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

Good afternoon, everyone, and thank you for taking time to join us for IVL first quarter '23 results briefing. My name is Vikash Jalan, VP, Investor Relations and Planning at IVL. Joining me today, Mr. Aloke Lohia, Group CEO; Mr. D.K. Agarwal, Deputy CEO and Group CFO; Alastair M. Port, Executive President for IOD segment is with us today from the U.S.; and Chris Kenneally, Executive President for Fibers segment. 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 on estimates on the future trends and industry, which are based on our analysis and available information at this point in time. So with that, I now invite Mr. Lohia to start the presentation. Over to you, please, Mr. Lohia.

Thank you, Vikash. Welcome to IVL's first quarter '23 analyst meet. My colleagues will share their perspectives on their BUs. But first, D.K. will summarize his perspective on IVL as a whole and finally conclude with our outlook. I would like to take this moment to recall what we discussed at our Capital Market Day in beginning March. My priorities are twofold: first of which is to announce IVL's competitiveness in each of our 3 BUs. My view is that next 2 years are challenging, where cost of capital is 200 basis points or more thereof. While the supply chains are rebalancing, as we have seen in the last 6 months, leading to destocking hence, leading to lower output. Margins are under pressure, and I believe more capacity is coming online, partly delayed due to COVID and then some more due to supply chain issues that impacted all forms of goods. My second priority is to find accretive growth in these uncertain times. We have faced major uncertainties in the past and have been able to still build a track record of successful growth, yielding 35% compounded annual growth over the last 10 years, from 2012 to 2022. The same management team delivered 17% CAGR growth in EBITDA and 11% revenue growth during these last 10 years. And I'm confident that our portfolio of assets with leading market positions in select markets allows us to maintain or even increase the share of our customers' wallet. The path to success at IVL has been its people and will continue to be so, and we are developing our talent to rise to the challenge. Our talent has an embedded growth mindset, which encompasses ownership and accountability to remain in the first quartile cost position and deploying efficient capital efficiency. The business outcome are natural, and I'm confident that IVL will continue to deliver first quarter results by sensible repositioning of some marginal assets to a more cost competitive location to serve our customers with competitive output, which is accretive to IVL shareholders. Thank you. And now on to D.K.

