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

Good evening, everyone, and thank you for taking time to join us for Indorama Ventures Fourth Quarter and Full Year 2022 Analyst Briefing. I'm Vikash Jalan, Vice President, Investor Relations and Training. Joining me today is Mr. Aloke Lohia, our Group CEO; Mr. D.K. Agarwal, our Deputy CEO; and Chris Kenneally, Executive President for Fibers business. A quick disclaimer that this meeting is being recorded, and a replay of this session will be available on our website after the meeting. We have made a few assumptions and estimates on the future trends and industry trends in the business, which are based on our analysis and available information at this point in time. So with that, I now invite Mr. Lohia to start and followed by Mr. Agarwal, and then we'll take your questions. Over to you, please, Mr. Lohia.

Thank you, Vikash. Welcome, ladies and gentlemen, to our full year [indiscernible] 4Q 2022 discussion. Next slide, please. So let me start with the key macro trends we have witnessed over the last 18 months. And as we all know, the last 18 months had quite [indiscernible] many aspects. I will share with you some of the key trends that impacted our performance both on the positive and the negative side. As we know, the freight rates played a very important part in our earnings, first 9 months, and then had a negative impact in quarter 4. The volatile energy prices as well have huge cost implications on our business. And now we see that normalizing towards [indiscernible] in the U.S. as well as coming close to normalizing in Europe. The economic activity globally has picked up apart from in China. But now with the COVID lockdown easement, we believe that the upside coming from the Chinese opening up is going to be quite -- will help to bring our numbers back to normalized levels. Let me explain a bit more on what we have understood from the number crunching in the last 3 months that we have spent analyzing on our markets. Let me start with the often used word destocking for the time. What it means that destocking for our business, for IVL business is that starting in end 2021, there was a supply chain disruption and for various factors, including shipping. And therefore, many of our customers started building safety stocks and security stocks. That got exaggerated in beginning 2022 with the Russian-Ukraine crisis and the spike in the price of crude oil. And therefore, the restocking or the stocking of security supply continued well into the first half of 2022. As we entered into the second half of 2022, the normalization of the supply chain started with the availability of ships with concessions easing at ports as well as the availability of trucks and drivers for the last mile delivery. What was a remarkable period was the quarter 4 when the price of crude oil dropped from $101 in the third quarter to $88 in the fourth quarter. With the fear of recession, with the interest rates rising, all corporates including IVL, took the stance of destocking. So the destocking is real. It does not impact the final consumer demand. What it impacts is the factory order levels. Next, please. So with that background, we get into our record 2022 performance with a core EBITDA of $2.28 billion, up 31% year-on-year. We continue with our mindset, the growth mindset. We did 2 successful acquisitions, Oxiteno in Brazil, Latin America and the Vietnam packaging business. Both of these highlighted our ability to pick good assets and the performance of these assets were above our expectation. With the rising interest rates, we also renewed our focus on our capital efficiency and optimizing certain fibers and CPET portfolio assets. Plus with Agile exposure management, we had our net debt equity of 1.16, which was nearly the same as in the beginning of 2022 and a strong DSCR of 2.54x. We continue to tighten our operational excellence and that resulted in an operating cash flow generation of $2.2 billion, a cash conversion ratio of 98%. Our focus on cost was enhanced. Project Columbus has been ongoing now being now in the third year and has delivered substantial value with analyzed run rate efficiency in '22 or up to '22 of $449 million. We continue to work towards delivering accretive earnings for our shareholders and our dividend proposed for the fourth quarter is 40 [indiscernible], meaning a total dividend of THB 1.6 to our shareholders, yielding 3.9%. Next, please. The fourth quarter '22 performance was a disappointment. It was a challenging quarter. And our EBITDA -- our core EBITDA was up $264 million, down 43% year-on-year. It is not unusual for the fourth quarter being a lean seasonal demand quarter for us, but it got exacerbated by the rapid destocking, which I mentioned earlier. The recessionary sentiments and the crude dropped by 12% in quarter 4 over quarter 3, and with capital efficiency in mind and in order to not land up with any higher stocks than our sales, we lowered our operating rates to match sales volumes, resulting in price and margins decline in IVL performance. Kean exposure management to destock with preemptive reduction and output at 64% utilization rate, accelerated by the winter freeze in the U.S., adding to unplanned safe shutdowns. Our end consumer markets have demonstrated and established resiliency and the demand for our commodities and necessities continue to be robust. We have minimal exposure to durables. Our global operations were impacted by high LNG costs in 2022 and also in fourth quarter '22, and now these are normalizing to sustainable levels as seen in the U.S. natural gas pricing and ethane pricing. The fourth quarter continued to benefit from the obtained disparity -- and therefore, our MTBE performance was above par by putting pressure on our paraxylene and our PIA margins. Next, please. Let me summarize the event of quarter 4 from our reported EBITDA of $82 million to our quarterly run rate EBITDA of about $500 million. These are the components that were onetime impacts on our quarterly performance. and this is to demonstrate that the underlying performance of the business remains strong and unimpacted. Our balance sheet remains strong. Our group mindset and our operational excellence as well as focus on our people management continues to be the main drivers of IVL performance going forward. There are many components we have listed, and we have divided them into the 3 segments as well as what took place across IVL. So normalizing for inventory liquidation costs, normalizing for energy costs, for instance, normalizing for 64% operating rate. We feel confident that our $500 million sort of EBITDA targets are intact, and they have been intact for the last 2 years. There are many ways we could have carved out this information and present it to you. This is one way we chose just to keep it simple and easier for us to understand and explain. With that, I would like to now pass on the next part of the presentation to Mr. D.K. Agarwal, who will take you through the segments as well as IVL as a whole. Thank you so much.

