IOD will benefit from shale gas advantage in MTBE and MEG, as I talked to you. MTBE is strongly recovering from improved demand and butane prices is getting normalized. I think the turning point will be strong second quarter when the butane goes down and downstream portfolio because of -- all across will benefit from robust demand. LAB, very strong world capacity utilization. Ethanolamines, strong demand when you talk of propylene oxides, propylene glycol and surfactants. So a downstream portfolio will benefit from robust demand and Oxiteno integration. In the Fibers, Lifestyle will continue to benefit with demand growth and -- particularly in India and consumption in emerging markets. Well, on the OEM markets, as I said, semiconductor shortage will likely to continue. So the cars, but -- then eventually when it results, we'll see a strong demand for airbags, but replacement tires is great. And Hygiene finds a new normal, and we continue to focus on Olympus program. So thank you very much for a patient hearing. Now we can take your questions. This emphasizing our purposing statement which we rolled out, reimagining chemistry together to create a better world for our customers. Thank you very much.

Thank you, Mr. Agarwal. So I can see some hands are raised. So can you please unmute and ask your question, please.

Vikash, can you hear me?

Yes, we can hear you, Komsun. Please go ahead with your question.

Okay. I have 2 questions for Mr. D.K. First off, what is the utility as a percentage of the cash conversion cost of PET and PO, you can lump it together as integrated PET? And secondly, you showed us the split between West and East in terms of volume and EBITDA. What exactly are the euro units accounted for that? And Europe is the one who gets hit the most from the higher energy costs, while I don't think that Brazil or U.S. will suffer that much. And the third question is in terms of the CPET EBITDA. You mentioned about the higher energy cost, which is 41% quarter-on-quarter. Can you give us some color in terms of how much the surcharge we put in place in fourth quarter? And what sort of an increase in acetic acid cost? And follow-up with that question is, will the new spread be able to offset the higher energy costs in Q1? And another question on the MEG Group is that the -- you also mentioned 58% energy increase quarter-on-quarter for the whole group, and 41% of that was CPET. Is the rest going into IOD? And for the MEG Group, EBITDA doesn't improve that much, even if you're excluding the IVOL. Do you continue to see the benefit of high crude price towards the MET unit, particularly that ExxonMobil and SABIC just add 1.3 million tons of MEG capacity in Texas this month?

Thank you, Komsun, a number of questions. Let me address one by one. Vikash, can you bring the slide on the energy cost? I think what we have built up in our business plan of '22 is additional cost of $165 million over '21. So we were very conservative in our forecasting because we thought that energy prices will remain high. This is just to give you. So this is '21 versus '20, $190 million. Then additional costs budgeted in the Capital Market Day is $195 million versus $385 million, which I just showed you earlier in that page, right? Now on the left-hand side shows the TTF curve and the brand forward curve, you will see that fourth quarter was the peak. And fourth quarter, we recovered practically everything from surcharges, a significant portion of it. In '22, of course, the margins have been reset and some of our contracts has energy component into it, particularly in the tire cord and -- because it is across Europe. So we have put in our margin calculation that what is the energy price difference as compared to what we get. So there is enough built up. As soon as the Ukraine crisis has started, the Russia-Ukraine crisis, the TTF went up and then it dropped 25%, 30%. So actually, today, as we stand, we are more or less as per our business plan. We don't see, unless there is a big disturbance in the marketplace on the energy side these -- anyway, I just want to complete this question on this slide because some people may have a question on Russia, Ukraine. On the right-hand side, you can see that our revenue exposure in Russia is only 0.5% and 0.9%. So even the sanctions, if they come in, it's not going to impact us anyway because as we buy the raw materials from SABIC locally and the raw -- the exports from Russia is very, very small. If the crude goes up, which is going up, actually, as you can see -- on the top, you can see that $10 a barrel actually gives us a positive benefit of $60 million to $65 million. And why? And I will address your MEG questions separately. Shale gas advantage in MEG because it is a pay versus naphtha play. Higher is the oil, higher is naphtha. Ethane is not likely to catch up with that. Then MTBE because you are using butane and methanol. And then duty advantage in PET in Europe and Americas because higher is the prices of PET, the import parity goes up and there are other benefits. So high crude oil is always a benefit for us. Now coming to your -- Vikash, can you go to the MEG part, MEG IOD? You're very right that MEG margins over naphtha are not great. Integrated margin over naphtha is one of the lowest today, it's nearly $200 per ton. But this is the advantage of the shale gas versus this one. If you take MEG margins over naphtha, they are very, very poor. I don't know whether you have a graph. Vikash, do you have a graph of MEG integrated naphtha margin, if you can show?