Good afternoon. Thank you, Mr. Lohia. IVL continue to operate under challenging market conditions. As you know, in the last quarter, improved supply chain, heightened interest rates and looming recession fears led to significant inventory destocking in the chemical industry. This was witnessed in most of the chemical industries. This quarter started out with some better sentiment as China began to reopen their economy. I was just looking at a prediction of Chinese growth for the second quarter is predicted to be 7.5%, so that's a positive sign. However, the overall global economic growth has been somewhat moderate as the market remained in transitional phase. We continue to see destocking activities impacting a number of sectors at a varying degree, albeit to a lesser extent versus fourth quarter '22. Our sales volume dropped 8% year-on-year as continued destocking by customers kept sales volume below consumer consumption level to adjust inventory. Volume rose 5% quarter-on-quarter as the pace of destocking begins to slow from the peak in fourth quarter '22. Gas prices, as you know, have continued to normalize, reducing the cost pressure experienced last year. Lower natural gas prices have reduced IVL's variable costs on quarter-on-quarter $49 million versus net of hedging loss of $13 million. We expect for the entire year a gain of $183 million versus last year. The subsequent reduction in ethane prices strengthened U.S. shale gas advantage, benefiting our ethylene and MEG margin. The project Olympus, which is a continuous improvement program, continue to provide annualized run rate efficiency gain of $464 million and has been our primary initiative for navigating these challenging times, as Mr. Lohia was alluding to. The company achieved a reported EBITDA of $301 million in first quarter '23, which is an increase of 269% quarter-on-quarter and a decline of 62% year-on-year, translating into operating cash flow of $199 million. The net profit of THB 1 billion and reported EPS of THB 0.15 for the quarter. The core EBITDA was $343 million, up 30% quarter-on-quarter, but down 47% year-on-year, but we are still below our normal run rate, as you can see from our performance. If we go to the next slide. As I mentioned earlier, the market is still going through a transition period. One of the key macro indicator is PMI, for which the latter surveys indicate moderate improvement in global economic activities led by China, India and other emerging markets. Growth in China is being witnessed, is driven by service sector with expansion in consumer-facing services and tourism, while manufacturing still remains sluggish. With the reduced gas demand coming into 2023, the warm winter and high storage inventories, natural gas and ethane prices have continued to normalize, reducing the cost pressure, which we experienced last year. If you remember, we suffered $550 million additional cost. This improved our cost considerably, although we suffered from a hedging loss of $13 million, and we benefited $49 million on variable costs quarter-on-quarter because of the gas prices and others. Also returned the shale gas advantage to our U.S. operation. we expect the gas prices to remain low throughout the year, but we continue to monitor prices closely with our hedging strategy in place to mitigate our exposure and protect our bottom line. Inflation, as you know, had started deaccelerating but remained elevated, and financial condition is expected to continue to tighten with headwinds from further interest rate measures. Economic expansion is expected to continue at a moderate pace, supported by post-pandemic demand in China and growth from emerging markets. Now if you look at the volumes, overall PET sales volume has started to see recovery, improving 5% quarter-on-quarter, but dropped 9% year-on-year as the market had yet to return to the normal level. Our Americas market is still impacted by the customer destocking, while PET in Europe and Brazil is seeing increased competition from imports due to normalized freight cost as the freight costs have come down. We purposely reduced production of PTA in Europe to optimize our profitability during the quarter. As we look forward, we expect our CPET volume to return to normalcy in the next quarter as the destocking activities nearly come to a conclusion in PET segment, peak season approaches, and we are glad to report that our 200,000 tons India expansion project is starting up in May very soon. For IOD, our intermediate volume is impacted by unplanned shutdown at our MEG unit in Clear Lake, Texas and plant maintenance work in MTB unit. Both units are now back in operation, and we expect volume normalization in the second quarter. Our downstream sales, which Alastair will cover, volume continued to be impacted by destocking in the first quarter particularly in South America crop solution market. As we move into the second quarter, volume are expected to recover. So as you can see in the slide, our second quarter estimate is about 3.86 million tons. All 3 Fiber verticals are beginning to sign of recovery, with volume increasing 13% quarter-on-quarter, but still 20% below year-on-year. Lifestyle volume improved, but remained challenged. Mobility Fiber sales are up, driven by rebound in global automotive production. Hygiene volume remained resilient. As the global economy continues to recover, we expect Mobility sales volume to remain strong with slight improvement in Hygiene and Lifestyle. Now here, I would like to highlight that we are now emphasizing our reported EBITDA figures over the core EBITDA. Reported EBITDA, inclusive of inventory gain or losses as well as extraordinary items, provides a reflection of the actual profitability and cash flow of the company. To ensure ease of transition, the company will be providing you with a relevant core EBITDA numbers for the respective quarters. If you see on the bottom of the slide, we have given core EBITDA quarter-by-quarter. In first quarter '23, I will deliver reported EBITDA of $301 million, a growth of 269% quarter-on-quarter and a decline of 62% year-on-year; while core EBITDA was $343 million, up 30% quarter-on-quarter, down 47% year-on-year. The significant improvement from fourth quarter '22 was done primarily by volume increase in CPET and Fibers and decline in the energy cost, as we mentioned earlier. Overall sales volume increased by 5% quarter-on-quarter, which contributed $49 million to our results. Lower natural gas prices this quarter have reduced our conversion costs by $49 million, net of $13 million hedging losses on quarter-to-quarter. Lower ethane prices as a result of decline in natural gas prices strengthened our U.S. shale gas advantage. The price of Brent crude oil dropped to an average of $81 barrel in quarter 1, contributing to an inventory loss of $41 million for the quarter, which is the difference between the core and the reported EBITDA. Now coming to CPET business. CPET achieved a reported EBITDA of $142 million, a growth of 621% quarter-on-quarter and a decline of 74%. Excluding inventory loss of $23 million, core EBITDA was $164 million, up 21% quarter-on-quarter, down 62% year-on-year. After the period of heavy destocking in the fourth quarter, we have seen a partial recovery in our sales volume driven by moderate growth in the global economic activity. Note that this level of volume remained below our norm as destocking, though at lower, slower pace persisted during first quarter '23, especially in Americas. Meanwhile, in Europe, our volume was impacted by increasing competition from imports from China due to lower freights. The benchmark-integrated PET spreads improved $190 per ton in fourth quarter '22 to $201 per ton in first quarter '23, while our premium remains intact at $200. Again, this will still remain below the 5-year average due to high inventory levels at the start of first quarter '23. Our European and Brazilian businesses were impacted by normalizing the freight rates. The Packaging business. The Packaging volume decreased slightly due to slower demand in Vietnam and Philippines. IPA profitability improved as demand from coatings and construction market started to recover in Europe. However, the demand in the United States still remains slow. In this segment, the lower energy prices benefited the conversion cost by $26 million net of hedging losses. Outlook on this segment. We expect sales volume to normalize in second quarter '23 as demand starts to pick up with upcoming peak season and destocking comes to an end. Also, we expect further benefit from 200,000 tons of expansion projects in India, which is starting up this month. ADD investigation has been initiated in Europe, which will prevent further Chinese material flowing into the European market, helping the European market. Despite an uptick in demand and lower inventory level, integrated PET industry spreads are expected to remain consistent with first quarter '23 levels in the near term based on the present situation with the industry. On this slide, you can see that the benchmark integrated PET spreads dropped significantly in fourth quarter '22. You can see here because of the destocking due -- by downstream customers. Now this resulted in high inventory level. As we enter 2023, demand began to recover in the wake of China's reopening, leading to a gradual improvement in the spreads. However, the ongoing destocking and high inventory levels have caused the spread to remain below the historical average. Spreads, as you can see, have improved in this quarter compared to the last quarter's low. We expect the spreads to remain at similar levels in second quarter '23 with increased demand. IVL premium over industry remains strong, thanks to the Western contracts. However, you can see that the premium is declining as freight rates normalized in certain markets. This impacted our premium, particularly in Europe, while premium in the United States and Mexico market remains stable, given that the majority of the contracts have been concluded at fixed margin. So this gives you some idea about the CPET. Now I will hand over to Alastair, who will cover the IOD. Thank you.

Okay. So in quarter 1 '23, IOD segment achieved a reported EBITDA of $128 million, an increase of 37% quarter-on-quarter and 4% year-on-year. Excluding the inventory loss and moving to core EBITDA, it was $140 million, up 11% quarter-on-quarter and 12% year-on-year. Let's talk a little bit about the integrated downstream business. This portfolio achieved $98 million in reported EBITDA, an increase of 117% quarter-on-quarter and 12% year-on-year. Excluding the inventory loss of $2 million, core EBITDA was $101 million, up 14% quarter-on-quarter and 15% year-on-year. Our downstream business experienced a moderate increase in volume quarter-on-quarter. We did, however, see weakness in LAB and South American agro business due to poor demand. Margins in oleochemicals also normalized in quarter 1 of '23 from the peak of last year with the high prices. As we move into the second quarter, volumes are expected to improve, but margins to remain at a lower level than normal due to demand and destocking in the crop solution market amid the overhand of the glyphosite inventory. Moving to the Intermediates business. This portfolio achieved $30 million in reported EBITDA, a decrease of 39% quarter and 16% year-on-year. But excluding the $9 million inventory loss, core EBITDA was up 5% quarter-on-quarter and 3% year-on-year. We saw an improvement in shale gas advantage with the decline in ethane prices, benefited from both integrated intermediates and downstream businesses with the ethane price. And our MEG business was positively impacted amid lower feedstock costs, and MTBE margins were stronger due to gasoline demand and MTBE octane premium. We did take a planned maintenance, as D.K. mentioned, on our PO/MTBE unit, normal, planned. And an unplanned outage on the IVOL Clear Lake facility. So please note when you look at the quarter 2 reported EBITDA, this figure included the insurance settlement of $64 million for the IVOL shutdown in prior periods. So let's talk a little bit about the shale gas advantage. As you can see on this chart, we had an improvement in shale gas this quarter due to falling ethane feedstock prices, which led to an increase in the ethylene and integrated MEG spreads in North America. Upside from the U.S. ethylene spreads may be capped as North America crackers come back online. The MEG industry spreads are expected to improve as China recovers, leading to improved polyester demand. Moving to MTBE. Quarter 1 '23, saw continued strong MTBE spreads on the back of a tight gasoline market. MTBE spreads are expected to remain strong in quarter 2 '23, with lower butane prices and a robust gasoline demand as we move into the summer driving season. The MTBE premium of a gasoline may face some downside risk from additional supply following the start-up of a new PO TBA unit in the end of Q1 '23. So I'll hand over to Chris.

