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

Very good afternoon, everyone, and thank you for taking time to join us Indorama Ventures second quarter results briefing. My name is Vikash Jalan. I'm Vice Person, Investor Relations and Planning at IVL. Joining me today, Mr. D.K. Agarwal, our Deputy CEO and Group CFO; Alastair M. Port, Executive President for IOD segment; and Christopher 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. Obviously, we have made a few assumptions and estimates on any 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. Agarwal to share business and financial highlights for second quarter results and after that, Alastair and Chris. And then after that, we'll open up the floor for the Q&A. Over to you, Mr. Agarwal.

Good afternoon. Welcome to the second quarter analyst report. This is the time to visit what has happened in the past few quarters. As you can see on the slides, we saw global economic activities contracted as shown on the left-hand side chart with global manufacturing PMI dropping below 50% since first quarter '23. If you look at regionally, activities in Europe was particularly weak, primarily driven by mountain inflationary pressure, as you can see in U.K., very high inflation and interest rate hikes. The chart on the right hand shows the China reopening, which was weighed more towards services rather than manufacturing. They were traveling more rather than spending on manufactured good, was much weaker than expected as you can see in the China PMI declining in the second quarter on the right-hand side row. Now what we have witnessed since the latter half of 2022 was this unprecedented destocking trend. If you see on the left-hand side, there was a restocking and destocking. So let me explain that. During 2021 and first half of '22, we had a lot of supply chain issues as a result of the post-pandemic demand recessions. Transit times of the vessels for long and frac cost was extremely high. People were worried about availability. This resulted in everyone needing to carry safety stocks to avoid stock-outs. And our IVL business also benefited from this extra demand due to our customers building inventory and enjoyed strong premiums for being a local supplier with a high freight rates. As you know, we have a global footprint. Now moving into 2023, the situation reversed as supply situation normalize while high interest rates, inflationary pressure and sluggish demand prompted heavy destocking across the value chain. And this was witnessed by many chemical companies around the world. Looking ahead into 2024, we expect this destocking trend to end in our key markets. We go to the next slide. If you see that what has been the result from the first quarter, the -- our first -- the total volume is 3.6 million tons. So despite the challenging market, overall group sales volume increased by 4% sequentially, as you can see, with operating rate increasing from 72% in first quarter '23 to 76% in this quarter. So operating rate went up. On a year-on-year basis, overall volume, however, declined by 7% as industry inventory levels cracked from the heights of 2022. Industry-wide destocking has persisted across all three business segments. Revenue for this quarter has remained flat quarter-on-quarter at $4 billion. So that is linked to the crude oil prices. The America remained a bright spot for us with integrated model, as you know, duty production from Chinese imports and also Shell gas advantage, which we enjoyed in Americas. Our operating costs improved this quarter from lower energy prices. We benefited $26 million quarter-on-quarter conversion basis on a net basis as -- although we suffered from hedging loss of $29 million. So this is after the hedging loss of $29 million. And for the first half, the hedging loss was $49 million. If we look at reported EBITDA, IVL achieved a reported EBITDA of $321 million in second quarter '23, which is increase of 7% quarter-on-quarter and a decline of 68% year-on-year. This quarter, we also had an inventory loss of $48 million due to falling prices, an FX loss of $5 million in Brazil due to strengthening of Brazilian currency. The core EBITDA was $379 million, up 11% quarter-on-quarter, down 59 -- 50% year-on-year. Now, however, our operating cash flow has been very strong. This translated into operating cash flow of this quarter at $491 million, an increase of 146% quarter-on-quarter and a decline of 46% year-on-year. So overall, our results remain resilient as we continue to navigate these challenging market conditions. We have taken actions to safeguard our earnings and conserve cash, which we'll discuss in more detail in the subsequent slides. Go to the next slide. Now let us talk about the headwinds and tailwinds. As you saw some of the headwinds, you saw that what are the tailwinds. We believe today that PET destocking has largely ended as we see our plants operating at full capacity now. Secondly, significant dumping of PET material from Chinese producer into Europe has prompted an investigation by authorities. We expect the initial EU ADD ruling to come into effect in fourth quarter '23, which will certainly cover imports from Chinese producers. We have also seen energy prices reduced further this quarter, lowering our conversion cost by $26 million, as I mentioned, net of hedging losses of $29 million we suffered during this quarter. And as you have seen, the OPEC continue to maintain our crude oil prices at around $85 a barrel now, and the low prices of gas in North America sustained Shell gas advantage for our IOD operation. And you'll see that MTBE spreads remain strong because weak U.S. butane prices against robust gasoline demand resulted in continuing U.S. strong MTBE spreads. And Alastair will cover this in more detail. We expect this trend to continue well into 2024 with the tight gasoline market due to limited refining capacity addition. In this volatile environment, now this is important at what actions management has taken. Management has taken several actions to address and safeguard our earnings against the temporary headwinds. In the short term, the priorities on cash conversion, as mentioned in the Capital Market Day earlier this year with a target of $500 million in 2023. As of first half '23, we have achieved already 80%, nearly $400 million, primarily through the reduction of gross working capital and capital expenditure. So focus is on maintaining healthy liquidity levels and a disciplined capital allocation strategy cognizant of the higher interest rate environment, which we are in. Management is also actively remain working capital optimization and carving discretionary capital expenditure to lower the net debt. In light of the economic challenges and cost pressures, particularly in Europe, we are implementing measures to improve the competitiveness of our portfolio in the region. We are underway with our plan to optimize the footprint of our Fibers segment, which we announced earlier, reducing the fixed cost by $25 million and the result in shift of manufacturing base to our lower-cost Asian sites. In the same direction, we are conducting an evaluation of all business segments to assess make-or-buy decision in order to maximize profitability with a particular focus on Europe. Let's continue drive to deliver on the Project Olympus, target to unlock efficiency in the procurement, sales and operational excellence while investment in digital improvements will unlock latent value of the organization as we roll out our SAP HANA 4. Olympus delivered run rate efficiency gain of $481 million. For the long-term effectiveness of the business, we continue to strengthen the organizational structure of the company. We see a vast amount of unlocked potential in our people. We are simplifying the organization in order to optimize efficiency and productivity of our teams, and we are centralizing the organization for leaner and more agile structure, which in turn will increase the speed of decision-making and enhance collaboration across the company by removal of silos. We are leaving no stone unturned when it comes to our operation, and our team -- and maximizing COMA, which is contribution margin and volumes and assessing expansion opportunities in high-growth market with a strong innovation pipeline. So these are all some of the actions, which we are taking. Coming to the next slide. If you look at the volumes, overall group sales volume increased by 4% sequentially. As you can see, with operating rates increasing from 72% in first quarter '23 to 76% this quarter, second half volume is to improve from a destocking curtails and ramp-up of capacity expansion project. Now if you go into the different segments, CPET sequentially improved with volume up 2% quarter-on-quarter, but dropped 9% year-on-year. As we see, PET destocking has largely ended with Americas production