Yes.

So you're right, SABIC started the new plant, but shale is still at the FM. But coal as based MEG is quite expensive. I think MEG margins over naphtha are not good. And with the polyester growth coming up, we think they are at the worst point at present. So that was about your MEG demand supply. This gives you the MEG situation. You can see the third graph. The blue line shows North America integrated margin and the green line, you can see Asia. Asia margins are just going below. And today, it is not worth producing MEG, it's better to produce polyethylene and many people are allocating their molecule to polyethylene rather than MEG. So -- and you can see, historically, I mean this is the worst. But the gap between the 2 is the advantage of shale gas, and that's where we will see the benefit coming in. Now your other question was asked about the energy prices, the utility of cash conversion cost on an integrated basis. So as an integrated conversion cost portion is about 30%. And actually, in Europe, we have built up, as I mentioned to you, a very significant increase in our business plan, unless there is a big issue in Europe. Vikash, can you go to the Russian slide that how would the Russia oil gas is supplied, which will help if you can bring to that slide? Well, this is an important slide. So there are 3 pipelines which serve Russia gas. And you can see the Russian -- overall Russian pipeline were limited throughout '21. And the remaining was only 30%. And you know in the sanctions, energy is not included. And in January, Europe has imported a significant quantity of LNG from different parts, and they are considering as a contingency plan from Algeria, Qatar, U.S. and Australia. We don't believe that Russia will cut off. A good news yesterday was that we saw, there's going to be a meeting between Russians and Ukrainians in Belarus. Well, we are not counting anything on it. So [ gas ] it's a small story -- I mean, long story short, our business plan has built in quite a significant cost based on the fourth quarter. Even if it goes more than that, then there may be a $40 million to $50 million impact maximum, if they skyrocket to numbers of fourth quarter or beyond that. And we don't believe that's going to happen. So I think I answer your -- most of the questions, if I'm not wrong? Did I answer everything? So here you're seeing -- just to clarify here one more point, Komsun, that we show cracker profitability separately and MEG and intermediates, what you see negative 41% here, which has improved from 87% is based out on transfer price of ethylene or bought out ethylene. And so this is a negative EBITDA, but you can see from 30% to 99% improvement is mostly cracker. This will significantly improve with IVOL. And then you have $319 million which is coming from downstream. This is a per forma, which we wanted to show you, IOD plus Oxiteno, and how does it look like if we add Oxiteno's results in '21 versus our results and $553 million. Of course, as we mentioned, IOD will continuously improve in MTBE, intermediates and also better operating rate. So Komsun, any other questions if you have, otherwise, I hope I answered all of your questions?

Mayank from Morgan Stanley, can you please ask your question?

Thanks, Vikash and D.K. sir. 2 questions, sir, from my end. One was in terms of -- if I kind of look back to what 2021 started and what the guidance was correct on the net debt side. You've talked about around $600 million of reduction in debt. Obviously, things have moved quite a bit around commodity prices, et cetera. But if I look at, I think, the bridge that you were showing us, that if it was not for the acquisitions you could have actually kind of hit your target of $600 million reduction in net debt rather than the $200 million ending in 2021. So is there a thinking process now that this new bridge that you have shown in net debt to equity reduction, will that be met despite moves around commodity markets? Or you think there could be some downside risk to these numbers on debt reduction?