Thank you, Mr. Lohia. Good evening, all of you to take out time on Friday evening for this analyst presentation. If we can go to the next slide. During the course of this year, we made 2 successful and high-quality acquisition, as you know, Oxiteno in the IOD segment and Vietnam packaging in CPET. This both acquisition have been very successful, has contributed an additional $227 million to our overall EBITDA. Actually, both have accelerated the expectations on a 9 months basis. The newly acquired Oxiteno business delivered a core EBITDA of $215 million, leading to an EV EBITDA of less than 5. As you remember, our target was to have 6%. So this has really performed very well in spite of weak fourth quarter. With Oxiteno, we unlocked more than 20 million of synergy benefits in '22 and are on track to realize another $80 million in the next 3 years, all the initiatives are in the pipeline. As you know, we created a clean team to unlock this value. I think the most important part is this acquisition accelerates the IOD business transformation into a specialty surfactant clear with expanded biomass feed capability. Brazil has bio at lean availability, and it makes us the largest non-ionic surfactant producer in Americas. Our first ever acquisition in Vietnam in packaging also delivered satisfactory results. On an 8-month basis, the deal contributed $12 million exceeding out expectations as we expanded the sales volume to large customers, leveraging IVL global relationship. This is our first investment in Vietnam. We achieved 40% of our target annual cost savings of $3.5 million in the first year of operation. This now opportunity provides us the channel to diversify our business across the segments in a very fast developing new market of Vietnam. Let's go to the next. This is on impairment. We took a very strategic review of our footprint and decide to optimize by impairing few assets in Europe and 1 in Asia. The assets that are affected are in 2 categories. One is mobility fiber assets in Europe and 1 PT asset in Asia, which falls in CPET. This has led to an impairment of $260 million, which has been accounted in the books, out of which only $7 million have cash implication and $253 million is noncash. What is the impact of this? We expect a result that our ROCE will improve by 30 basis points because of this and we'll see a $38 million upliftment in EBITDA, core EBITDA, and this improvement comes from lower fixed cost as we are reducing manpower by 550 people, changing product mix towards positive contribution margin products and especially in Europe. As you know, Europe had the challenging circumstances of high energy costs. Let's talk a little bit about fiber. We are disappointed with our results of fiber and that expedited this review of assets. The retained situation in Europe because of high energy price has made costs very high in the region, making the mobility fiber assets in competitive for certain product categories. We have reviewed these assets and their long-term positioning and decided to take impairment of few assets for $120 million. In the combined patch, although our results were fantastic, we look at each investment separately. CPET asset in Asia, the PTA plant is of old technology and high-cost plant, having negative cash flow in the past 2 years, and we took impairment of about $140 million in this. So this is a total $260 million impairment, $253 million noncash and $7 million of cash. Let's go to the next slide. Let's look at the cash flow, which was -- Lohia was referring. Operating cash flow was very strong during the year to $2.2 billion, which was 98% of our core EBITDA conversion and which is very important. In spite of poor performance in fourth quarter, our operating cash flow during fourth quarter was $494 million, which was 187% conversion of core EBITDA with better working capital management and destocking. During the year, our free cash flow generation was $1.57 billion, as you can see from this graph, after maintenance CapEx and finance costs. And this was deployed in the strategic growth of the company and growth CapEx was $1.9 million, which primarily included the acquisition of Oxiteno and Vietnam packaging. Investment into creating future readiness of Oxy organization like S/4/HANA project, adding recycling assets towards our stated target to reach 750 kt tonnes by 2025, and improving our operational platform through Project Olympus initiative as we just discussed. Our dividend policy remains intact with minimum 30% of net profit, which we are consistently following since our IPO in 2010. Even in fourth quarter '22 today's Board meeting, we have proposed a dividend of [ 40 satang ], which will add up to total THB1.6 for the year. Of course, this is subject to the shareholders' approval. So if you see, there is a net increase in net debt of $512 million through our profile, expanded our equity base, and we reduced our net debt to equity by 5 basis points during the year. So entire acquisitions were actually managed by internal cash flow predominantly. Next slide. Now updating on the project Olympus, which we are very proud. We have continued to achieve sustainable efficiency gain as part of our efforts to become a leaner organization by operational excellence, strengthen the P&L structure by removing cost and future-proof the business. As Mr. Lohia mentioned, we unlocked the cumulative saving of $449 million at the end of last year, driven by operational excellence procurement and supply chain initiatives. As you can see, operational excellence was the biggest driver, delivering $242 million efficiency gain through yield improvement, overall equipment effectiveness improvement cost optimization and removal of bottlenecks. This was up $81 million from efficiency gain in this area versus the previous year. Along this side, we saw $100 million efficiency gain via procurement and supply chain, up $36 million year-on-year, driven by our competitive bidding process, our ability to leverage economy of scales and cost efficiency from bringing some activities in-house. So you can see this continuous improvement drive of Olympus continues in the IVL. Our full year performance of 2022, as you can see, was $2.28 billion core EBITDA versus $1.74 billion in 2021, registering year-on-year growth of 21%. As we just said, we had a disappointing fourth quarter and an EBITDA of $264 million, which was a drop of 43% year-on-year. As explained by Mr. Lohia, fourth quarter was adversely impacted for key reasons: heavy destocking in all product categories beyond usual lean season due to normalization of supply chain as the vessel time reduced cautious buying due to recession fear and drop in crude oil prices. Everybody was trying to destock because of the recession and the crude oil prices were dropping. Our sales volume during the fourth quarter was 3.3 million tonnes versus 3.7 million tonnes, which