normalized. In Europe, we are actually optimizing productions to minimize the impact of Chinese import until the antidumping duty is there. And for IOD, our volume is up 14% quarter-on-quarter, driven by intermediate portfolio. What is happening in IOD, that the business is benefiting from higher EEG volume to capture improved margins on purchased ethylene. Fibers volume is up 3% quarter-on-quarter but, 7% down year-on-year. Lifestyle volume improved quarter-on-quarter, but significantly down year-on-year due to a strong competition from China. We expect India volume to improve with the recent implementation of BIS. This is a certification requirement in India recently implemented, which will curtail the Chinese imports. Stable Mobility fiber volumes with a stronger-than-expected automotive production supporting our OE trials and airbag business. Hygiene volume continued to be impacted by weak demand in Europe due to inflationary pressure. So you can see that the volumes are certainly going to grow. Now let's go into the financial results. The IVL post second quarter reported EBITDA of $321 million, an increase of 7% quarter-on-quarter and a decrease of 68% year-on-year. Average Brent crude oil prices for the quarter declined to $78 per barrel, resulting in inventory loss of $48 million in this quarter. We also had $5 million of FX losses, as I mentioned, due to strengthening of Brazilian real during the quarter. The EBITDA improvement quarter-on-quarter, driven by resiliency in PET Americas business, partly negated by IOD downstream results, which we'll cover in the future slides. Ongoing Chinese capacity additions in PET. I mean, normalized supply chains have put pressure on Asia industry spread. However, our integrated PET margins remain strong as we are able to control demand significant price premium above industry benchmark. And our U.S. integrated margins remain advantaged due to shale gas advantage. Further, lower gas price in the U.S. maintained our shale gas advantage for North American operation. The lower natural gas prices have reduced IVL variable costs by nearly $26 million quarter-on-quarter in spite of a hedging loss of $29 million. So that gives you some idea about the IVL results. If you see our regional -- this is a regional breakup. Our operation in America remained a bright spot, driven by PET business where we are insulated against Chinese imports. Lower gas prices maintained the U.S. shale gas advantage for North American business. And we have increased the glycol production to capture this improved margin, taking the advantage of the shale gas. MTBE spreads has been strong due to tight gasoline market and competitive butane feedstock. In Europe, performance improved quarter-on-quarter on account of lower energy prices, although you can see it is in negative numbers here. However, performance remains negative due to competition from low-cost import and inflationary pressures cap demand relatively sluggish. As I mentioned earlier, we are taking a close look at our European operations to improve the competitiveness of our portfolio in the region, which also includes conducting an evaluation versus make-or-buy decisions to maximize the profitability. Today, we'll update you on what we have achieved in the Fibers segment, and we'll provide more update on this activity in the coming months. Now let's go into business segments. So CPET achieved a reported EBITDA of $194 million, a growth of 37% quarter-on-quarter, down 69% year-on-year. Now this is excluding inventory loss of $29 million. The core EBITDA was $225 million, a growth of 37% quarter-on-quarter, down 48% year-on-year. After a heavy period of destocking, which began at the end of 2022 in PET, volume improved by 2% quarter-on-quarter, much lower than what is typical for high season in quarter 2. Normally, we have a very strong quarter, but the increase was only 2%. Western market continue to face feedstock price regional disparity, impacting our cost competitiveness to the Chinese imports. As you know, the gasoline price in Europe and America are high and the paraxylene price is linked to it. So we have high cost in those regions. Poor domestic demand in China post opening amid PET capacity additions put pressure on PET spread. Benchmark integrated PET spread averaged around similar level of $201 per ton in quarter 1, but remain below the 5-year historical average. The normalizing of freight rates negatively impacted our European and Brazilian business due to competition from imports while the U.S. PET business continued to benefit from cost-plus contracts. The European authorities are currently investing, dumping of material by Chinese producers. We expect the initial antidumping duty to come into effect by fourth quarter '23. Lower energy costs benefited conversion costs by $19 million, net of $13 million hedging losses. Europe performance, in particular, was aided by normalization of energy prices. The Packaging vertical realized 10% higher volume quarter-on-quarter and a growth of 6% year-on-year with Vietnam and Myanmar leading the growth. Specialty Chemicals saw a decline in profitability. As you know, we have planned outage of our NDC unit. So that is the summary about CPET. Let us a little bit deep dive into what's happening in the spread. As you can see in this slide, while the integrated PET spread from naphtha to PET, so middle graph shows you naphtha to PET has been relatively stable, as you can see. There has been a compression of margin and integrated PTA-PET due to migration of margins into paraxylene. You can see that dark blue, paraxylene spreads are high right now while the PET-PTA spreads have been compressed where is our play. The current PET margins have fallen below sustainable level, squeezed by the high paraxylene prices. The pure-play PET producer in China you see on the left-hand side, if you look at the producers in China, nearly half of the capacities are not making any positive cash flow at these level of spreads. These are the pure-play PET when they don't have any integration. Also it is important to recognize that the Chinese industry is highly consolidated on the top, if you see, with top 4 players commanding 80% of the Chinese capacity. As seen in the past, if you see the right-hand side, which gives you history of 10 years of spreads, these levels of spreads cannot sustain and we expect the margins to improve as the operating rates improve. For IVL, we have devised a four-pronged strategy to navigate this landscape. So how do we compete in this market condition? First, enhance our strength in the domestic markets. I mean, you know that we are present in so many countries; utilize our strength in recycled PET as a differentiator; forward integration into packaging; and the number of markets where we operate, there is a duty production. And as the European entity comes, this will further help us. So that gives you a landscape. Looking at it in a different scale, as you can see that what we saw that there were compressed industry margin, we are able to get the premium. And this premium is not the price premium, but it is the margin premium or we call it the spread premium. And how is this possible? Because we are the -- see the leading producers. We are globally operating. And we have access to the premium markets. These are protected from China because there are antidumping duties, there are huge duties and they can't access to those markets, and high levels of integration which we have. Like in the United States, we have from PX to PET, and you know that it came to PET. Procurement efficiencies as well as very strong customer relationship in the last 2 years has been testimony of that relationship because when they were running short of the product. Let me now remind you that 2022 was certainly an exceptional year due to supply chain disruption. So if you compare our EBITDA to 2019, so let's ignore what we made in first half 2022, the current weakness is in our European operation, and we expect this gradual improvement in Asia and Europe by 2024. So if you see the graph, first half '19 versus first half '23, the major issue is EMEA because of dumping of Chinese product. In Asia, margins were pressured by capacity addition and poor China demand. As previously noted, based on historical data, these spread levels are not sustainable. It is crucial to recognize that pure-play PET players who constitute nearly 50% of the Chinese market are not generating positive cash flow, as I mentioned. And for Americas, we expect to see continued resilient performance with some margin contraction on new contracts. 25% of our contracts in U.S. and Mexico are multiyear contracts because you sign multiyear contracts, and they're linked to raw materials. Now I will hand over to Chris, who will present the Fiber. Then Alastair will take over the IOD, and then I'll come back. Thank you.