Okay. So Mayank, good question. I think you saw that we had $200 million reduction in the debt, but we made $500 million on the strategic acquisitions. So if you add up then it becomes $700 million. The -- and that's what would have happened. But $800 million got sucked into the working capital because of the increased prices and increased number of days, but particularly because of supply chain issues. We wanted -- like Egypt and all that we put PTA on the pipeline. So that was the reason. Coming to your question whether we have any risk of -- as you know, our equity portion is quite significantly increasing with the retained earning. I don't think the needle will move much with what we are projecting at 1.2, unless the crude goes up to $150 a barrel, and I have to put $400 million, $500 million more into working capital. So I don't think this needle will move much from 1.1 what we are forecasting here. But assuming a $75 a barrel. But I mean it may be 1.15 or if we -- but our results -- I mean, if crude is higher, our profitability can be better. So I think we are very confident that we should be able to achieve this result of 1.1.

So just a follow-up, sir. So how much is the absolute reduction in net debt are we talking about for 2022 now?

Vikash, do you want to answer that?

Yes, Mr. Agarwal. So Mayank, in 2021, we were targeting around $400 million. And in 2022, if I give you the absolute reduction -- because there would be a cash flow creation and then the Oxiteno and all that. So just give me a minute.

He's asking absolute reduction, yes?

Yes, yes, absolute reduction. So our net debt is going to be as per the business plan we have. So at the end of 2021, our net debt was $6.2 [ million ]. And in 2022, it is expected to go up a little bit because of -- so that will increase then because we are going to pay $1.1 billion for the Oxiteno acquisition, and then there would be interest payments, dividend payments and certain CapExs that we have on the Olympus. So net debt absolute will go up and absolute equity will also go up and net debt to equity will come down.

I think, Mayank, a thing like that because $1.1 billion we are paying, we are also being strategic investments for expansions and all that. So maybe the free cash flow may not be positive, but it's still the debt equity goes down because equity builds up. Our policy of dividend still remains low.

Okay. But definitely, it will not be a big increase in net debt numbers in absolute terms for 2022. Is that fair?

Absolutely. And this is the reason there were a lot of speculation whether we need a fresh equity and all that. That's all behind us. So you're absolutely right on that.

Okay. And sir, the second question was more related to the corporate governance issues around the announcement that you have made on insider trading. Can you just give us a bit of a background of what has happened? And can you just tell us on what are the steps -- stringent steps, if any, that you guys have taken already?

Good question, Mayank. I think IVL [ mentions ] some very high degree of corporate governance. I just wanted to make you understand that this is not related to IVL. This was related to another company called TPAC. Of course, some of the IVL executives were alleged to be involved in the security insider trading for that company. We've deliberated at the Board. Naturally, individually, they have to pay their fines to SEC. We will investigate internally also and we will take necessary action as per the company's rules and regulations. But there's nothing related to IVL, as you know. But yes, absolutely, this news came last year, and we deliberated a lot at the Board Meeting.

Yupapan from Thanachart, I can see you have raised your hand. Please ask a question.

Actually, I have only one question. Like do you have any like hedging position in your -- in terms of the energy cost? And I see that you already put in a quite accretive assumption on the energy cost increase this year, but that nearly USD 200 million. But in the fourth quarter, along the last year, the energy cost increased by $100 million. So do you think that there could be more downside risk on that? And also, what is the assumption that you put in, in terms of the energy cost that you put in the 2022 budget?