is a drop of 12% versus Q3, a significant drop. This production was reduced by 16% to further optimize year-end inventory as we wanted to have lower inventory, leaving an operating rate of only 64%. And However, earnings reported by our major brand owners and customers indicate resilient and consumer demand of our products. So this is purely a one-off event of destocking, as Mr. Lohia was explaining. Go to the next slide. Now it is important to see the EBITDAs across different geographies. It is clear that some regions outperformed others and some highlights, specifically on the regional level in [indiscernible]. Americas, which is our -- continues to remain our strongest region with benefit from strong earnings from CPET being having an integrated platform and IOD platform, in spite of high energy cost, as you know, because of the Ukraine crisis, the U.S. energy cost also skyrocketed. The Oxiteno contributed $215 million for 9 months operation. America fourth quarter performance was impacted due to drop in volume by 11% quarter-on-quarter caused by destocking seasonal weakness in integrated downstream of IOD, especially in Crop Solutions and Texas freeze event impacting nearly 72,000 tonnes volume. Asian performed well for the year, supported by limited exposure to China, as you know, our exposure to China is limited and strong integrated PET spreads due to heavy stocking, as Mr. Lohia was explaining, that the first 6 months, we had a very strong demand. And the fourth quarter, we had a destocking. The fourth quarter result was impacted due to significant drop in integrated PET spread and drop in lifestyle volumes in fibers. The integrated PET significantly margin dropped during the fourth quarter. European performance remained weak for the entire year 2022 due to high energy costs, lower operating rate and impact on PIA due to high octane. As we said, high octane resulted in the higher prices of Mix-Xylene, which impacted the business of PX and IPA. Fourth quarter also got impacted due to lower volume by 16% quarter-on-quarter and reduced import parity, as you saw the drop in the freight cost was there so that impacted the European operations. Now if you look at each CPET, coming to CPET, which delivered strongly in 2022 at an EBITDA of $1.328 billion, driven by higher margins with supply chain tightness, reset of contracts in western markets, negating the high cost, especially in Europe. And as I mentioned, high Mix-Xylene prices due to octane shortage impacted our PIA and PX business negatively by $70 million, which were, of course, recovered in MTBE and IOD. As supply chain normalizes with reduction in the vessel cycle time, the heavy destocking happened across product line aggravated with the fear of drop in oil prices and a hike in interest rate. The sales volume dropped in fourth quarter in CPET by 10%. However, the production was reduced by 13% to manage the year-end inventories, which improved our operating cash flow. Despite the severe decline in PET volume this quarter, it is reassuring to note that fundamental consumer demand remains intact as dividend by the stable volume and revenue performance of our FMCG consumers, like Coke and Pepsi, I mean, they reported very good results. The resilient performance of our packaging business in fourth quarter also reinforces resilient end product demand. As I mentioned, during the fourth quarter, the industry integrated PET spread dropped from $294 to $190 per tonne in fourth quarter due to destocking and poor operating rate in the industry, the heavy destocking, which was happening. The CPET EBITDA as a combination of lower volume and poor spread resulted in a decline in EBITDA of 49% quarter-on-quarter to $136 million in fourth quarter '22. Our specialty PET got -- business also got impacted as I mentioned, due to high MX prices and slowdown in housing, construction and coating markets where 50% of the PIA demand comes from. Now what we see in first quarter, we see destocking normalizing and improvement in our sales volume as we sit in February. The management is also focusing on value pricing over volumes to improve the profitability. Our recycling investment is at the core focus of IVL to meet the commitment of 750,000 tonne capacity by 2025. This certainly gives us as a preferred supplier with our brand owners like Pepsi, Coke. We have also formed a dedicated focus group to invest in new technologies to meet our 2030 sustainability region of having 25% feedstock by renewables and circular sources. So that's about the CPET. Now looking over to IOD. As you can see, IOD registered a record EBITDA of $730 million in 2022 versus $377 million in 2021, registering a growth of 94%. We may, as you know, that this vertical has been made in the last few years. We have made 2 successful M&As in this vertical, leveraging on shale gas advantage in North America and emerging as largest non-ionic effect and produce in the region. I have no doubt this paves the way for growth in other regions as the market remains fragmented. IOD vertical is on track to parallel our success in CPET by consolidating the industry, leveraging on innovation and customer intimacy, which has come with this 2 acquisition. The ethylene crack margins continue to remain weak in fourth quarter with high ethane costs because of the gas prices as well as the COVID lockdown as the PET derivative demand was very poor. In light of minimal spreads, management decided to bring forward the planned turnaround of the Lake Charles site, reducing production in fourth quarter. In addition, the Texas freeze event in December, further reduced ethylene production volume. Asian benchmark integrated MEG spreads continue to be under pressure as zero COVID policy of China continued in the fourth quarter and lockdown dampened China's downstream polyester demand. MTBE, the star of the year, margins got normalized in the fourth quarter '22 seasonally, however, remaining at high levels due to strong octane value. MTBE today in the first quarter continued to remain strong with high premium of MTV over gasoline. Continued shortage of octane and lower price of butane will keep MTBE margin stronger as indicated by the forward curve of the commodities. Our Oxiteno acquisition has done well and while continuing to be long-term bullish on the growth and profitability aspects of the downstream business, we did see a slower fourth quarter '22 due to significant down stocking by our customer. Destocking impacts were largely visible in Home & Personal Care, Crop Solutions and coating markets. So this destocking happened across all the areas. In addition, the normalization of freight rate impacted import parity of commodity chemicals, reducing both volumes and spreads. We have seen improved demand in the first quarter as we said in February with restocking, achieving 90% of the normalized volume. IOD in the fourth quarter Downstream