Thank you, D. K. [Foreign Language], and very nice to be with you all today. And allow me to take a few moments to expand on a few points that D. K. has already mentioned, both in regards to the challenges we're facing and also opportunities. Firstly, the challenges. There's no doubt that in 2022 and 2023 have brought with it some unprecedented challenges in the form of inflation, certainly the China impact and destocking. And for Fibers, that has translated into a few elements that you see in our results: Lower demand for our products, resulting in capacity utilization -- decreased capacity utilization; certainly, increased competition from China leading to lower margins for our products; and inflation, particularly in Europe, has impacted our costs. Now looking at 2023 specifically, Fibers achieved reported EBITDA of $20 million, a decline of 37% quarter-on-quarter and 70% year-on-year. Excluding the inventory loss of $9 million, core EBITDA was $31 million, a decline of 21% quarter-on-quarter and 45% year-on-year. Lifestyle Fibers margins remained challenged as the China recovery did not materialize. And certainly, China fiber exports at significantly low prices continued to impact our domestic markets such as India, Indonesia as well as Brazil. Now we did experience higher volume in our Lifestyle business due to the normalization of production in Thailand and Brazil. Now D. K. mentioned India BIS. Just to expand on that, so everybody is aware of what we're talking about. BIS is the Bureau of Indian Standards, and they impose certification for importing certain products into India to ensure quality, safety, and reliability standards. And in April '23, they applied that for staple fiber. And in October '23, they'll impose the same for filament yarn. Now this will certainly impact our business because, one, it will curtail our imports from China. And two, we expect to be able to improve our pricing certainly in the Indian market. And we'll gain benefit from this in fourth quarter '23 onwards as we have already qualified our materials to supply into India. Now for Mobility Fibers, despite softer-than-expected replacement tire demand, we've certainly seen stronger-than-expected light vehicle production growth of 5% versus 2022, which is really encouraging, and that certainly supports our OE tires and our airbag business. The Hygiene volume continued to be impacted from weak demand in Europe, primarily due to inflationary pressures and low utilization at our Russian plant, which is -- which we have been experiencing since the beginning of the conflict in the Ukraine. For our U.S. business, our volume was impacted by production issues in the first half '23, but we're very confident that we are recovering now and will be in set for second half '23. On another positive, IVL is ramping up our Hygiene operations in India, aligning with our strategy to capture growth in this emerging market. And I want to highlight that today's Fibers business is built on a strong foundation. Yes, whilst we have been experiencing these pressures in the market today, we do know that we are catering to the end markets that have the opportunity for long-term sustainable growth. They are supported by the mega trends of growing populations, urbanization and a rising middle class, which is particularly important in our emerging markets. We remain the market leader across all of our verticals and are well positioned to capitalize these long-term trends. At the beginning of this year, I outlined at our Capital Markets Day a very important management action plan that we had in place. We shared with you our plans on restructuring our Fibers footprint, which includes strengthening our core portfolio of our polyester-based fibers and the necessary actions to address underperforming sites and shifting to higher-performing locations. I'm pleased to say we're progressing on that road map that we shared at the CMD. And indeed, we're actually ahead of the plan to deliver on our target of 10% manpower reduction in Europe, which translates into $25 million fixed cost reductions. In addition, management is taking further actions to address challenges in the environment. Cost conservation initiatives focused on fixed cost reduction, prudent prioritization of our CapEx and working capital will improve our cash flow significantly by year-end. We're centralizing our organization for a leaner, more agile structure, which, as D. K. alluded to earlier, will increase our speed of decision-making and enhance our collaboration across the segment. Our Olympus program remains in full implementation, which brings additional efficiencies, and I know D. K's. going to touch on that in a few slides. So what does that mean? Well, it means these actions will provide us with a competitive advantage over our competition going forward. Why? We have a stronger platform to capture growth opportunities, and I think India is a great example of that. We will have an optimized asset footprint with a leaner cost structure. And you can see we've already started on that path and are generating results. And finally, and I think most importantly, customer centricity, enhanced customer relationships and intimacy. We are investing in our people. We're investing in our commercial competencies, which will set us up well to extract greater value pricing and expand our dialogue with our customers. So in summary, there's no doubt that the industry has been facing challenges in this moment. But in this moment, we're also taking actions to set ourselves up for the future. So thanks for your time today. And with that, I believe I hand to Alastair.

Thank you, Chris, and good afternoon, everybody. So IOD achieved reported EBITDA of $94 million, a decline of 27% quarter-on-quarter and 70% year-on-year. Excluding inventory loss, core EBITDA was $109 million, declined by 22% quarter-on-quarter and 58% year-on-year. Please note that when you look at quarter 2 reported EBITDA, this figure includes an insurance settlement of $64 million for the IVOL shutdown in prior periods and a licensing income of $2 million. PMI continued to remain flat to falling in Q2, which saw the lowest chemical activity in some regions for 17 years with rig counts declining. In downstream, the portfolio achieved $62 million in reported EBITDA, a decline of 36% quarter-on-quarter and 65% year-on-year. Core EBITDA was $69 million, down 32% quarter-on-quarter and 54% year-on-year. Please note that in quarter 1 '23, we included an adjustment of 2022 profit of $16 million, market de-inventory by customers on the back of working capital control targets and also more robust supply chains, as D. K. mentioned. Downstream volume remained at a similar level quarter-on-quarter. We're experiencing lower margins amid pricing pressure from imports on ethanolamines and solvents and also via the weak construction and consumer goods markets affecting propylene oxide and pure ethylene oxide sales. We successfully completed the 5-year turnaround at the Port Neches cracker. We finished the Camaçari and Mauá turnarounds, and these all negatively impacted the downstream business by $7 million. As we move to the integrated intermediates, this portfolio achieved $31 million in reported EBITDA, an increase of 6% quarter-on-quarter and a decrease of 77% year-on-year. Excluding the $9 million of inventory loss, core EBITDA was $41 million, in line with the last quarter but declined by 63% year-on-year. The U.S. integrated MEG margins remained advantaged quarter-on-quarter, due to the low gas price. And quarter-on-quarter volume improved significantly as we recommenced both Clear Lake and Lake Charles operations. Our EG EBITDA improved quarter-on-quarter by $20 million. U.S. MTBE spreads fell during quarter 2 from $624 a ton to $578 a ton as concerns on the global economy and China growth weighed on oil prices. However, the spreads remained high versus historical norms, and they remained high due to the resilient gasoline demand, favorable butane prices amid poor petrochemical and heating demand. Lower PO demand lowered MTBE production, impacting MTBE COMA by $6 million. But we're actively improving MTBE to propylene oxide production ratio to maximize MTBE volumes amidst strong demand. So how does the outlook look? Downstream volumes will start to recover as destocking in crop solutions and HPC markets end, and the economy is kickstart. Crop prices are rising on the back of Ukraine grain blockades. Both the downstream and intermediates business will continue to benefit from low U.S. gas price. MTBE spreads to remain strong as a result of the summer driving season, keeping gasoline market tight and butane prices low. We see opportunities arising in the market, particularly in the surfactants and ethanolamines due to the recent FM by coproducers. As D. K. mentioned, what are we doing in the short term? We will continue to delay discretionary spend. Hiring, CapEx and working capital control will achieve -- will have significant attention until the markets recover. However, we continue to focus on our resources on Olympus, synergies, innovation and digital improvements to unlock the latent value within IOD. I'll hand you to D. K.