Good question. So let us understand this graph properly first. This is '21 versus '20, okay, $190 million incremental. We have built up $195 million over 2020, additional cost built in. So cumulatively, we have pulled $385 million for '20. We have actually hedged 25% to 30% in Europe, already the energy prices, and that's the policy which we are following. So there is enough buffer in these energy prices in Europe, America or Asia. And as all of you rightly said that U.S. and Asia may not get that much impacted because we still have a lot of coal base. So we have considered higher coal prices, higher energy prices across everywhere. If situation goes up that in Europe it becomes too high -- if you see the left-hand side curve, which gives you -- the yellow line is TTF. And you can see what happened in the fourth quarter. It adjusts from $10 per million Btu, it went to $40 per million Btu. And the gas in America is $4 per million Btu. And you can imagine that the people who are transporting LNG, how much money they were making. And then it became very volatile. So you saw it went up and now it has come down. So we have built on the forward-curve basis. But if we were in the worst scenario, if further, there is a big crisis in Europe, we may have $40 million -- $50 million hit on top of $385 million, if that is at all a thing. In first quarter, we have no extra cost. We are on line with the budget.

I have one more question, actually. Could you like provide asset in terms of the gas prices [ that would be ] to like IVL?

Sorry, gas prices for?

Like for the cost to IVL.

So it is different in different regions. In America, we buy based on Henry Hub, which is hedge against the Henry Hub and then you have a transportation cost, which ranges from $4 to $5 per million Btu. In Europe, as you can see, it is a $40 per million Btu which is factoring up to $25 million, $30 million -- $30 per million Btu in the second quarter, third quarter, fourth quarter because that is backwarded. So we have considered gas price based on different regions where we buy and hedge accordingly. And we have a robust hedging policy. And as you might have seen results of many, many companies in Europe, very badly hit by these gas prices.

Yupapan, do you have any follow-up question?

No Thank you.

[ Kumkum ] can you please ask your question?

I have a few questions. The first one, I just want to understand how the energy costs that -- how you can pass it through like through the surcharge mechanism? If you can -- for example, you show that in the fourth quarter, your cost has gone up by $31 million -- $41 million Q-on-Q. Of that amount, are you able to pass it on as surcharge? That $41 million is the net after the surcharge, it's taken into account already?

So that question on $41 million, if you go to the fourth quarter, I think that you're referring to the PET. The PET in '21, we had a contract settled in '20. You remember that, right?

Yes.

So we had to announce the surcharge. We actually recovered only -- probably -- I don't have the rough numbers, but about 25%, 30% recovered out of it. That's why you don't see fourth quarter and otherwise or I would have shown a better results. From '22, the margin itself in Europe, now the margins have gone up by EUR 110 per ton, and the energy impact is only EUR 30 to EUR 35 per ton on the first quarter. So our margin improvement, which we have taken up is significantly higher, in so -- which is already locked in, actually. And in case of other product lines like fibers, tire cord, and all that where also we produce in Europe, in formula, we have built up that if energy price settlement is based on quarterly that what is the energy price versus the -- within the bank? So if there is a higher energy price, the margins get basically increased. So to answer your question that do we have enough hedge against the energy increases if possible in Europe, there are 2 ways to look into it. Number one, we are hedging our energy anyway. To the extent, 25%, 30%, we plan to hedge up to 50%. Second, our margins in Europe, which are basically now sucked into '21, already takes care of these high energy costs significantly, much more than that significantly. So that's why we have built in $195 million already into this. So some contracts have energy components, some are dictated by the market prices and market prices are reflective of the high energy costs already. So that's how it works. So we have a good hedging mechanism against the expected if there is any further spurt in the energy prices.

Okay. Actually, I have one more question on the IOD, the IVOL to be specific. I noticed that you have reported the IVOL performance as noncore operations. I would expect that this item in 2022 would be considered as your core because right now, everything is running at 75% already. Is this a fair expectation?

Absolutely, correct to confirm, this will be shown as a core business going from first quarter '22, and we expect to contribute about $60 million to $100 million EBITDA from IVOL cracker, depending on the ethylene crack margins. Ethylene crack margins are dictated by locally thin prices and the local energy -- local, basically the ethylene price. Remember, one thing is very important that here in this graph, we show cracker separately. And you can see in the fourth quarter, the intermediates have gone positive. So when -- even if ethylene is dropped, but our glycol prices are high, you will see glycol margins going up. So this negative 11% has already become 8% positive in intermediates, which is MEG and MTBE. When you will see first quarter, this pie will further increase. So Lake Charles, absolutely, we will show it as a performing asset coming from first quarter '22, and it is running quite smoothly.