also had a onetime $10 million inventory loss, which is part of this core EBITDA because of significant drop in palm kernel oil price. As you know, palm kernel oil is imported from Malaysia and Indonesia and goes to Brazil. So this was -- there was a rapid drop in the PKO price, so this was onetime inventory loss. Next. As I mentioned, the fiber was a disappointment. The Fiber segment achieved core EBITDA of $212 million in 2022, a decline of 21% year-on-year. Lifestyle core EBITDA of $74 million declined 43% year-on-year, and Lifestyle Fiber segment showed lower core EBITDA mainly due to market slowdown in China with high downstream inventory amid COVID lockdowns. And in Europe, we had the increase in utility costs, which impacted the performance. Hygiene Fiber segment ended 2022 with a core EBITDA of $79 million. Volume were down 13% due to softer demand in wipes post COVID and also lower volumes in Russia because of the Russia-Ukraine crisis. Mobility Fiber EBITDA at USD 53 million showed a 4% year-on-year growth volume declined 10% in line with the reduced regular OEM tariffs demand and significant cost increase in utility and energy prices. Management shown a good agility in managing price increases during the period despite heightened volatility. Replacement demand for light vehicles and study. Q4, if you look at particularly in the fibers, continue to see the weakness due to destocking and poor margins in lifestyle due to lower polyester operating rate in China, as we mentioned. Sales volume quarter-on-quarter declined by 18% in Fiber division. Production was reduced by 23% to minimize the year-end inventory as we did in different other segments. Q1 '23, as we said, we see the revival of demand on restocking, and China reopening should benefit this vertical. As you know, the Chinese GDP growth is expected to increase from 3% to 5% forecasted for '23, which is an $18 trillion economy. Let's go to the next slide. Let say now look at the volumes, which is very important for you to see quarter by quarter, what happened. Sales volume during fourth quarter dropped by 450 kt, which is quarter-on-quarter reduction of 12% due to destocking in various segments, as we just discussed. Production was reduced by 16% to manage year-end inventories. Now we are almost at the end of February. And so far, we have seen definite signs of recovery in volume across all of our key businesses. Our estimate is the total sales volume across IVL returned to around 3.6 million tonnes in the first quarter of '23, which is very close to the third quarter of '22, which is a similar level as to the third quarter of '22. This is in spite of lower production volume in Europe in fiber and CPET due to poor economics. If you see, we have not shown an increase in Europe because of the economics and particularly, we're importing PTA instead of producing PTA fully there. However, the recent drop in gas prices will help to revive the production economics in Europe. And we'll talk about this outlook for our businesses towards the end of the presentation. So this gives you some highlights about the volumes. Go to the next slide. We remain committed, as Mr. Lohia said, to our financial discipline, which is clearly visible on this slide. We have a liquidity of $2.4 billion, which includes cash and cash under management, plus unutilized committed banking lines. Our debt service coverage ratio was 2.54x, showing prudent management of a year in debt payment. The repayment obligations, which you are seeing on the right-hand side of the graph are well spread out, leveraging on our banking relationships and debt market globally. The debenture maturities will be refinanced on maturity, creating more liquidity and a strong DSCR. Globally interest rate, as you all know, went much higher in 2022, though our costs went up by only 76 basis points only due to limited exposure debts to floating rate, which is 37% in the end of 2022. So 63% remains fixed. Of course, we expect interest rate will further move up in 2023, and we will see increase in interest cost by about $70 million to $80 million, which is small in relation to the continuously rising rates that we see globally today. I mean this fixed interest rate has certainly helped IVL. Our ForEx risk is minimal and managed by maintaining a natural hedge portfolio and matching foreign currency assets with the same foreign currency liabilities. Last but not the least, which is very important, our sustainability linked debt of 20%, which by end of March '23 will be 27% based on committed line funding of $500 million. So the sustainability linked debt are cheaper as well as a longer tenure. Our dividend policy is very consistent. You can see the historical dividend speed. We pay every quarter, which also shows the strength of our business model and strong visibility of cash flow generation. The Board has recommended today a final dividend of 40 satang, making annual dividend of THB 1.6 per share. This year would be a record dividend and gives a yield of close to 3.9%, which is much higher than 10-year government bond yield of 2.6%. So if we see -- looking ahead to 2023, there are several signs of recovery that indicate a potential favorable outlook for markets and the global macroeconomic situation and positive factors for IVL. So let's talk about what are those. China household saving is sitting on JPY 12 trillion. The expected GDP growth forecast to increase from 3% to 5%, resulting into increased demand across all product categories. We saw this pent-up demand coming into regions as we opened up what we call is a revenge spending. The normalization of inventory levels will further improve demand due to restocking. We expect our sales volume in 2023 to grow from $14.7 million to $15.4 million, supported by organic growth and new expansion projects in pipeline, and particularly in India, we are adding a PET line, which is -- be operational by March as well as fiber assets. The situation in Europe energy market has become more balanced. As you saw, the energy has come down, which will benefit us by $183 million net of mark-to-market loss because of the hedge situation. We expect to see normalizing price for U.S. natural gas and ethane, which would bring back the shale gas advantage. This will improve MEG and attract margin as marginally witnessed in first 2 months, we already see those improvements in the first 2 months. Alongside these external developments, we'll continue to take decisive action to ensure we have the best platform to support our future growth. Continuing our laser focus on cost management via Project Olympus, we continue to deliver the value. and pursuing performance improvement through our footprint optimization, which you saw guided by our strategic review. So this gives you something about 2023 outlook. This wraps up my presentation and will be willing to take your questions. Thank you.