Yes. Thank you. Thank you, Alastair. So I think slightly covering on the Project Olympus. This is an ongoing cost transformation program. It continues to drive efficiencies in 2023, enhancing the organization's competitiveness. I mean this is a timing to improve the competitiveness and be prepared when the market turns around. As you can see, to date, we have unlocked additional gain delivered to the run rate efficiency gain of $481 million. As we mentioned earlier, these improvements were driven mainly by operational excellence, procurement, supply chain initiative and cross-segment synergies. We are also highlighting to you some updates on the key initiatives to future-proof our organization such as SAP S/4HANA, digital and IVOX. We have advanced in digitalization using SAP 4HANA, going live across our selected American sites and summation sites. So it's going very smooth, very challenging project. EMEA sites are set for February 24, 50-plus live dashboard across CPET and IOD segments are under development, offering real-time insights into the key operational metrics. Additionally, the successful implementation of SuccessFactors program across IVL has streamlined the talent management activities and brought the latest HR practices in a global scale. Through our digital initiatives, we expect to achieve $45 million savings by the end of this year under IVX, which is Six Sigma. We focus on leadership and operational excellence. Over 19,500 employees now have Lean Six Sigma White Belt certification, and 600-plus efficiency projects are in place aiming for $80 million savings for Project Olympus in 2023. So that's a little bit update on Olympus. Let's go to the next slide. As I mentioned, this is the time for conserving cash. We -- in CMD, we talked about $500 million in 2023. In first half '23, we have achieved 80% of this plan and conserved $400 million, which came from reduction of 9 days of working capital due to operational improvements, and we considered cash of $276 million, the release of working capital. We continue to work towards working capital optimization and expect to have further marginal improvements in second half. We also very critically looked at our CapEx plan. And in 2023, we plan to reduce our CapEx by $139 million over to what was committed in our Capital Market Day. This is by optimization of maintenance CapEx of $64 million and a reduction in growth CapEx of $75 million. We also looked at 2024 CapExs. We are further optimizing it, as you can see, by $130 million to $135 million against what was planned earlier this year. Our focus remains deleveraging and present high interest cost environment. So you can see that we are focusing on CapEx. Now this shows you some historical operating cash flow. I will continue to maintain our history of consistent operating cash flow generation, a testament to the resilience of our platform underlying fundamental and the advantage drawn from our diversified footprint in terms of geography, in terms of product. With visible and growing cash flow, coupled with a substantial liquidity of $1.8 billion, our company is well positioned to navigate and accelerate ongoing market turbulence and prepare for the -- when the market revives. For the LTM period quarter '23, our operating cash flow reached about $1.5 billion, reflecting 121% cash conversion rate. This improvement is a direct result of our strategic focus on optimizing working capital as elaborated in the earlier slide. In addition to our strong cash flow history, we are also focused on prudent financial management. Our net debt to equity remained unchanged at 1.18x at the end of June '23 with a CapEx of $391 million in first half '23, which were fully funded by operating cash flows. Looking forward, we see -- foresee improvement in our net debt to equity, primarily driven by reduction in CapEx commitments, as I explained throughout '23 and '24, along with ongoing refinement on the working capital optimization strategy. These achievements collectively reflect our prudent financial management and our commitment to enhancing our company's long-term financial health. Now if we go to the balance sheet, we maintain a very balanced and disciplined approach risk management, which you can see on this slide. We have a natural hedge on ForEx with global assets and a manufacturing footprint in 35 countries. Our debt and net assets matches in the currencies. At this time, we have a little higher Thai bad debt due to lower interest rate, which we plan is also to balance going forward. We're also maintaining liquidity, as I mentioned, in the form of cash and cash under management plus unutilized committed credit lines, which are -- stands at $1.8 billion. On top of this, we have either completed or committed but under documentation process for our long-term debt repayment of nearly $700 million for 2024 to maintain strong liquidity. With the rise in benchmark rates and growth CapEx, our finance costs went up to $103 million in second quarter '23. In second half '23, the interest costs are expected to around $100 million to $105 million each quarter. Management is also actively reviewing working capital optimization, as I mentioned, curbing discretionary spending to lower the net debt. We maintained average net debt to equity at around 1x, as you know, across the cycles. However, in second quarter '23, it was 1.18 due to acquisition in '22. We are focused on deleveraging and expect net debt equity to improve with our cash conservation strategy and operating cash flow, which gets generated. Our focus ESG remains robust. Today, the ESG-linked debt proportion increased to 26% of gross rate in second quarter '23, which was 20% in 2022, showing our commitments towards sustainability. In July, very recently, we successfully signed Thailand's first sustainability-linked trade finance facility of $50 million to support IVL's day-to-day contribution to our ambitious sustainability commitment. This new facility reflects IVL's leadership in leveraging sustainable franchising in talent and our commitment globally. Now this is the last slide to give you some outlook. We remain concerned today about the macroeconomic outlook for the rest of the year. As you know, China hasn't recovered and there is a deflationary environment in China. We believe that the global economic environment will remain subdued in remaining part of the year with weak manufacturing activity, interest rate hike. Other than that, you know that the inflation data wasn't bad day back. Fear of utilization, but surprisingly high labor cost, overall impacting demand slowdown and cost increases. While destocking as we stand more or less completed across most of our businesses, the demand slowdown will persist and put a dampener on a very meaningful recovery in the macroeconomic. IVL recovery of funding will come from a determined cost-conscious approach. And using the low demand phase to push forward with our asset optimization plan, we will review our capital allocations to conserve cash and lower our financial costs. We believe that we have consumed most of our high-cost inventories in the first half. As you know, when prices drop, you basically carry a high cost inventory, and that's what we consumed in first half '23. And you saw that we lowered our carryover stock by the gross working capital reduction of 9 days. Therefore, we believe that we should have a better performance in the second half based on higher utilization rates and lower utility prices. Hopefully, we anticipate that the stimulus plan in China will bring some life to the petrochemical chain, and we are seeing the global automotive industry finally in recovery phase. Overall, as we move through the year, we expect contribution from management actions and the factors mentionable to reflect improvement over first half results and also position ourselves well when the recovery happens in 2024. So thank you very much. Now we can take your question, answers.

Thank you. [Operator Instructions] Okay. I can see that there's one hand raised by CLSA, [ Khun Napat ].

I have two questions on the PET. First question is on the PET spread because I see the July PET spread now falling to about $136. And I wonder, because in the presentation, we were talking about the new supply of the PET. My question is how much capacity that has already come to the market? And how much do we expect for the second half this year and also '24? And the second question is on the -- because 80% of the Chinese producers are not PX integrated, and I wonder how much is that cash cost versus IVL. And maybe last one is on the destocking situation because, in the MD&A, we were talking about the destocking of their IOD. And I wonder if -- do we see any destocking? Or is already over for the PET? Yes, I think that's all for me.

