Indorama Ventures Public Company Limited

Welcome everyone and thank you for taking time to join us for Indorama Ventures second quarter reserves briefing. My name is Vikas Jalan and Vice President of Investor Relations and Planning at IVL. Joining me today we have Mr. D.K. Agarwal, Deputy Group CEO and Group CFO. Muthu Kumar and Kumar Ladha, both are co-presidents for CPAT business. Alistair Amphot, Executive President for Indovina and Diogo Bori, Executive President for Fibers. A quick disclaimer that this meeting is being recorded and a replay of this session will be available on our website after the meeting. We have made a few assumptions and estimates on future trends for industry and business, which are based on our analysis of information at this point in time. So with that, I now invite Mr. Agarwal first to share business and financial highlights for second quarter 24. Over to you, Mr. Agarwal.

Yeah, thank you, Vikas. I think let's first understand what is the macroeconomic situation, which of course directly or indirectly impacts our industry as well as other businesses. The first slide on the left shows the economic deacceleration and interest rate. We have certainly seen some slowdown in the U.S. economic activity, affected in a lower PMI for second quarter 24. And then again in July, which could pave the way for potential rate cuts in the coming months. And as you might have seen, a lot of volatility in the stock markets after some data of unemployment came in. These cuts might extend to other major economies as well. However, even with the expected rate reduction, financing costs would like to remain elevated as compared to pre-COVID level. However, I think they will peak in the second quarter. IVL strategy with about 50% of its debt being floating by the end of 2024 positions the company to benefit from these rate cuts. So as you know, we have been in the fix earlier. Now we have been on the floating and we'll certainly look at the opportunity to fix it to reduce our interest costs. Challenges and reforms in China. The economic environment in China remains challenging. Nonetheless, the recent reforms announced by the Chinese government during the third plenary session in July and property sector expect to stabilize, offer some encouragement and may positively impact the market. We certainly see India is a very, very strong market today. The third item is the supply chain disruption. As you are aware, the world supply chain is again getting disrupted. The supply chain disruption have intensified with a noticeable spike in the freight rate as you can see the Shanghai freight index as evidenced by the rising Shanghai freight index. The disruptions are driven by easing destocking and ongoing issues in the Red Sea again. Persistent port congestion is increasing the logistic cost and extending delivery times. The high yields a strong domestic production presents because of the geographical footprint in the key market is expected to again provide a strategic advantage, particularly as this disruption will gradually be reflected in the sales pricing from third quarter 24 onwards. Because, you know, there is always some lag. in the freight rates. So we certainly see some benefits in the western markets where the freight sector is. Actually, even in the regional, because even from China to Indonesia, the freight rate has become significantly higher, around $1,500. So we are seeing a lot of disruption happening. High oil prices and competitive advantage, which is a very important thing, as you can see in the fourth bucket here. Sustained high oil prices continue to underscore the competitive age of U.S. gas, with IEA leveraging its local production capabilities and gas-based feedstock to maintain a competitive advantage in this environment. As I speak with you today, the gas price is $1.90. Spreads have gone down. The crack spreads have gone to 30 to 32 cents per pound, never seen in last few years. So very interesting time when the gas prices have come down and the ethane prices are very low. So the cost of ethylene in the United States is very low. Go to the next slide. So let's talk about second quarter financial results. Indorama Ventures achieved an adjusted EBITDA of $370 million in second quarter 24 with 1% increase in volume quarter on quarter. Sales volume reached 3.64 million tonne driven by demand growth and the ease of destocking. Segment performance, Indovania's performance saw notable improvements in both volumes and margins which Alistair will cover. Consistence with the industry trends observed among major specialty chemical companies. So the destocking has come to an end and we are seeing the recovery in the margins and volumes. An increase in contribution margin per ton as well as volumes are reported in Novena. Despite disappointingly low benchmark spreads for Asia integrated PET, even during the high season, as you know, in second quarter, normally the integrated PET spreads goes up. But because of overhang of the Chinese PET capacity, they remain very depressed. So this was disappointing. IVL was able to maintain a premium over the benchmark due to our global footprint and strong domestic supply chain capabilities. As you can see that CPET, when they had a lower benchmark spreads, still the adjusted EBITDA remains 370 and you will see in the CPET section, it remains stable. Operational disruption, I think this is something Alistair will cover. 