Thank you, Alastair. And [indiscernible]. Before talking to the quarter 1 performance and outlook, I wanted to take the opportunity to restate the strategic direction of Fibers that I outlined during our Capital Markets Day earlier this year. And that's twofold: firstly, it's acting on our European sites, which we know have marginal profitability. Those actions include restructuring our workforce, reconfiguring our manufacturing line operations and certainly optimizing our portfolio mix. And those actions are underway, indeed. We have announced workforce reductions in 2 of our German sites, and the execution of those plans are currently underway. The second aspect of our strategic intent going forward was in regards to Asia. And that's introducing to our Asian operations with more innovative, high value-added products to improve our global competitiveness. And the first of these products focus on segments which are more premium in nature, such as flame retardant propositions as well as automotive interiors. And that, I'm pleased to say that both of these strategic intents are underway and in action, and I look forward to updating you as we go through our quarterly updates throughout the year. Now to the results. Fibers achieved a reported EBITDA of $32 million in quarter 1 '23. And as you can see, that significant growth quarter-on-quarter, yet still not to the levels at the same time last year. If we exclude inventory loss, the core EBITDA was $39 million, up 72% quarter-on-quarter and 54% year-on-year. So whilst it's positive to see some early signs of the headwinds easing, there's still a way to go. So if I may just step through the 3 verticals and start with Mobility. As D.K. mentioned earlier, we have seen a rebound in the global automotive production, resulting in growth of original equipment tire business in quarter 1. That growth was around 1% for the quarter and driven by China coming back to growth. But what was even more pleasing was the performance in March, which grew 4% for the month year-on-year. And regarding the outlook for Mobility, we have confidence that, that volume will continue to grow with the industry outlook of -- remaining favorable. Indeed, for 2023, global light vehicle production is expected to grow at just under 4%, 3.9% to be precise, over 2022. And our OEM tires and replacement tires are expected to grow at 4% and 0.6%, respectively. Now with Lifestyle. This vertical has remained with challenges, particularly in regards to China. The pent-up demand in China has yet to translate to pre-lockdown local consumption. And as a result of that, we have seen China Fiber export at very low prices, impact our strong domestic markets, such as India and Indonesia. Now going forward, we are confident that margins are expected to improve through the year as the downstream demand in China improves, and it will. And polyester fiber globally demand -- the global demand is expected to grow at over 4%. And finally, Hygiene, D.K. also referenced the fact that there has been some resiliency demonstrated by this vertical. Volumes and margins have remained relatively resilient despite consumers downsizing or, in some cases, down trading, particularly in those regions facing inflationary pressures. Looking forward from a raw material perspective, we see a reduction in the polypropylene prices is occurring now. And importantly, our growth projects, which I've referred to in our past engagements being Project Gemini in the U.S. and [ Hello ] in India, ramping up as we expect. So in closing, whilst we do see some of the easing of these headwinds we've mentioned prior, and that is a positive. Our focus remains on those actions that we are undertaking to shore up our competitiveness, and that's particularly within our European region and introducing new innovation products in our Asia regions. [indiscernible]. And with that, I hand to D.K. to talk about project Olympus.

Thank you, Chris. The project Olympus, which we are very proud of the continuous improvement. Our ongoing cost transformation program continues to drive efficiencies in '23, enhancing the organization's overall competitiveness. This quarter, we unlocked additional gain to deliver cumulative run rate efficiency gains of $464 million in spite of lower volumes. The improvements were driven across the organization, as you can see, different functions, operational excellence, procurement and supply chain initiatives. Now let's look at the financial metrics. With a cash conversion ratio of 66% this quarter, our operating cash flow was $199 million for the quarter. Cash conversion was lower due to net working capital outflow of $70 million with the rise in volumes and prices. However, inventory days came down in line with the gradual normalization of destocking as compared to fourth quarter '22. Our liquidity remains strong in the form of cash and cash under management plus unutilized banking lines at $2 billion, which is a testimony of our balance sheet discipline and headroom to weather through any price volatilities if it may arise. Our net debt to equity was around 1.18x and expect to reduce as we deleverage in the next quarters. As you know, we operate with a balanced and disciplined approach of cash flow allocation to dividends, debt servicing, maintenance CapEx and growth CapEx. We have a very natural hedge on ForEx with global assets and manufacturing footprint in 35 countries. Rising interest rates have limited exposure to 61% of debt is at fixed rate with the rise in benchmark rates and growth CapEx, our finance costs went up to $96 million in first quarter '23. Our ESG-linked debt proportion increased to 27% of net debt in first quarter '23, which was about 20% in fourth quarter '22. Now coming to sustainability. We are excited to share our progress towards a sustainable future through certain strategic partnerships and collaborations. Since beginning of the year, we have signed a 10-year exclusive partnership with Poly Materia, a leader in the field of biotransformation technology. This alliance empowers our hygiene customers to produce wipes and masks using biotransformation technology, which will allow this essential items to safely return to nature without generating microplastics or toxic residue. This innovative solution is specifically designed to address the critical issue of unmanaged waste leaking into the environment. Furthermore, we have proudly joined forces with Together for Sustainability, a global initiative dedicated to promoting sustainable supply chains. By encouraging our suppliers to adhere to high sustainability standards, we aim to minimize the risk of supply chain disruption and enhance our collective climate maturity. As part of this initiative, IVL will collaborate with EcoVadis to assist our supplier, identify value chain risk and opportunities, improve sustainability practices and foster collaboration among all participating members. In another vital partnership, we are teaming up with Evertis, a pioneer and sustainable PET varied films. Together, we will use flakes from recycled PET trays to produce PET film suitable for food packaging trays. So it is tray-to-tray. This collaboration is an essential step in diverting PET trays from landfill or incineration, supporting the EU's recycling targets and creating a circular economy for PET trays. We're also proud to announce that IVL rating has been upgraded to A from BBB in the recognition of our strong corporate governance and water stress management practices. As we continue our sustainability journey, we remain disciplined and dedicated to expanding the partnership and making a positive impact on the environment, communities and the world. Now just an outlook into the second quarter. We expect the global economy to continue its recovery. As I mentioned, Chinese -- with the China reopening progresses, with destocking activities, ending the arrival of peak season and the start of 200,000 tons India expansion project in May, we foresee a return to normalcy for our PET sales volume in the second quarter. We expect IOD intermediates volumes to normalize post shutdowns. As you see, all the assets are running. Even Lake Charles ran for 90% capacity utilization. While IOD downstream volumes are expected to recover, but margins remain under pressure due to destocking, as Alastair mentioned, on the crop solutions market. Volumes in Mobility sector expected to remain robust alongside slight enhancement in Hygiene and Lifestyle verticals. As I mentioned, energy prices are expected to remain at a normalized level, positively impacting conversion costs, particularly in Europe while preserving our shale gas advantage in North America. We expect $183 million gain, out of which $15 million was realized. So nearly $168 million will come in the coming quarters. The company continues to focus on enhancing global competitiveness. In Europe, proactive actions will be taken on sites that are operating in marginal profitability. While in Asia, we are introducing innovative products into the portfolio that will provide competitive supply globally. As Mr. Lohia mentioned, segment [ initiative ] across our 3 businesses is being strengthened to deliver the shareholders' return. So thank you very much for hearing us. Now we can take your questions, please.