Yes. Thank you, [ Khun Napat ], and let me take your questions. So destocking in PET has actually come to an end because we can see that the -- our demand in U.S. has normalized. PET, we have -- in Europe, of course, we have optimized, but the demand has come back with the strong weather. So the destocking in PET has come to an end. IOD downstream, as you rightly said, there may be still some carryover. So that's why it is reflected in the second half volume. Now your next question was on the 80% of the Chinese PX producers. You're right, you can see that nearly 75% people doesn't have any PX integration and 50% nearly are the pure play PET and balance our integrated PTA-PET. And you're right, in July, they just dropped. And you can see in the right-hand side, we are showing the July, which went significantly low. We don't think that -- we have a first quartile cost position in Asia, and we don't think that their cost structure is lower being a pure play. But basically, what they are trying to do is that the integrated paraxylene producers have been more aggressive. Your question on capacity, yes, there's a lot of capacity came in China, which is nearly 3.2 million tons, but 2.5 million tons came in China and 0.7 million tons in non-China. But it's very important to understand what is the relevance of China here. On the right-hand side, if you see the Chinese product demand is about 7.7 million tons, still growing by 5%. China exported in 2023, 1.9 million tons, May. But you look at the right-hand side, they don't export to United States. They are not able to export to Brazil because of high duties; Japan, because of high duties; and I'll show you the other slides. What you see here, North America, basically Mexico, which is going. So their presence is in South America. And Europe, they have exported a significant quantity. In Europe, we will have antidumping duty by fourth quarter. This is in the last phase. So let us go to the slide that where do we sell and how this looks like. Can we bring that slide up, the production slide? So we are in the U.S., we are in the Brazil, and these markets are significantly protected. So what is happening, as I mentioned, Japan has significant duties. Can you -- this is to give you one -- before I show you this one. This shows -- so if you see on the left-hand side, 2023, 46% of our sales is exposed to China exports but -- because this includes European EMEA margin; EMEA sales, which is European sales. Post antidumping duty, only 30% of the sales gets affected, which is basically domestic China as well as some exports from China plus some other regions. And why this is? Because right-hand side, you see that these are the protected markets, which are heavily protected. Like United States, there is no import from China. It is -- there is antidumping duty. There is a Trump duty of 25%. There's a countervailing duty, so no imports from China. It doesn't affect. India, 5.5% but there's antidumping duty. And recently, the BIS will get implemented next year. Europe, once we have the antidumping duty that gets -- market gets protected. And Mexico is also having no in-person duty and antidumping duty is expected. And Brazil, you see there's antidumping duty. So you have to look at two different markets, what is influenced by China, what is not influenced by China. And as I mentioned, the Chinese pure play and integrated PTA/PET because $136 when you talk is the PTA/PET integrated. This is far below their cash costs. So that doesn't survive. And we have seen in the past also, such margins come and then the operating rates goes down and then the margin goes up. I'd also like to show you one more slide. Can we bring, Vikash, the pricing? There are two benchmark prices. One is the Chinese benchmark prices. Another is Southeast Asia benchmark prices and the Taiwan benchmark prices. Can you bring it back? So if you see that there is a gap of $140 to $150 per ton on those prices. So actually, China is also not representative of the prices because these prices in these markets are determined by what is their potential to export to other countries. So yes, China-integrated spreads have come down. The pure-play won't be able to stay in these margins. So this is the spread, which -- so this is -- here you see this is the gap which is ASEAN PET price versus China PET price. And you can see this is widening. The bar shows what is export from ASEAN, which is Southeast Asia, this is also published prices, and premium over the China. And why do they enjoy this premium also because China has antidumping duties, but these people don't have antidumping duties so they can enjoy a better margin. So China is relevant, but not so relevant in the global market in which we operate. Hopefully, that answered your question. If you have any follow-up question, please.

I wonder if we have already seen the cut run of the Chinese producers in the past 1 month?

Absolutely. So it is really tough, the last July, and this is because of the very low Chinese demand, which has not been come as the Chinese economy opened and it's not sustainable. As you saw in that graph, this is again another bottom which we are touching. And normally, we have seen in the past, the operating rates goes up, they cut the operating rate and then the spreads goes up. So you're absolutely right. I mean this is real trough from China perspective. But also, I wanted to show that where we sell the product and why do we enjoy the premium.

Okay. One last question is on the energy cost, hedging because I see the energy costs coming down and we did have some hedging loss in the second quarter. I wonder what is our position now for the second half this year?

So you're right, first half, we had about $49 million loss on hedging. The second half, I mean, depending on how the market is. We just recently saw Australia, there was a strike and the gas prices went up. But we assume that there will be a loss of $35 million to $40 million in the next half, depending on how the prices go and move because they are quite volatile. We still follow the policy of 50% hedge, which we are following, that by end of the year, we can hedge for '24 50%, which is actually mark-to-market nearly breakeven or -- so that continuous policy, we will maintain.

And Khun D. K., just want to make sure I understand correctly on the hedging. So did you say that we are going to have hedging loss in the second half this year?

Yes, first half realized is $49 million. If you take today's market price, it is around $35 million to $40 million. But this we consume, right, in our plants. So it will depend whether we -- whether we'll have those losses depending on the price in the month of consumption. So we calculate this based on the month of consumption. So first half, what we assume $49 million. If I would not hedge, my energy saving would have been higher by $49 million, the way to look at it.

So you mean that you hedge at higher price than the market?

Yes, yes, yes. As...

So that's why you think you're going to have a loss in the second half again?

Yes. Second half, depending on the market price. If the market price goes up, then anyway, the conversion cost, it's a notional loss, right? So it depends on the market price in which it gets consumed.

Thank you, Khun Naphat. I can see next, we have JPMorgan, Sumedh.

Yes. Can you hear me, Vikash?

Yes, we can hear you, Sumedh. Please go ahead.

Okay. Yes. My question is more on the destocking trend of maybe broad for industry. And I ask this question considering your global footprint, so you will have the best color, I believe, among many companies. So just want to understand, firstly, from a geography standpoint, do you see any difference where one geography is better over another or not? And as you said, PET, you still see -- you've completed the destocking, but on the IOD side, you still see some happening. So why is that the case? Why is it different product-wise? And lastly, maybe from a more medium-term perspective, do you believe that this is a permanent change from the buyers? Or is it very temporary because of the disruptions we saw in the past?

Yes. Thank you, Khun Sumedh, and I will ask Alastair on IOD, but let me first cover what has exactly happened and what happened in PET. So in 2021, there was so much supply chain disruption as we showed you and there was extra demand. The vessel transit times were high, congestion at the port was high, people were worried about the material. So extra order happened, demand was stronger. So people were carrying a lot of inventory. When the supply chain normalized, naturally, everybody wanted to carry lower inventory. So they cut down and the transit time also went down. Now this significantly impacted PET, but your question was on geography. So it impacted more in United States and Europe rather than Asia because Asia basically was still importing some from China, some from domestic supplier, but more impact was in these regions. So in PET, in first quarter, we saw, in United States, destocking happening. And that's why you can see that our America performance wasn't great in the first quarter. The volumes are lower. But now we see that it has improved because destocking is more or less completed. Destocking also depends on the value chain, that how much value chain -- so PET comes at the converter who makes the bottles and then stops at beverage producer. But when you look at IOD, you are talking of supplying to our customers. Customer is supplying to another customer. So it is -- the value chain is quite longer, similarly in fiber. But let Alastair add on IOD. Alastair, go ahead.