50 days unplanned outage at the Iowal gas cracker led to an EBITDA loss of approximately $17 to $18 million in second quarter 24. So this EBITDA would have been better by $17 to $18 million. And with the improvement in the FRAC spread, this will certainly benefit in third quarter. Now this cracker's operations has normalized in August. beginning of August and high gas cracker spreads continuing. Performance is expected to improve from third quarter due to enhancing Shell gas advantage as I just talked in the United States. Cash has been very important focus for the company. So operating cash flow for the trailing 12 months up to second quarter 24, the company reported an operating cash flow of $1.5 billion with a cash conversion of 123%. In second quarter 24 alone, operating cash flow was $494 million, with a cash conversion of 134%, benefiting both from EBITDA and a release of nearly $266 million in net working capital. So a lot of focus on the working capital. Despite having a strong operating cash flow in second quarter 24, our debt, net debt, went down only by 32 million as we had to make a deferred payment for Occitano acquisition of $150 million and the two dividend payments came in this quarter. I think in Capital Market Day, we talked to you about asset optimization. I'm happy to report that significant progress was made in asset optimization, including the closure of PET PTA site in Netherlands, effective 30th June, the PTA site in Montreal, Canada, and the ethylene oxide and derivative facility in Australia. These actions have resulted, as you have seen in the financial results, net $666 million of impairment, post-tax and expense provision in second quarter 24. Despite this closure, revenue is expected to remain stable as operations are being shifted to other locations and the sales are being shifted to the other locations, leading to reduced fixed cost, improved overall performance and enhanced shareholders return starting sequentially from third quarter 24. Fixed cost savings will be substantially materialized, reaching nearly $170 million per annum in 2025. As you know, the Canadian plant is shutting from 1st September, so there will be some cost third quarter, fourth quarter. The entire will be realized in 2025. However, EBITDA increase would be in the range of $150 to $160 million per annum. from 2025 onwards and some of that will be realized in 23, third quarter and fourth quarter also. Further details on these developments will be covered in the subsequent slides. Now let us take a closer look at the sales volume. In second quarter, I will achieve 3% quarter on quarter and 1% year on year increase in sales volume. which is signaling the end of destocking. As you know, 2023 was a complete year of destocking. Even the first quarter was a lot of destocking happening in Indovenia. Now we have seen a return to more stable demand pattern. This growth was underpinned by continued expansion in the PET volumes, driven by strong brand owner preferences. However, overall CPAT volume growth was slightly tempered by decrease in PTA volume due to optimization of assets, particularly in Rotterdam. These optimizations, because remember, these productions are gross productions. So that's why this gets reflected here. These optimizations are, however, overall beneficial to the cash flow and EBITDA growth, which can be sequentially seen from third quarter onwards. Indo-Venia's performance was bolstered by growth across key sectors, including home and personal care, energy and resources, coatings and constructions, partially offset by ethomines turnaround. So there was a UA turnaround, plant turnaround. This growth was supported by favorable megatrends and increasing domestic market demand. In the lifestyle fiber segment, the adverse effect previously faced due to challenges in China during second quarter 24, are expected to normalize over the remainder of the year. Diago will cover that. We should elevate some pressure and support improved performance. Additionally, ongoing supply chain disruption and high logistic costs are proving beneficial for domestic volume growth. These factors are expected to continue supporting domestic volume throughout the rest of the year. So as you can see, we have given you some number of the estimated Q3 volumes of 3.74 million tons. Now let us see our second quarter results in detail. As you mentioned earlier, we posted second quarter adjusted a bit of $370 million, an increase of 1% quarter-on-quarter and a decrease of 11% year-on-year. Remember, second quarter, 23 had a very strong integrated PET margin. Fibers, the fiber segment showed improvement year on year. However, remained stable, steady quarter on quarter, even with volume pressure in lifestyle fiber, as we mentioned earlier. Volume recovery is expected, thereby improving performance for the rest of the year. Indovenia demonstrated a strong performance during second quarter 24. We saw higher volumes and contribution margin per ton or coma per ton. driven by easing de-stocking challenges and improved domestic demand. You can see 98 million versus 70 million in the first quarter. The HVA portfolio of Indo-Venia delivered strong results, supported by North American crop seasons and therefore enhanced surfactant performance. And you know, South America will have a crop season in the second half, which Alastair will cover. CPAT, you can see experience declined in adjusted beta this quarter. from 249 to 234, as you can see, primarily due to the normalization of the NDC campaign run gain. So normally, we run our NDC in campaigns. So the quarter which we run, then we gain. And second quarter, there was impact of 20 million because of that. And also the impact of IWAL cracker outage, which I just mentioned to you, about 16 to 17 million dollars. So this all together resulted in approximately 34 million variants in EBITDA from quarter to quarter. Volume growth and our premium over industry help mitigate the impact of depressed and disappointing integrated PTA industry benchmark splits. Looking ahead, the segment anticipates improved earning in the latter half of the year, driven by reduced fixed costs from asset optimizations and benefits flowing in the Western markets from ongoing logistic disruptions. So you will see that improvements coming in third quarter onwards. It's very important to look regionally where we are in region. Of course, America still remains star here. Asia benefited from higher volume in PET and improved regional mix. Particularly, our Egyptian plant is doing very good as it applies to the European market. Though benchmark integrated PET spread, as I mentioned, went down during the quarter from 138 to 130. So, in the first quarter, it was 138. Second quarter, it dropped actually 130. As per industry publication, at current level of benchmark spreads, many producers in China are below their cash cost with negative cash flow, and there has been some shutdown of the capacities which has been announced, which Mutu will cover. The Americas region remains flat, as you can see, 257-257, primarily due to the robust performance driven by strong volumes and margins from our Indo-Venia business, This helped offset