Thank you, audience. You can unmute, and you can ask your question. Komsun, I can see your hand is raised. Can you go ahead and ask your question?

Can you hear me?

Yes. Please go ahead.

I have 2 questions. First one is the -- am I correct that the IVOL was a drag in Q1 because of the unplanned shutdown even if the ethane price has been very low? And in the second quarter, do you expect it to be improved? As you mentioned that ethane has remained relatively weak, but we are seeing a cracker coming along, so might not be weak for long. Second question is that are you expecting PET spread pattern this year to be similar of previous year? Or this year will be relatively flat line because of the destocking and restocking along the year?

Aloke here. So maybe for the first question, Alastair could answer that. And for the second, D.K. will do that. But just to -- if I understand it correctly, the impact of ethane would not be directly on IVOG. IVOG is a consumer of ethane to make EU and EG, so there would be an impact on our profitability. So I'll give it to Alastair to explain it now.

So 2 aspects. Yes, so IVOG is running now, and it's running nice and stably, so we expect a better volume in Q2 than Q1. As you saw, we also have the shale gas advantage from the Lake Charles cracker. So we're expecting reasonable spreads from that, I think, in Q2 -- Q1, we saw around about 8 gradually rising from $0.06 to $0.08 a pound. Today, they're sitting around about $0.09 to $0.10 a pound. We do see some pressure on that, but we're not expecting the natural gas price to particularly rise. Inventories are very high. Weather is moderate at the moment. And I think the export facilities are pretty much maxed out. So we see the alternative pressure on natural gas that it might stay low for a while. We do see more capacities and start-ups with ethylene. We also see a lot of exports of polyethylene. I think it hit record exports in March, so that was good news. But we're also seeing outages in the marketplace. You saw one of the incidents that happened last week in the Gulf Coast with one of our peers. So therefore, I think we're thinking crack margins could stay. They'll be under pressure, but they could stay at a reasonable level and better than Q4, certainly. In terms of MEG, I think we're seeing continual rises. I think a big factor is how well China opens up. And if we see the polyester demand increasing in China, we're going to see MEG still at compositive territory and will run at full potential, if that's the case.

Alastair, what about the EU part? Is the EU demand healthy? Or is that also going through a destocking?

Yes. I think with the downstream customers that we move both EO and PO into, I think they're seeing competition. I think they're seeing a lack of demand pressures. I think the -- just with the economy and the inflation of interest rates, durable goods purchases are down at the moment. And we're getting a lot of polyols coming in from Asia into Europe at the moment. So I think we're seeing demand certainly down. Some customers are doing extremely well, and some customers are not so well. So I think to Mr. Lohia's point, conversion efficiency and cost leadership is very important in that industry as well.

So maybe to sum it up for me. I would say that our intermediate business and IOD is healthy, both MTBE and MEG are better placed today than they were in the second half of last year. And on the downstream side, there is pressure. So we would convert the EO into EG, being a large captive consumer. So that is as far as IOD is concerned. D.K., the second part?

Yes. Komsun, the question was around the PET spreads. As you know, the fourth quarter -- if you can bring this slide on the fourth quarter was -- there was a lot of destocking. We saw the spreads coming back. As you can see, the inventory in China has dropped in April, you can see the number of days. So we think the PET spreads will remain quite stable. Of course, not like last year because last year, there was a lot of extra demand because people were restocking. There were a lot of supply chain disruption, as you can see in the graph. But our premium, as I mentioned, remains quite intact, around $200 per ton. This is a mix of Western contracts. As I mentioned, Mexico and U.S., all the contracts have been signed up, which are slightly better than last year. So that is what overall indication -- even Chinese exports have been very strong. The capacity utilization is quite high in China. So we are positive about the spreads that they should remain stable.

I can see [indiscernible], you have a question. Can you please go ahead and ask your question?

Can you hear me?

Yes, please go ahead.