Thanks, D. K., and thanks for the question. Yes. So I'll end on agrochemical products, but start on generally what we're seeing. As D. K. opened up, a lot of stock built up in '22 in Q2 and Q3, really because of a number of factors. Factor one is coming out of COVID with a lot of containers being blocked in Shanghai, et cetera. People panicked and said we need to build up inventory. Link that to freight rates and local inventory was king. Link it to, I guess, the previous year 2021, where we saw hurricanes in the U.S., we saw polar vortex in the U.S., reliability wasn't in the supply chain during those preceding years. People saw high demand, high crop prices, high selling prices and therefore, took the opportunity to bolster their inventory and working capital. Come the end of '22, what did you see? Well, you saw freight prices going down, you saw a normalization of reliability. A lot of our peers and competitors were running really well. There was no hurricane seasons. There was no weather events particularly. And then the interest rates on working capital went up. So they've became a very hard stop on buying around the world. And I think we saw that right across every factor of the chemical industry. So I think you saw that sudden rise up because of nervousness and because people could afford it. And then that sudden rise down because affordability disappeared and reliability improved. So I think that's what you physically saw. When it comes to agrichemical, you saw all of that in a microcosm of real increase. You saw a lot of imports coming in from China that were very cheap, especially around glyphosate, et cetera. You saw very good crop prices and very good crop yields and therefore, a high demand. And you saw very high prices. So everybody jumped in and bought at the same time. And then what did you see after that? You saw falling prices, you saw reliability. And therefore, I think coming into this year, a huge portion of the petrochemical needs you need for the herbicides and the insecticides, et cetera, were already present and therefore, the ordering system through the supply chain, all shuddered to a much greater slowdown. What are we seeing today? Well, we're seeing a lot of glyphosate inventory still. That's where our DEA goes globally. That will work its way through. We saw a slowdown of herbicides and insecticides at our more high value-added surfactants going into slowing down. That's starting to pick up. We're seeing an increase in volume. We're seeing an increase in mix, not back to normality yet, but we're seeing it starting to come through. I think if I think about all of the fertilizer and crop chemicals inventories, it reached record inventory level around about February of '23. In that period, the U.S. fertilizer and crop protection manufacturers actually shipped about 12% more volume year-on-year between March and May. So you can see the inventory coming down. On the other side of the fence, people haven't stopped growing and are using the inventory. So it's one of these supply chains where you had the bullwhip up. Now we've got the bullwhip down, it will start normalizing. We're thinking -- we're seeing green shoots now. We're thinking maybe give it another quarter. Q3 might be similar. Q4 will be stronger. But you'll see it. People still need the chemicals. People are still growing food. People are growing more food and therefore, the need for these chemicals is going to increase. So you'll start seeing normalization and then steady improvement after that.

Thank you, Alastair. And I think as you also heard that one of our competitor has some force majeure, which certainly has increased demand of ethanolamines in U.S. Here also, I want to show you this slide that is there end demand issue? It's not. You can see the financial results of Coke, Pepsi, Procter & Gamble. Procter & Gamble uses our IOD derivatives, surfactants. They are in our Fibers, Hygiene business. So you can see the revenue is going up and their earnings going up. So it's also due to the prices which they have increased but volumes have relatively struggled. So it is all the destocking is happening in the chain margin and I think it is coming to an end, and we'll see that very strong demand comes back as the economy revives. So I hope that answered your question, Sumedh.

Yes. Just one quick follow-up. Which of these -- I mean, are there any trends that you'd point or you think are structural? I mean I can just think of higher interest costs as one which has led to sort of higher carrying cost for working capital. I mean, are there any other structural trends you see? Or these are sort of more of cyclical trends, which should very much be behind us?

Yes. So that's a very good question. Sumedh, there is no structural change in the products which we serve, right? 70% of our products are very resilient. Either they're beverages, they're personal home care, people are still cleaning. These are not the luxury spending where they reduce their expenditures. So it's basically destocking. End market demand is still reasonable. Of course, it's not that strong as it was in COVID time. Interest cost -- high interest cost certainly is affecting the construction industry. So there are some products which are linked to construction industry. That gets affected. But automobile, as I mentioned to you, the automobile, actually, demand has gone up. You might read in any of the chemicals that they are showing strong automobile recovery. And that is because you remember that last couple of years, there was shortage of semiconductors, which actually resulted in low automobile production. Now that restriction has gone away. So even automobile is now stronger. So there's no structural change in our business. And it's just a destocking impact, which we are seeing right now, and which is faced by all the chemical industry today.

Thank you, Sumedh, for your questions. Mayank from Morgan Stanley. Can you ask your question?

Sure, Vikash. Can you hear me well?

Yes, please go ahead, Mayank.

So I think firstly, thank you for doing the presentation. Most of my questions are a bit more strategic and related to what you have been, I think, focusing on this presentation around cash conservation and cost and CapEx. Can we just think about like a bigger-picture perspective because obviously, you have done all these acquisitions now. Do you think about now balance sheet deleveraging as the next 1-, 2-, 3-year kind of a step that you want to talk about? And if that's the case, how do you see your balance sheet net debt evolving over the next 6 months and 18 months? If you can just start with that, then I'll follow up with a few others.

So Mayank, as you know, in this present volatile environment, we are -- our focus is -- major is right now on the deleveraging. You saw that a lot of cash reduction we have done in the CapEx is $139 million itself '23 and then we have $710 million. So as we think about end of the year, we'll be 1.13 debt equity and further deleverage in '24. However, we are a very growth-oriented company. Certainly, we are not looking at any major M&A today, looking at our balance sheet as well as the present economic environment. Our focus is right now in the cost reduction, improving the footprint, taking those necessary actions so that we will be cost-competitive. So that would be the -- on the deleveraging. Hopefully, that answered you.

Yes, I think a few things, correct? I think on the slide that you're showing right now, if you look at, you still have almost half of your CapEx as growth CapEx. Is there a way you can think about of reducing this number and keeping it to minimal? Or just running at more like maintenance CapEx until you kind of get clarity on demand and outlook on that so that it helps the deleveraging process quicker because technically, on a $7 billion near debt, $100 million is a smaller number to kind of delever, correct? So that's the way we are thinking about it.

Yes. So the way you look at it over the cycle if we make $2 billion EBITDA, interest cost of $400 million, is 1.6 taxes, about $100 million, $150 million, so 1.45. And if $600 million to $700 million, then we'll deleverage post dividend about $650 million to $700 million. So that's the plan over the cycle. You're absolutely right, the growth CapEx we have trimmed. We are further going to look into it in Capital Market Day and how we can reduce growth and further maintenance costs. But right now, at present in our earlier slides, it was -- this expenditure was $1 billion-plus in Capital Market Day, which is now $890 million and even 2024 was higher. So yes, absolutely, that is our focus, how to in the present high cost of interest cost environment.