Thank you, Mr. Agarwal. So we can take up the questions, and you can either raise your hand or you can also type the questions in the chat box. Yes, [indiscernible]. Do you have a questions, please go ahead. We can hear you.

Yes. Thank you for the presentation. I have a few questions to ask.

Yes, please go ahead.

All right. The first one is can you give us an estimate of the gas price [ cap ] for this year versus last year? And the second one is can you give us a guideline in terms of the potential incremental EBITDA from MTBE if the margins stay at this levels to [indiscernible] 2023. And the third one is what is the result of the West PET division for this year versus last year? Are we expecting the margin either to be the same or better? And the last one, as D.K. mentioned that U.S. packer margins seem to be improving. And can you quantify a little on that if, say, U.S. packer margin staying at [indiscernible] things like that.

Thank you, [indiscernible]. So I'll take all 4 of your questions. The gas impact I just mentioned, the impact is -- you can see $542 million. We had adverse impact in 2022, which was basically recovered from enhanced margin. This had $86 million gain due to gas hedging. So it was net of that. Today, based on the forward curve, we have $183 million gain after taking the loss on hedged quantity. We continue to have the hedging in place. So our benefit will be $183 million. We believe the gas prices are quite low. So we are trying -- we are locking in this outstanding benefit, which we may have. Coming to MTBE, if we can bring the MTBE slide, MTBE was very strong last year, 2022. You can see here there are 3 columns. What is the brent, this is prices, gasoline minus brent, U.S. MTBE minus gasoline and U.S. MTBE prices in the spread. In 2022, as you can see full year, the spreads were quite high, particularly in the second quarter because of octane shortage. Based on the forward curve, you can see here that as we speak in February, the gasoline is, as you know, the gasoline crack margins are high. They're at $255 per tonne. And the premium of MTBE over gasoline is $223, means octane is pretty short in the first quarter and $585 per tonne versus $371 in the first quarter. I won't tell you that second quarter will be [ $884 ] or anything. But if you see the forward curve, which shows again second quarter peak coming up because normally, butane becomes cheaper in second quarter, up to winters, butane gets blended in gasoline, and you can see the average is $636 per tonne. So I won't say any incremental EBITDA. But today, octane is short in U.S. And we have actually -- we were supposed to take a turnaround. We just took a turnaround in the first quarter for 7 days, and we expect the full production in the remaining part of the year. So that would be my guideline on MTBE. West PET negotiation has been quite good at the -- basically in U.S. and Mexico, we have raw material linked contracts, which is actually 12.5% of the total volume. But they contribute nearly 35% of the integrated PET EBITDA, and they are at slightly better prices than last year. So roughly to give you. However, in Europe, because of the European situation, right now, the volumes in Europe are only raw material in 10%. The 90% are on the spot basis. You can see a premium here that what shows that average 2022 premium over the benchmark was $260 per tonne. We think this premium will narrow down. But if you see 2017 to '22 is $247 per tonne. And as Mr. Lohia was mentioning, freight will certainly have impact in the Europe. But the U.S. Mexico, which is rock solid on the integrated spreads. Coming to the U.S. cracker, let's go -- I think let's understand what happened in the cracker. In Ukraine, crisis resulted in very high gas prices. You can see here in the second quarter or third quarter, resulted into high than cost. Now as the Europe energy situation normalized, the energy prices have collapsed. And you can see which has resulted into better crack margin. You can see from first quarter, they're about $0.09 to $0.10 per pound. Today, the -- still, there is a surplus capacity. But as the China opens up, the derivative demand goes up and gas is likely to hold on to these levels because now the European situation is easing out. The forward curve in Europe also shows that energy is going to be cheap. We think this crack margins will certainly improve, depending on how the Chinese demand shapes up. So I hope that answered your question, all the 4 questions.