I will start my question first on the PET side. I'm not sure whether I hear it correctly, the destocking that you talked about in the fourth quarter was really much happened in EU. And in the first quarter, it starts to happen in America. And I'm wondering whether this is still ongoing in America and whether like what -- whether we should expect the seasonal recovery that we normally see in the second and third quarter this time. One more question on PET. I'm not sure whether there is an effort to pursue antidumping duty against import from China. What do you hear from that? And is there a chance that it will be happening? And if it does, like any time frame that we're talking about here? Another set of questions will be on IOD on Page 11 of your presentation. Can you remind me what happened in the second quarter '22? Like if I look at integrated downstream margin, it was high at $179 million and third quarter at $192 million. And I don't remember what happened there and whether -- what we should expect in the second and third quarter this year. Because I have a feeling that like this part of the business is relatively more stable. And like what we should expect in the next few quarters here.

Yes. D.K. would take the question on PET, but just to remind you, in my opening remarks, I also mentioned that there is new capacity in PET coming on stream in China. Some of it delayed from COVID and then further delayed due to supply chain issues. And maybe, D.K., you want to talk through the China export data?

Yes. So [indiscernible] first, let me address your question. Fourth quarter destocking happened. First quarter also in United States, and Europe, the destocking happened. But in second quarter, now we are operating the plants back to the capacities. As you can see, our CPET will be 2.66 million tons second quarter volume. So that is -- like in first quarter, it's nearly 2.68 million. So very close to that. Europe, still our operating rate is comparatively lower. If you see EMEA production below, we are purposely keeping the production low of PTA, particularly because to keep our profitability optimized. Your question on antidumping duty, Europe has initiated the antidumping duty against China. Now the time frame is 8 to 9 months for final duties. But within 60 days, there will be preregistration approval. And if the preregistration approval happens, then these duties will be done retrospectively. And because it will be done retrospectively, we think that flow from China to Europe will reduce because there is a risk of antidumping duties. Can we bring the slide on the PET exports and demand, which we have made? Yes. So if you will see the -- not this. The other slide. So you can see this is, anyway, one of the indicators that from China, the PET exports have gone up to 1.2 million tons. The domestic Chinese demand is also picking up. If you can bring the slide on the consolidation of the PET industry, please? Yes. So this, you can see that what is the recovery of the domestic demand and exports that 2.5 million to 3 million tons is 83% utilization rate of the PET. So you can see a big rebound in Chinese production, which includes the domestic demand as well as exports. So -- which shows that destocking is more or less done from the remaining markets. And you can see that PET inventory has come down and the margins on how the demand of PET in China. Remember, first quarter, the full -- the recovery of China hasn't happened. So second quarter, you will see further improvement. So this gives you an idea that how the PET industry is healthy. Is there any other question [indiscernible] that I can take up?

I think I'm okay now, yes.

Thank you.

Go ahead, Alastair.

Sure. Thank you.

Actually, D.K., can you just summarize for me? Sorry [indiscernible]. Can you summarize for me what's the level of demand in Europe? And what's the size of import from China? And what's the size of domestic market? Just very big picture.

So the domestic -- the total demand in EU 28 is about 4.2 million tons, which is really flat, the growth at present. The imports are about 1.4 million tons and 2.8 million is local production. So basically, there is a lot of imports coming from China, and that is the reason this antidumping duty has been levered. Now this will be very positive for the market because once China is blocked, as you know, in the United States, we have antidumping duty. Brazil will be antidumping duty. So once this is successful, this will certainly help in improving the European margins once this is implemented.

Yes. Thank you. So Q2 2022. So I'll talk a little bit about another question about downstream. Just to remind you on upstream that we had the $64 million insurance settlement on the IVOG, which was included in the intermediates part. And also, if you remember, we had extraordinarily high oil pricing, extraordinarily high demand for mobility. So gasoline pricing extremely high. And therefore, octane levels were extremely high. So those are the 2 ramp-ups that you saw in intermediates. In terms of the downstream businesses, I think many, many factors all played at the same time. So you had an emergence, I guess, from the COVID lockdowns. I think they started emerging probably October, November. Six months duration to get sort of full mobility and full access to people, shopping and spending. I think there was a lot of pent-up demand in the economy, good interest rates, as you all know, low inflation. And therefore, a lot of demand on the supply chain also linked to very high transportation costs, as we know. So a perfect storm of everything lining up. And then a huge, I guess, unreliability, I guess, within the supply chain where a lot of people have delayed turnarounds during COVID for the good reasons and right reasons and a lot of turnarounds during that time. So the people that could run, like ourselves, took full capability of that. So I think -- let's look at a little bit of the markets at the time. Housing starts were definitely up, and that played into our coating sectors. The crop industry, record high soybean and corn prices and yields. High demand for ag solutions. We still had the residual of the COVID cleaning, so a ramp-up for home and personal care that continued post COVID. I think the -- I guess the pent-up demand in the mattresses and durable goods put a lot of high volume onto EO and PO and then also PG for construction. So I think you saw an awful lot of rebound. And the interesting question is do we see the same rebound in China after 6 months, and it's only been 4 months. But I think you saw a lot of things going in the right direction. Now the underlying fundamentals will return. I'm not sure we're going to see the 179s and the 192s that you saw before, but a little bit more of a normality in the markets. And we're going to be increasing our volumes back to good levels, but the plants were running really flat out, and the whole supply chain was running flat out. And I think we saw a little bit of that in the Q4, that stocks built up in the area, and we're doing some destocking now in the whole supply chain.

Let me add [indiscernible] I'll add to Alastair's comment on oleochemicals. So most of the other inputs in our downstream business are locally sourced, both in the U.S. and Mexico and in Brazil. But the oleochemical part, we got a PKO from Indonesia and Malaysia, which has a long lead time. So in Q2, Q3 last year, it was a rising market, so there was a lag benefit. And now in the falling market, we have a lag loss. So that's, as Alastair said, a lot of moving points within that industry. But PKO or the oleochemicals also had a role in it. Is that correct?

Absolutely correct. And obviously, we have our own alcohol plant in South America, and we made some good margins from that plant as the PKO and alcohol prices went up. I would say that we've got to think that the downstream business is pretty much -- 75% of the volumes are nondiscretionary and 25% are discretionary. So when we say we're turning back to normalcy despite what's going on in the industry, you're going to see reasonable volumes coming through downstream and returning to that once the destocking periods come to an end.

Next, I can see, [indiscernible] from CIMB.