Sumedh from JPMorgan, can you ask your question, please.

Sure. Actually, my question was similar to the one question asked earlier, but let me broaden my thought, right? So given the fact that Brent prices have gone up, we should expect PX/PTA to move up as well. So how confident is Indorama in passing on these high costs to PET prices? So could you please give us some understanding of PET spot market? I understand the contract, but spot market dynamics will also be helpful to know?

Good question, Sumedh. Can we go to the margin chart, Vikash. The crude oil, you're absolutely right. [ But as all-in ] PTA margin -- when the margins go up the cost goes up, the PET goes up. And you can see on the left-hand side how the integrated PET spreads are -- keep going up because the market is short. And you can see below the Brent price. No, if it became $150 a barrel, forget about $100 a barrel, right. $150 a barrel and $50 a barrel increases the naphtha cost by $300, okay? So PET price can go up by $320, $300. Now today, the PET price in China is about $1,120. We have seen PET prices gone up to $1,700, $1,800. So we will be able to pass on the entire increases. The margins in the PET are dictated by demand supply and where you can see here left why the integrated spreads are gone up because the market is very short of PET. Many reasons. Demand is good across the world. There has been a lot of interruption in the supply chain. China, even because of China's dual policy, the production is not -- the exports are not increasing significantly. They exported about 400 kt in December. So whether you take Europe, you take Brazil, you take U.S.A. everywhere, the product is short. And remember, the second quarter when the demand kicks in because of the seasonality, we are at actually a very dangerous situation where product availability can become a question. So I'm not worried whether the crude goes to $100 or $150 a barrel, our spreads, which we will be able to pass on. So higher oil price does not affect our PET spreads, we will be able to pass on them. They actually -- the benefit will come only from MEG and MTBE. The only benefit in PET will get is because of import parity because higher is import parity, the duties becomes higher, and both Europe and America is a deficit market.

Anybody, if you have any questions, anyone please you can ask them now. While we're waiting, I have one question on the WhatsApp that someone has sent to me about the -- there's one more announcement on the ESOP scheme for the management. So can you explain a little bit more about that?

Yes, so on ESOP scheme, many Thai companies have this ESOP scheme where we have been deliberating at the Board level how do we align the management. Of course, we have a short-term incentive, which is linked to the -- that year's performance. We wanted to bring a long-term incentive scheme -- we have classified these long-term incentives into warrant 1, warrant 2. In the first warrant 1, we are talking of $19.95 million. These are allocated to the people who have been in the service for more than 15 years. They are given at zero cost to them, that will give an exercise price at a discount of 15%, which is 37.74. And the condition is that 20% will be after 2 years of allotment, 20% after 3 years and 60% after 4 years of issuing. Warrant 2 will have 36.2 million warrants, which are -- those were less than 15 years. Exercise price, there is no discount. This is the market price, which is calculated based on 180 days average price of 44.39. And so the blended exercise becomes 42.03. And the same conditions apply on exercise debt. The dilution impact if all these are exercised will be 1% -- 0.99%. And the -- if they are not exercised naturally, it will depend if getting money on the date and the objective is that management's objectives are all aligned here. And they are, of course, subject to the approval in the Annual General meeting, which will be approved in April 2022.

Thank you, Mr. Agarwal. We don't have any more questions on the chat room. Also nobody has raised hands. So any last comments, Mr. Agarwal, otherwise, we can [ close it out ].

No, I think -- thank you very much for taking out the time to hear our quarterly earnings calls in 2021. As we mentioned, we are very excited about '22 earnings and be safe as the countries are opening up now. Thailand still have 25,000 cases. But hopefully, we can see physically sometime in the quarterly earnings calls. So, be safe with your families, and thank you very much for attending today's earning call. Thank you.

Thank you. Thank you so much. Take care.