Sorry for just asking this again, but like if you think about now the net debt of around $7-odd billion, are we saying $600 million, $650 million is the annual reduction that we're thinking about now going forward? Is that the way you think about? How do you look at...

I mean over the cycle -- over the cycle, the $2 billion -- I'm just saying $2 billion just roughly. Last year, we did much higher than that. And we have a lot of CapEx, which has not resulted into the operating -- there is a nonoperating debt, like particularly, as you can see, our recycling assets, our Mocksville expansion in Hygiene, where a lot of CapEx has been made, but they are not throwing the cash. And over the next '24, '25, those will throw additional cash coming out. So you have to look at like this and the free cash flow, can we -- to the extent of depending on what earnings potential we have, is about $700 million to $900 million a year at least. And then working capital, because remember this debt also includes working capital. So if you are able to reduce another $200 million, $300 million working capital, that will also add in reducing the debt. And whatever we -- the debt, whatever earning goes, that goes into the equity. So the debt equity will significantly improve because it is a multiplier effect, right?

Fair enough. And I think the last question was on the interest cost. I think you had shown us that maturity of your interest or of your debt. And I think next year or so, you still have around 15% to 20% of your debt coming up for refinancing, I suppose. So what is the thinking process in terms of a more steady-state interest cost or interest rate that you can kind of go going forward now because over the last 2 years, your interest costs have nearly doubled, correct? So just trying to see where you settle at.

No, absolutely, right. Our effective interest cost is right now 4.91%. 60% is right now fixed, remaining is floating as the benchmark is there. The benchmark went up. As far as the 19%, what you see here, the Thai baht interest rate is, of course, comparatively lower than the U.S., you can see the differential. And the 7% will get refinanced as debentures. We are also strategizing the 12% repayment, whatever it come. We are negotiating in Thai bhat loans, which will be lower interest costs. So our target interest cost will remain around 5% to 5.10% in the next year at least. But then it will scale down as the interest rate environment eases. So it will all -- the mix of different currencies and the tenure, which we have and then we have the sustainability link, which has better. So all the next year's repayments are -- right now, our strategy is to keep floating for some time because we think the interest curve will correct and the focus will remain that we can keep this interest cost in that region.

And just to add, Mayank. On top of that, we have a liquidity of $1.8 billion in the cash and cash under management plus the unutilized lines.

And floating interest rate, as you know, working capital is cheaper. So we can also utilize the working capital. So that's the focus right now on the finance cost, yes.

Thank you, Mayank. So next is Khun Yupapan from Thanachart.

Thank you for your presentation. I have a question regarding the PET business. How much is the industry cash cut right now? And can you share us like how many percent of supply is making loss? And regarding the pipeline of the new supply addition, when should we expect that the new supply wave pull-in? Is it going to be -- and this is last year of new supply? Or should we expect the supply wave to be continued over the next 2 years?

Yes. So if we can go to that slide, the cash cost -- industry cash cost in China because if you see the majority capacity addition is in China, which, as we said, about nearly 3 million tons is coming over this year. There is some additions planned next year, but predominantly in China. All these which are not integrated with paraxylene are making losses, PTA/PET integrated because it has come very, very low. So as you can see, that is making losses. In China, we will see these additions in capacity. We have seen this in past also, as I mentioned. The operating rates goes down, then the -- because there is a very consolidated industry, 80%, 4 players. And as I mentioned, the most important is the environment in which we operate. Our exposure in China is we only produce 0.5 million tons, which sales to domestic and China export out of 5.4 million tons. The remaining production is either in Asia, is in Thailand, Indonesia, India, which, as I showed to you, the benchmark prices become higher. So -- and Chinese, even if they remain at lower, the different margins are the protect -- the countries are protected. And we don't believe that Chinese can sustain these margins. If you can go to that '14, '22, that can show you better spread and how the spreads have moved. You can go to that slide. Can you bring that slide? So this is the ASEAN price advantage, which I told you, these are the published prices over China PET prices. These are two published prices from [ ISS ], so you can see. Now this is the graph to look at it for last 18 years. This is from 2004 to '22. The side -- the shaded area is the max and minimum range of the spread. And you can see that what we are seeing today outside, this is going outside the graph, right? And although the cost increase is there, if you take 18 years cost increase, it's a significant increase. So we do see sometimes this strange spreads. You saw in October '12, November '12 and this is July. So these are some change periods, and then you can see that operating rates get adjusted and the margin goes up. So you can say that 80% of the people today who are producing in China are making cash losses. Maybe they integrated paraxylene guys because they are making money in paraxylene. So they may be making money. But then again, you have to look at it, whether you look at it as an integrated play or you look at it as a PTA/PET play because they can always sell paraxylene in the market.

I have another question. I see that you have guided the PET operating in the third quarter, but it's still down from the second quarter, and so I think still low related to normal level. But you mentioned that the destocking already end. Is there a reason why that you expect the lower margin, operating rate in this third quarter?

No, third quarter, we are showing here 4.93 million tons versus first half and second half, you see is 5.24 million tons. So actually, in India, in PET, we'll be operating higher. So you can see it's a 76% operating rate. The Indian capacity has been added into this in PET. Overall, for IVL, we are talking of 77% operating rate versus 74%, so which is 7.67 million tons. We had a shutdown of the cracker in IOD in second quarter. This is normally taken every 5 years. So you can see that IOD is also 1.45 million tons versus 1.38 million tons and the Fibers will be also higher. So I think the volume growth is in all the verticals.

I can see that there's one question from Crédit Suisse, Khun Poom. So she asked about an update on Corpus Christi project. And how it's going to impact the business?

The three partners are still looking at the project. Of course, the targeted start-up is first quarter of '25. The project cost, as we have been reviewing, is slightly higher than the original budget. So there will be a meeting and we'll get back to you. But right now, the project is on the track. The demand in United States as you know, that 1 million ton -- 1.1 million tons is imported in U.S. And actually, when you take U.S. and North America together because that's the NAFTA, that's where it's about 1.2 million tons. So the capacity which will come even if it comes in PET is 1.2 million tons. That will basically replace imports partly and they partly can be also -- because this will be a cost-competitive facility for exports. So the latest update is project is right now at present on track, but there will be a meeting of principles to look at the project cost and decide accordingly.

So there's no hand raised. So actually, I'll pick up from the WhatsApp. On this slide, when we talk about this protected markets, so if you talk a little bit about that. .