May I ask 2 housekeeping question? What is the level of the net profit contribution from Oxiteno in the first quarter? And what would you -- what would be your expectation that it could be covered back up to maybe $100 million level? And my second question is on hedge losses. Do you have any loss on the hedge contract because gas prices coming down?

D.K., maybe you can take both of them?

The gas question first. Can you bring the gas slide? Meanwhile, I'll give you the Oxiteno numbers. The -- if you see the gas price, you're absolutely right, the gas prices have come down. Still, we will have a gain of $183 million in spite of hedge loss of nearly $84 million. And so gross, if we didn't have hedging, there would have been a gain of $84 million. Remember, last year, we hedged and we gained $84 million. So we continuously want to hedge that. The -- we realized only $15 million in the first quarter, and the remaining will get realized in second quarter, third quarter and fourth quarter. So we continuously keep hedging, and this will get translated into the earnings in second quarter, third quarter and fourth quarter. You cannot bring the slide on the gas? Yes, this one. So you can see that $542 million was the cost impact net year. And this year, $183 million will be the advantage. $15 million came in the first quarter only, and this is after $83 million loss due to gas hedging and -- so this is net of 260. And you can see the forward curve here, how the TTF and HHS there. Now coming to Oxiteno. So we don't give normally the net profit. But if you see the fourth quarter was $32 million, and the first quarter '23 is about $33 million. As Alastair was alluding, we think the volumes are going up. The crop solutions stocking is still -- destocking is happening in the second quarter. You can see these results in the companies like Syngenta and all that. But as this normalization happens, we think second half volume will be reasonably strong. The way to look downstream business is a sustainable business. As you can see, including IOD, downstream and upstream is around -- including Oxigeno and downstream will be a business of about $500 million to $520 million on -- and upstream, as Mr. Lohia was explaining, is about $220 million to $250 million. So this business, on a normalized manner, is about $750 million worth. So this is the way to look at this business. Q4 and Q1 was very heavy destocking, which happened. And as Alastair was explaining, Q2, Q3 was very strong due to -- as oleochemical gain came in, the other demand was stronger because supply chain disturbance was happening. All the crop solutions was strong, oil demand was strong, and this will all get normalized. So this is the way you can look at the IOD total business overall.

Okay. I can see Mayank from Morgan Stanley.

I think the question was a bit more broad-based, and I think all of us are struggling a bit to understand what's going on around the demand scenario. So if you can just give us a bit of a flavor of this entire destocking. And then now what's really driving the delta in demand, up or down either ways, in each of the businesses, especially in PET, especially considering the comments we have heard in North America from your competition as well as I think the earlier comment Alastair was making around the crop solution side. If you can give us some flavor around that of what you are seeing in the month of May? And what has been the challenges in the last 3, 4 months. Can we just talk about that a bit? That will help us a lot.

Mayank, Aloke here. So my view on this is that when we had the COVID-led disruptions followed by the Russian-Ukraine war and further supply chain disruptions and all the safety stock being built up globally in most industries, that led to demand that was not a consumer-led demand, but more of a supply chain safety demand, the benefit of which we saw in the first half of '22. And it continued a bit in the third quarter of '22 across all our businesses, I would say, barring Lifestyle and Fibers. Hence, in the last 6 months, what we have seen is that we have produced lower volumes because of lower demand. But when we look at our customers, at least the FMCG customers, we see their record, their volumes are still doing well. They still are recording good results. So the consumer demand is still maintained. That is very hearty for us to know. What we are seeing is only the destocking, that means the rebalancing of the supply chain in my mind. That is one, which is leading to lower output, leading to higher costs and therefore, impacting profitability. On the other side, there is also a perfect storm in the sense of the margins are lowered over previous year across all our industries. And that is partly to do with the new capacity that has come on stream. And that new capacity has also come at lumpiness. That means part of that capacity, which was meant to come in '21, got delayed. And then finally, a lot of that capacity is coming on stream now. So you have lower demand because of destocking, in my opinion, not because of end consumer demand but because affected demand. And then you have new capacity starting up, leading to that pressure on margins. So in one way, we are squeezed by both demand and by margins. And this is across all the businesses that I'm seeing. To talk about what we are seeing in May, I will ask D.K. to maybe summarize on that.

So I think, as Mr. Lohia mentioned, today, we are operating all our plants at full capacity. The demand has come back. The destocking in the United States has completed. And the volume which we are giving you here, 2.66 million, because we were in the middle of May now. So that on CPET side is quite solid. And we think that for the entirety, on the IOD and all that, together it should be around 3.86 million tons. But as Mr. Lohia was mentioning that margins have come under pressure because: one, is the freight normalization; second is the additional capacity is coming in and people destock. We are not getting any more safety stock. But being PET is such a resilient business, and I can give you a good example of India. India grew 28% last year. 1.4 million tons is Indian demand, which is still 1 kilo per capita. Both Pepsi and Coca-Cola has ordered so many filling lines, in total about 50 filling lines, and the total growth in Indian market will be another 20% this year. So this shows that PET is very resilient. We are seeing this in Nigeria. We are seeing in many, many countries like this. So demand of this necessity product remains quite strong. And as Mr. Lohia was saying, if you look at Coke and Pepsi results, they are not showing any drop. And their profitability has improved. So that would be a way to explain, Mayank.

I think just one thing on North America specifically, if I can just ask around the demand story. So if you look at over the last quarter, as you said, you have kind of completed the destocking. But have you seen any improvement or normalization in terms of growth rates now in May? Or you still see there are some pockets of consumers saying that we could see lower prices because oil is coming off? So let's not kind of complete -- let's not kind of buy ahead of us and kind of remain at these levels for some time. So that entire premium that you were thinking about in 2023 or 2022 because of change in contract, that kind of gets subdued now?

No, Mayank. So what happens the way the U.S. and Mexican market works that nearly 85% of the contracts are fixed linked to the raw material. So all those contracts have been already done and frozen for this year. So that's why -- and first quarter, we saw lower demand. But now as we speak, the demand has come back. It's still at a slower pace, but all our plants are running at full capacity today. So it is -- I mean, this year, we will not see the pressure. However, in Brazil, the margins will be under pressure because that is on import parity as the freights to Brazil have come down. And we just started seeing some uplift in the freights, but U.S., Mexico is rock solid.