So [indiscernible] from Credit Suisse, I can see that you've asked a question in the chat box. I read out for you. Can you please repeat which assets you made the impairment? That's #1. And does it mean that the operations are mothballing, you exited those assets completely or not?

Okay. So if you can go to the impairment slide, as I mentioned, there is a fiber assets, and that is a PET assets or PTA assets. Fiber assets, basically, we have shrunk the footprint, and we have rationalized low-profitability products, particularly there are 4 assets in the airbag yarn field on the tire cord side on the lifestyle side. So we have actually shrinked the footprint. One side, particularly in France, we have fully impaired, but we will still run 3 to 4 years, which may be basically used for recycling assets. So that is the fiber side. On the PTA side, which you see $140 million is mothballing the site by first quarter of '24. This is a high-cost PTA asset, and it is better to buy today PTA at a much cheaper prices than make it, and this has been causing a negative cash flow. So total noncash impairment is $253 million and $7 million is cash, which includes severance and the redundancy to be paid over '23, '24. So I hope that answered your questions.

Okay. [indiscernible], you can ask if you have any follow-up questions. In the meantime, I'll pick my and I can see that you have raised your hand. Can you ask a question?

Yes.

Yes, please go ahead.

The first question was more related to your point around destocking. Can you give us a rough idea in terms of in each geography, what is the level of inventory days are you pairing at your end? And what is your sense that the customer levels as normal inventory day versus normal that you see?

Yes. [indiscernible], that was a question only, only one question?

Yes. So that was one. The second question was more related to this [indiscernible] impairment side of things as well as Oxiteno. You have [indiscernible] highlighted Oxiteno acquisition that 1 of the U.S. assets of Oxiteno is something that would bring in extra synergies. So can you can you just talk about, where are we on that in terms of the [indiscernible] Oxiteno assets in U.S. and [indiscernible] you expect for 2023. And the last one was in impairment. Are you expecting any further impairments to happen for 2023 or around that the numbers done right now?

Very good. So the destocking, if you can show that vessel chart. The destocking, of course, happened due to the lead time of the railcar. It happened across Western Europe, Europe, United States as well as in Asia. Our finished goods inventory, we keep around 18 to 20 days. But to show you the gravity of destocking, on the left-hand side, you can see the cycle time of the vessel. That all capacity depends on how much a cycle -- which is a 40 days reduction. This means people who were buying PET everything landed up into their go down, and they had to cut this. And as Mr. Lohia was explaining, people were keeping safety stock because nobody wanted to be stock out and happened in first quarter, second quarter, third quarter. So that was a quantum of reduction of the transit. Even on the right-hand side, in United States, where the railcar, the most of the movement is railcar, the railcar, the speeds were increased, lots of rationalization happened and that reduced by 5 to 6 days in U.S. system also. So shipping, as well as railcar, both destocked heavily, and that also impacted into the other business segments. On your Oxiteno synergy, we -- this Pasadena asset is [indiscernible] located to Clear Lake, Texas where we were buying the ethylene oxide, purified ethylene oxide from a supplier, which contract has dominated by end of this last year. And we already unlocked $20 million of synergy benefit in '22 in cross-selling, the SG&A reduction as well as the innovation integration. We are having to have another $80 million in the next 3 years. This EO supply captive itself will unlock about $17 million to $18 million annually, and the Pasadena asset is performing very well with asset utilization of fairly 85% to 90%. Third question was on further impairment. We don't have any further impairment coming in. We took a very strategic view of all the asset portfolio and to understand the long-term demand, competitiveness. And as you can see, predominantly, it was in Europe fiber assets and PTA asset, which was very old asset in Asia. We don't expect any further impairments. Hopefully, that answered you.

Yes. Just a follow-up. That's very clear on some of the first point mainly on destocking. If you can go back to that slide, if we look at it, we are still not back to 2019 levels in terms of some of the shipping time. So [indiscernible] further destocking for the rest of the year?

I think it has come to a nearly end, first quarter has some lag over. But actually, if you see the Shanghai freight index, it has come significantly lower. We have a slide on Shanghai freight index if we can bring in. Actually, freights have come down and most of the destocking will get completed in the first quarter, even if something is left out. So that would be the next. And you can see the Shanghai Index, which we were talking, freight rates, you can see pre-pandemic level. And at increased oil prices, the operating cost of the ships are high. So it has really bottomed out now, freight rates, which is a good indicator of the situation.

So on annual basis across various geographies, what are the run rates that we should expect for 2023 for [indiscernible]?

So the volume I gave you, let us give the operating rate exactly. Yes, Mayank, let me give you the exact numbers. I don't want to go wrong on that. But first quarter, you can see 76%. But overall, I think the year should be 78% to 80%, but we'll give you the exact numbers. Yes, go ahead, Mayank.