Yes. So if you see the -- what this slide shows that our 28% market is in Americas, which is basically Brazil, Mexico and United States. All three markets are fully protected. You can see the -- so the product from China right now is flowing only in Mexico, about 250 kt, which will, again, as antidumping duty comes, then becomes a protected market. Right now, the biggest dumping is in Europe which antidumping duties will come in fourth quarter. And that is -- you can see 23% of our sales, and that's where you saw the margins are under pressure. In Asia, whatever we make, 49%, basically on the -- this 49% is basically India, Thailand. And as I showed you the graph that India is again a protected market, there will be BIS. So this -- and like in Brazil, when we talked about this antidumping duty. Even in -- there's some Indian markets like Japan. Japan from China, there is a duty of 80% to 120%. So Japanese market cannot be accessed by China. So the world is split between what Chinese can export and what Chinese cannot export. So the Chinese exports are predominantly going in Middle East, in part of the Asia and the CIS countries, which is Russia and all that. So that's what you saw on the export statistics. So that gives you the -- what environment, which we operate, and that's why IVL has a better premium in terms of margin versus the Chinese competitor. And that's why we think that more reference number now is not China, but the other countries like Southeast Asia, which I showed you the graph.

Okay. There's a question, hand raised by Macquarie. Kaushal, can you please go ahead?

Vikash, can you hear me?

Yes, we can hear you.

Thank you, management, for the presentation. Just -- the first is just on Oxiteno. Could you sort of share what was the contribution from Oxiteno this quarter? And also, if you could remind us what is the FX sensitivity to the bottom line for that operation over there?

Yes, Alastair, do you want to take that? Let's bring the Oxiteno slide.

Well, let me start off by saying there's obviously nothing wrong with the Oxiteno business, and it's still a good acquisition from IOD and IVL's point of view. Let's just think about the business that they have today. I think it's balanced. It's got a resilient portfolio during normal times. If you remember, a lot of the products that they make, 75% are nondiscretionary and 25% are discretionary. So nondiscretionary sales can be impacted by severe market factors. However, these markets do tend to recover faster than discretionary markets. So I think we split the business down into four real segments. One is home and personal care, which is really a nondiscretionary market. It can be impacted a little bit by use of maybe lower-tier surfactant products rather than the higher tier when spending power gets limited. But the business in South America for home and personal care is actually quite resilient and half 1 is actually higher than half 1 last year. As you know, and we just talked about the Crop Solutions business, which is about 30% of the surfactant sales is significantly affected by inventory loss. And then the coating business that normally goes into both export markets and internal markets, and that's been impacted by a lot of imported products, which we're now battling against and making sure we're competitive against them. So that's the overall sort of look at Oxiteno. If you look at this slide, and this is a half 1 to half 1 '22 to '23. You can see the volumes were down about 13%, primarily due to destocking that's been going on since Q4 of '22. The core EBITDA, you can see the gap there. Now part of that is the large inventory gain we got in half 1 of '22 versus the inventory loss through falling prices -- raw material prices that we see in half 1 of '23. Obviously, that will correct itself as prices stabilize and even start rising. And then there's a tax swing of about $9 million of incentives that's changed. So if you look at the business EBITDA half 1 to half 1, there's about a $58 million gap. Think about that in terms of two ways. One is about $25 million is volume loss really in that destocking phase. And that's the volume we will get back as the markets pick up. And then the impact of margin loss across the supply chain disruptions, we could command higher premiums. We became a very localized insular ability to run in Oxiteno. We will keep some of that as the volumes pick up, maybe not all of it. So as we think about Oxiteno going forward, it's going to move back to about a $50 million a quarter run rate. So that would be about $200 million a year run rate. And that's pre-synergy. And as you know, we've got a pretty aggressive synergy creation program that covers operations. It covers supply chain. It covers optimization networks. It covers share of wallet. It covers swapping products between regions, et cetera, et cetera. And that's going to add about $70 million to $80 million on top of that. So if you think about the Oxiteno run rate, think about we will go back to the $50 million a quarter run rate.

I hope it clarifies that we're looking at a normalized $200 million. Last year, we had this gain due to inventory gain, and this is due to some -- because palm kernel oil, there's a big lag coming from Indonesia to Brazil. And then post synergy, we're looking at $270 million to $280 million. Your question on exchange; of course, the Brazilian currency became stronger this 6 months because interest rates were at 13.75%. So it had a onetime impact of that $6 million to $7 million, what you saw. Recently, Brazil has cut the interest rates because the real inflation is 5.5%. So we are expecting further interest rate cuts in Brazil, and that has started already weakening the currency. So it should get normalized in the coming quarters.

And just maybe another question for you, D. K. I mean, I've not really been following the antidumping sort of process that's sort of taking place in Europe. Could you sort of remind us that -- is this a new issue? Or is this something that's been discussed for a long, long period? What has changed in the last couple of months?

Yes. So this process takes about 9 to 12 months. This process started when the product started coming from China in significant quantity. It's a long process because you have to get investigated. They investigate the producer. They investigate the customers. So that process is completed. Now this will go into the commission's final approval. After -- and the official gazette, it will come in the fourth quarter on the Chinese product coming from -- of PET in Europe, EU27 countries. So it's a long process, which is now at the fag end of the last quarter process. That's all.

Okay. Understood. And just my last question. In terms of your portfolio, which products have seen the most demand destruction because of high inflation? Or has the portfolio overall in terms of demand -- end demand has been quite resilient despite high inflation?

Yes. So I think whatever -- if you -- we showed you the slide of Coke, Pepsi and Procter & Gamble. 70% of the product portfolio like food and beverages, if you look at our home and personal care, did not get affected in IOD. What we saw was the destocking crop solutions what Alastair explained, that's a destocking. Construction linked, we saw some destruction in like some of the specialty polymers or the Fibers business, which is, of course, inflation-linked or NDC, some reduction in the -- because of the electronic sales like TVs -- large-format TVs. So those were the very small percentage of our business. I would say this is more an inventory adjustment, which is happening and which is clearly reflected in the earnings of these end customers who are serving that end consumer basically. So once this stocking is completed, and we are already seeing in PET completed, IOD is at fag end, so then we'll see this demand recovery quicker.

Yes. Thank you, Kaushal. So I can see one question in chatbox from DBS, Khun [ Ban ]. It says I just wonder why income tax expense is high in second quarter '23. Even if you exclude the nonworking items, it remains still high.

Yes. So that is right. The ETR was -- second quarter was having some adjustments of the first quarter. But if you look at first quarter and second quarter combined, the ETR is how much, Vikash?

Yes. So it's very, very -- less than 10%.

10%. So kindly look at it as a first half combined because there was some adjustment extraordinary, which came into the second quarter and the first quarter adjustments were there.

And then also, there would be, Khun Ban, there would be some impact of the mix, the regional earnings mix, yes. [Operator Instructions] I have one clarification, which a few people are asking that this hedging gains and losses we have on the energy, are we normalizing them in the core EBITDA? We are not.

No, we are not normalizing it. This is after the hedging loss. And the way we are showing this hedging loss is basically that if we would not have hedged the energy, then our cost would have been lower by that. But it is not adjusted in core EBITDA. So if you want to normalize, you'll have to add it back to the core EBITDA to normalize it.

So that was just a clarification. And I don't see any more questions here. So audience, if you have any questions, you can ask them now. Otherwise, we can -- okay. So there are no more questions.

Thank you. Thank you very much for attending the -- and we look forward to see you in the third quarter.

Thank you.

Thank you.