Got it. And if you can, Alastair, can just comment on the crop solutions side and what's going on in the demand there?

Sure. If we're talking about North America, quite a lot of interesting things at play. If I talk about crop solutions, some of our main customers' demand is up 21% on their customers, which is the farmers in North America. Equally, it's down 17% in South America. So it's a tale of 2 continents there. So crop solutions is starting to recover, and it's going to stay high. I mean crop and yield prices are all high -- 5-year high. So I think the demand is going to continue. If I think about housing starts for our construction sector, certainly a reduction from Q3, Q4 last year in housing starts. That's starting to tick up now due to demand, which is quite interesting to see. I think if we look at the 5-year personal consumption expenditure, which we measure because we think it's a share of the wallet of expenditures in what you spend in the market -- in the supermarketplace, that is increasing month-on-month. So despite the interest rate rises, people are still spending. And I think if you look at North America as a whole, employment is very good. Wealth is pretty much very good. People still have disposable income. So I think out of all of them, North America is going to recover the fastest.

I think the last question I had was on the balance sheet. I think you have definitely seen an increase in your interest costs for obvious reasons, it looks real. But can you just talk about what would be your now going forward cost of financing? And how do you think about the debt levels as well?

So if we can bring the -- so 61% is fixed. The 39% is floating. Naturally, the floating has been the impact. The interest cost, as I mentioned, is about $97 million. We may see second quarter picking up. The effective cost, as you can see, is 4.68% for this, which is -- of course, has increased. We have basically gone into the debenture market. We are just going to close about THB 10 billion of refinancing. So -- and that means -- I think we'll see second quarter. We see this quarter, there was an increase in the net debt because of the certain working capital and the increase in the prices. We are planning to reduce our working capital by $300 million to $400 million in next coming quarters as the more strict policy on the working capital is followed. So I think you will see, Mayank, second as a peak of the interest cost. Hopefully, Fed doesn't increase more interest rates, but that will only affect if it affects on the floating portion.

I can see JPMorgan, Sumedh, you raised your hand. Can you please go ahead and ask your question?

Can you hear me?

Yes, Sumedh, go ahead.

So my questions are 2. So firstly, just continuing the PET conversation, there have been these capacity additions in China [indiscernible] sometime in late '24 or something. So I'm just curious whether you see PET margins -- integrated PET margins staying at that lower level of around 200 for longer because even though demand comes, there is so much supply. And second question is more on balance sheet. So firstly, the stock is trading below book. So is there any chance that the management has a buyback? And alternatively, [indiscernible] considering the balance sheet has become a bit healthier, is there opportunity that you see to add [indiscernible]? How should we think about that aspect?

Sorry, Sumedh, the line wasn't clear at all. It was quite garbled. D.K., did you understand the questions?

Sumedh, it was garbled, but I think you were talking about the increase in the PET capacity and impact on the spread. Was it correct? And the second -- yes. So yes, that is a -- as Mr. Lohia was mentioning, there's a PET capacity coming in China, which is a regular feature. But it is important to know that the consolidation of the industry in China and -- if we can bring that slide, that there's a lot of concentration in the industry. We don't see the integrated PET spreads to go to 260, 270 level. It will be wrong to say. But if you see this slide on the right-hand side that 4 PET producers account for 76% of the total capacity. The total capacity, we're talking about nearly 15.2 million tons today, and the operating rate is about 86%, 87%. So what we have seen in the past is that if the margins drop, then the operating rate in China drops to balance out this, and this is because of industry consolidation. And on the left-hand side, you can see even PTA industry has significantly consolidated. The 5 PTA producers nearly account for 68%. But Sumedh, we won't see the last year's PET-integrated margins because the supply chain has normalized. There is an overhang of the capacities, you saw the exports statistics which came from China. But the operating rates are quite healthy and the inventories are healthy. So Q2, Q3, you will see quite stable margins. Your second question was around balance sheet. It really got garbled a little bit, but if you can repeat that question on the balance sheet. You're saying healthy and you're probably...

Yes. So my question is twofold. Would you -- would the management consider share buyback if -- because the share price is below book? And secondly, if that is not the case, are we looking for new assets considering the market stress for broader pet chem industry?

We continually look at growth opportunities, but it does get more difficult now with the cost of capital gone up. So to find a willing seller at the returns that we seek is becoming a bit difficult at the moment. So I would not say that there's anything right in the horizon right away. And as far as the stock is concerned, I think I still prefer to continue to build the company than to use our liquidity to buy back the stock. So I continue with the concept of that. There would be opportunities. We just have to be patient. We have a good management team. We have good portfolios, and we have room to grow, especially our IOD business and grow it more internationally, grow it into Europe, grow it into Asia. So there are lots of opportunity for us to continue to look at. So I think we are going to keep our liquidity for the right acquisition or for the right growth.

I can see Kun-Naphat from CLSA.

Can you hear me?

Yes.

I have 2 questions. First question is on the guidance that we presented because based on the sales volume guidance in second quarter at about 3.9 million tons. And if I look to compare to the first quarter and the second quarter last year is almost the same level or even higher. And also the guidance on the seasonality, demand on the PET and also the MTBE spread. That seems to be quite healthy at about $500 per ton. And if I were to compare to the first and second quarter last year, which we did very well, MTBE spread softened only maybe $100 year-on-year. But looking at the volume that you guided and also the lower cost in U.S. and in Europe, I just want to -- I just try to compare the guidance in the last year, first half of last year, that we did very well. So it seems to me that we would have a very strong recovery in the second quarter and likely in the third quarter. And I just want to make sure, is there anything that I missed from interpreting on this data? That is one on my first question. Second question is on the -- because you mentioned about the new PET supply in China, are we -- have they already started COD or there will be any more coming up in second quarter? And last thing is on the -- I'd like to get some update on the IOD expansion that we were talking that we are looking to -- for expansion in Europe and Asia. Is there anything update on this?