And [indiscernible] to have those numbers, I think the last question I was just [indiscernible] was more about the U.S. contracts on PET, you did touch a bit earlier on that. Can you just explain [indiscernible] how much do you expect considering trade rates have come down as well as there's a bit more dollars in market now. How much is the increase in you contract pricing had [indiscernible]?

Yes. So in U.S. and Mexico, I'm talking of both markets, 90% of the contracts are raw material linked. This means you pass through raw material. And the integrated PTA/PET spread over last year, if I remember correctly, it's $9 to $10 improvement. But you can say same as last year, but slightly better than that. However, Europe, of course, is only about 12%. The remaining is on the spot basis, which will be guided by the import parity. So European -- that's why you can see our European operating rates, we are keeping low. Any more questions? So Mayank, the operating rate for '23 is expected to be 80%.

Thank you, Mayank. Thank you. Sumedh from JPMorgan. I can see you have a question. Please go ahead.

Yes. I have 2 questions. Firstly, just a general question on the PET market. How are you seeing the market today? I mean last year spreads were around $300 plus [indiscernible] $200. So any title on that [indiscernible]? And my second question I'll ask.

Okay. If I can come to the spread slide, [indiscernible], certainly, last year, the PET spreads in the first half as we were attaining your supply chain shortage resulted into a very strong integrated spread. As you can see, $293, $289, and it started from fourth quarter of '21, actually. You will have to split this integrated spread in PET and PTA. We are a big buyer of PTA now. Dark blue shows you the PTA. And you can see that as we speak today, it is already at $212. But if you see PET has $142 while PTA has dropped to $70. We are a buyer of PTA. So we look at more at integrated in Asia. But in Asia, we basically look at PET more, $142. To give you a guidance, that what is the market condition. I think it depends a lot on China open up. China had a negative growth of PET domestic last year because of lockdowns. We think that China will be very strongly coming back, as I was just telling you that so much savings of household is there and the research shows that there's a lot of spending, which is going to come from China, which is difficult -- basically benefits our necessity business because PET necessity even if you travel or you go to dining or everything, we are not in durable goods. We are in necessity and which will get first slice. So difficult to guide, but it won't be second quarter, third quarter, I can tell you that it will be wrong to say that we'll have the same second quarter, third quarter, that shortage. But yes, it is already showing increasing trend, as you can see in the first 2 months. But demand is strong. Our customers have shown resiliency PepsiCo get very strong results even in spite of price increases they made. So it also shows the inelastic city of -- to the price increases. And as we were saying that being in the necessity business. Now with the price increases they have done, they are focusing on volumes. So we feel very positive about PET as a category.

Understood. And just my second question is on your M&A strategy. Again, I think, obviously, [indiscernible] general declines second quarter with announcing few months back and probably [indiscernible] of '20, '21. So are we expecting something where you kind of go back to market and for [indiscernible].

As Ms. Lohia has mentioned, we are always a growth company. But right now, we don't have anything in pipeline, as I mentioned. There are certainly -- IOD business has become a very strong business for us. You can see with the EBITDA was what we have done. We have a good headroom to grow. But nothing in pipeline at present, but growth will be the focus for the company, particularly in IOD business, which is highly fragmented business, as you can see. And we have a very limited presence in India. We have very limited presence in Asia Pacific region in Australia, we have. So there are opportunities in this business. PET, we are already organically expanding. India, 200,000 tonne capacity soon coming up. Nigeria, we're going to expand. So those organic will be coming up. Naturally, we can't do with an acquisition in PET because of antitrust issues. IOD certainly gives us a lot of platform to grow the business, but nothing in pipeline right now. Thank you, Sumedh. This slide just shows you the volume growth from 14.7 to 15.4, what we are planning. The organic assets will gain up to 14.8. As you can see, in -- IOD is still -- we have assumed lower MEG production. But if MEG, contribution margin goes up, then MEG will certainly have a ramp-up of the fraction. We assumed in '23 that MEG wasn't improving, but now we see with the gas prices coming, it can bump up. And then you have Oxiteno full year for 1 quarter. And then India, PET expansion and full operation of recycling projects will give 20,000 and the fiber new projects in U.S., India, will be another 200,000. This is an Indian expansion. So that is what we are estimating 15.4 million tonnes production. And as I mentioned, this reduced PTA production in Europe is considered here because it's better to buy PTA right now rather than make.

So if I may add 1 more question. Can you please tell us again the advantage of -- or benefit of the lower gas prices? I missed the first part [indiscernible].