Kun-Naphat, no, on the IOD, there is no specific update. What we keep working on is that that's an opportunity for us. We are having a leading position in Americas. And now that we have a full competent management in place, there's an opportunity for us to grow in Asia and into Europe. So we continue to build that from an organic standpoint. We have a plant in India. We have a plant in Australia. But if there comes along a better opportunity or a larger opportunity, that is what I was talking about in terms of growth opportunity. You raised a very good point -- to your first point with regards to the second quarter, the third quarter of last year versus now that we are saying for our outlook, a good capacity utilization high volume output. So the volume that we are predicting is based on the resiliency of our markets and with the leading position that we have in the markets. So I don't doubt that the ability for us to sell that volume or to produce that volume. The margins are the question. Last year, there were lots of tailwinds in every conceivable way. Oil prices were high, which means import parity, that means a duty structure, the freight rates, the lag, the positive lag. So all in all, there was tremendous pressure on the supply system. And if you recall on PET, the industry spreads -- Chinese spreads were also very high last year compared to where they are now today. So for the PET segment, the high benchmark spreads from China, the very highest -- the very high freight rates, the higher absolute price leading to higher duty component, all that play very well to our premium. As you saw in one of the slides, our premium last year of our benchmark was, what, $290, which at the moment has dropped to $200. So that $90 on a, what is it, 5 million tons you can easily calculate the impact of that right away.

$260.

$260 to $200. So that's a big impact, which now with the current oil prices, and the current freight rates and the supply increasing. So not all the suppliers come into stream. There is still some supply coming on stream in the second quarter in China. We have our own supply in India coming on stream in the second quarter. So supply continues to get built because that's natural for our industry. The only thing which comes in lumps. And at the moment, the market is under destocking. So there is a pressure on the market, and that leads to a pressure on the margins. On the IOD, again, there were -- in the 1st of April last year was the consolidation with Oxiteno. Oxiteno has a very strong presence in agrochemicals and crop -- and after the Ukraine war, there was a good tailwind on that side of the business. Freights, we have seen now the impact of freights on Latin America. As the freights have eased, not only has it impacted the PET business, but it has also impacted the downstream IOD business. As you know, the Oxiteno business in South America is all downstream. We have a very, very small MEG capacity that we only run when there's a positive COMA, so the oleochemical I mentioned earlier. So last year, the second quarter and the third quarter were dream quarters, and those are quarters that you get maybe every 2, 3 years. At the moment, the entire industry or IVL's businesses are heading towards normalization. But before we get to normalization towards the second half of this year, we have to go through the rebalancing of the supply chains. That means the destocking and therefore, producing to inventory. We don't want to hold extra liquidity in inventory. So we are asking our businesses across the world to produce -- to demand rather to produce the stock. So we have this disciplined approach towards working capital management, reducing working capital days in this high cost -- in this high interest rate environment. So all of that is playing on -- not playing for the short term, not by just building inventory, but -- and that is why I'm surprised nobody asked about the reported EBITDA numbers rather than core. And I'm going to report it specifically so that I can ask our managers, all our business teams, that this is a number they have to work towards. When it was core EBITDA, the reported numbers got lost. It became a financial number. But actually, it's not a financial number. It is an output of the decisions that they make during the quarter. They produce more and the inventory -- if it's inventory loss, it goes in inventory loss and not under the core. So I hope you understand that the reported will bring better discipline and better focus by the management teams in each of our verticals. Thank you.

Mr. Lohia, if I may have one follow-up question. From what you explained, it seems like that we are more concerned on the PET supply side. But for other products, we should not have any major issue on the new capacity. Is this correct?

Absolutely. And even -- you're right, absolutely. On the other businesses, it's more about just rebalancing. But on the PET, also, I won't be concerned with the new supply especially because PET continues to grow. The new supply comes in Asia. And in Asia, the growth rates are more like 7%, 8%. In the West, the growth rates are 2%. On an average, the growth rates are 4% to 5%. So I wouldn't worry too much about the PET. We have seen this over the last 30 years, as you have watched us over the last 20 years, there has been capacities coming on stream. PET benchmark margins basically average out at $135, $140. And that is where it is today. And some of that has become the norm. So last year, in 2022, the same PET margins was at $200 -- how much? $220. So it was just unreal. So I'm not concerned. I'm not concerned. I'm just saying that this is a great opportunity for me to work with my managers and try to go through this ups and downs and say that, okay, how do we manage for success? How do we not get excited for short-term benefits, but we have to manage the business over the long term.

One last question is on the IOD because in the presentation, we mentioned about the impact on the planned maintenance on the MTBE plant in the first quarter. So is the second quarter -- do we have any maintenance shutdown in the second quarter?

Alastair?

Yes. So not on the MTBE plant. That was a mid turnaround cycle. We do a turnaround cycle every 5 years, so 2020, 2025. The quarter 1 was the planned mid-cycle mini T&I, which we had actually planned 21 days, and we did it in 7. So that was good news. In terms of Q2 turnarounds, we've got the Port Neches cracker, which will come down for 50 days. And then we've got the [ Kamasuri ] plant annual outage, which will come down in -- for about 25, 30 days. So those are the only 2 planned outages.

So these are not -- if you take the IOD, the Port Neches ethylene crackers are the smaller of the 2 sites. Lake Charles is a bigger cracker, which is running fine. And amongst all the ethoxylate plants, I think we have a dozen of them. So there will always be one, which is under turnaround. But the first quarter got more heavily impacted by the EOEG unplanned shutdown, which more or less we lost the entire quarter. That is the first plant that we bought in 2011, what you call Clear Lake that makes EOEG, that's 550 kilotons of MEG capacity.

The second quarter last year, the average crude oil price was $114. And this year, we are estimating $78, so that impacts MTBE margin. And MTBE was very short last year, same quarter, $884 versus the margin and now it's $620. And as Mr. Lohia mentioned, the integrated margin was quite high in second quarter. But volume guidance is correct. So it's -- you don't repeat the second quarter. Basically, second quarter was fantastic last time.

Thank you. I don't see any more questions from the audience, so thank you. We can bring the meeting to the end, and we'll be in touch with you.

Thank you, Vikash. Thank you for joining.