Lower gas prices. Okay. So can we go to the gas price? So last year, average gas price in the United States was very high because of the European gas prices, right? The natural gas, LNG was getting exported from -- as you can see here, that '22 average was $6.63. Now it's dropped to $2.71, $2.50. And the -- which -- so the advantage, one is in the conversion cost because we use a lot of gas. The net advantage versus '22 is $183 million. This is net of mark-to-market loss because we continue to hedge. Today, we are hedging for '24 also. So to make sure that we are not exposed to the volatility in the gas. The second benefit of lower natural gas prices is on the crack margins because ethane goes down as the natural gas goes down. If you can go to the crack margin slide. With that, basically, the crack margin goes up. Although today, the polyethylene prices, haven't bounced back because of the Chinese demand. So it has dual benefit. One in the ethylene crack margins, as you can see on the -- in this slide that crack margins in '21 were nearly $700 per tonne. On the left-hand side, you'll see when the gas prices were very high in second quarter, third quarter, ethane was high, the crack margins were very low. And as a result, actually, in fourth quarter, we did not run Lake Charles. Now we are running Lake Charles at 80% capacity utilization. You can see in the green line, the January, which is improving the spot and NTP, which is a contract price U.S. NTP as the gas prices drop. Now of course, there's an overhang of the capacity in United States. But as the Chinese demand for polyethylene kicks in U.S. shale gas advantage is very strong, which will also -- and MEG because MEG China is the biggest importer. So this will also benefit in the MEG integrated margins. If we can go to the MEG slide, which can also give you some advantage to look at it what is happening in the MEG. And the MEG -- so this, you see here that U.S. integrated MEG margin in third quarter and fourth quarter were very low because of high ethylene costs and high ethane costs, only $220 and $258. Naphtha based crackers were $101 and $77 versus if you take 5 years average, it was $500 per tonne. Now as the gas prices reduce, ethane prices reduce, that margin has gone up to $375, $377, which shows the shale gas advantage, which you see on the right-hand side, in the dark blue, what is a shale. Higher is the crude oil price, shale gas advantage becomes stronger. Now what will be the crude oil price? Of course, as the China opens up, if the mobility increases, the crude will be upwards. Of course, there is a recession here. So we are not speculating on the oil price here, but this is based on $84 crude oil right now. Hopefully, that explains you, Sumedh.

Thank you, Sumedh. So I can see 1 question here, which is on the hedging position and price of the natural gas in 2023 in U.S. and EU. So we've shown the slide. We can show that slide.

So we are -- we have this mark-to-market loss at present, and you saw in $185 million gain, netting of the gas losses on the mark-to-market. The average price hedged, you have the average price hedge exactly. But basically, you can see that on these gas prices $290, $340, we are hedged about 47% in Europe and about 40% in America. But now since the prices have dropped, we are hedging aggressively to lock in this $183 million gain. And that translates into gain in '22 also, as you can see, [indiscernible]. So it's a continuous hedging process, and that gives you the details, yes.

Thank you. There's 1 more question from Kiatnakin Asset Management. They're asking what's the guidance for EBITDA contribution on Oxiteno in 2023? And how much did it contribute in the fourth quarter?

So if we can go to the Oxiteno slide. As I said, we have to look at the -- the full year was 9 months contributed $215 million. Of course, we had the peaks and troughs. Fourth quarter Oxiteno downstream was weaker and the sales dropped by nearly 19% due to destocking. And normally in Brazil, the fourth quarter is crop solutions demand is weaker. There's a seasonal. Second quarter, third quarter is the strongest. I'm told that Brazil is going to have crop -- the record crop this year. So we are -- as I've just mentioned in my presentation to you, first quarter volume are already on 90% normalized. So it was more impact of destocking in all the areas like Home and Personal Care, we talked about the crop solutions and coatings. But there is no structural change in the demand of our products. And in first quarter, we are already seeing recovery back. And we -- and PKO lost one time of $10 million because of rapid drop in the palm kernel oil price, which dropped from $2,000 to $900 per tonne. There is a transit inventory in -- which is actually taken as a core EBITDA here.

Thank you. I don't see any more questions here. So anyone, if you have any more questions, you can ask it now.

Just 1 more thing about -- have we -- this is Sumedh again. Have we reported any realizing gains or losses in this 2022?

I think were you got the question. This mark-to-market has to be accounted in the in the earnings. So -- and the noncontrol. So there are 2 types of hedging, effective and ineffective hedging. $28 million is realized as a P&L, $23 million which was effective, is under the noncontrolled NCI, which goes into the share capital. Just to give you a number on that.

Yes. And Sumedh, you're asking the mark-to-market gains in the hedging gains in '22, right?

Yes.

So in 2022....

'22, it was all realized. Because that was realized, that is.

So that's $85 million gain in 2022.

But '23 also, MTM loss, which I'm showing 57. 28 is accounted as a P&L already in this year.

Sorry, I am confused now. So 85 is the realized and 57 is unrealized?

Yes. 57 is mark-to-market unrealized as on December 31. Okay. Under the accounting policy, you have to -- if it is ineffective hedging or effective hedging, your account as a P&L. So $28 million of that has been accounted as the P&L items already, which is in fact in the last years' P&L.

And may I check which lines that is coming in terms of in your income savings?

It is in the core EBITDA.

So it is another income [indiscernible].

It will be part of the utility cost, the COGS normal. Okay. We don't have any more questions. Maybe -- so it's a Friday, I think. So thank you very much, and we take this opportunity to invite all of you on March 1. It's our annual Capital Markets Day event, we are doing next week. So please do come in person. We'll be having Mr. Aloke Lohia, our Group CEO; Mr. Agarwal. Alastair from the U.S. will be joining online, and Chris Kenneally will be speaking. So see you on March 1. Thank you.

Thank you very much. Thank you very much for joining.