the normalization of NDC performance from one time gain of 16 million in the first quarter and 17 to 18 million dollars due to Ivol cracker outage. So this 34 million dollar otherwise the results would have been higher in second quarter. The region is expected to improve for the rest of the year with normalization of gas cracker volume as I mentioned to you. And increasing gas cracker spreads with improved shell gas advantage. I must mention here that because of the lower energy prices will also benefit in the Western world as we are seeing lower energy prices. In the month of July, U.S. cracker spread went up by 50% over second quarter 24%. EMEA impacted with lower PTA volume due to asset optimization, shutdown of PTA plant in Rotterdam, expecting upsides with reduced fixed costs sequentially from third quarter 24. So that gives you a regional snapshot of the business. Today, of course, we have an exciting introduction of our new generation leadership. You can see two people on last, Mutu and Kumar. It is with great enthusiasm that we welcome both of them as the newly appointed president and co-leader of CPAT. CPAT will run in a co-leadership model with more than 40 years of shared experience across the PIT business, spanning all key regions, two unique viewpoints and expertise. Their new appointment in July 24 gives a very significant advantage. They are dynamic. You can see and you can ask more questions. Dynamic, strong and uniquely experienced in this industry as well as being part of the Indorama Ventures. I mean, they, you know, Muthu joined us from a wool business and then he has been in America. So a lot of new ideas they should bring, focus on next generation management. As you know, we are investing in artificial intelligence integrated business model, IBP, into new way of work I'm very confident this new team will take to new heights to the CPET business. So now I'll hand over to Mutu to take over the CPET business.

Thank you. Thank you very much for the introduction, Mr. Agwal. Good afternoon to all of you, analysts, investors, other stakeholders. My co-leader Kumar and I are very much honored to be here with all of you today as the newly appointed president and co-leaders of CPET segment. Since our appointment in July 24, we have been looking forward to this opportunity to share our vision for CPET's bright future. I would like to start very simply. Our deep roots in the industry have taught us a crucial business truth, which is that PET is a great product and will continue to thrive. We will share some more strategic plans and information around that in the coming slides. Now, looking into the new organization, we are also glad to have Yash Lohia joining us as the Executive President of PETCOM Special Projects and also supporting recycling, IVIH, and bringing his sustainability expertise. IVIH, as you know, is the arm in IVL that is working on new technologies, enhanced recycling, and renewable feedstock. Now, we have carefully assembled the new CPET board, and also a 17-member global executive leadership team who together are poised to guide CPET to new heights. Now let's outline CPET's vision moving forward, anchored on four main pillars. The first one is to ensure near-term business continuity. We are ensuring a smooth transition into our hybrid, regional, and functional model designed to bring agility and efficiency to our operations. The commercial teams will continue to operate on a regional level, but closely collaborating among them to maximize the value on a global level and staying very close to our customers. And our key functions, including manufacturing, finance, and procurement, are now coordinated on a global scale and making sure that the functional expertise is strengthened across the segment on a global level. On the second, portfolio transformation, our goal is to propel CPET into becoming a top quartile cost producer. This involves continuous portfolio assessment and driving manufacturing efficiency. We have already started on this path, and you will see that the dividends are coming in very quickly. By optimizing our portfolio, We aim to enhance our competitiveness as well as operational excellence. On the third, the sustainable value creation and innovation, third pillar. We aspire to become the number one sustainable packaging provider globally and expanding our value-added specialty share as well. Sustainability and innovation are at the core of our strategy, driving us to develop products that meet the evolving needs of our customers and the environment. On the last one, enterprise transformation, we are deeply focused on enhancing global efficiency of our operations through integrated business planning, IBP, and maximizing the digital platforms and AI to become a very tech-enabled organization. This transformation will enable us to leverage technology for faster and better decision-making and and bring agility and operational efficiency. Now let's talk about why we are uniquely positioned to drive this vision forward. As I mentioned, our years across this industry show that PET is a growth industry for several reasons. Let me share this compelling case for the continued strength and stability of our PET platform. laying out the key factors which are driving future growth and how IVL's CPET is strategically positioned to succeed, even in a challenged margin environment that Mr. Agarwal mentioned. Now, looking at the global PET demand, we have seen substantial growth from 17 million tonnes in 2010 to more than 31 million tonnes by 2023. By 2030, this growth on a continued fashion is projected to reach close to 42 million tons, a solid CAGR of 4% between now and 2030. Of course, this growth is split between virgin resin, virgin PET, and recycled PET. And as we all know, RPET is growing at a much faster rate here at a 16% CAGR as compared to 2% for virgin resin. This growth shows the increasing importance of sustainability and the demand for recycled materials in developed markets, while emerging markets continue to drive this growth through population increases as well as higher per capita consumption. Several factors are driving this growth. Population growth is a major contributor, especially in emerging markets, where PET consumption is continuously on the rise. Additionally, modern lifestyle trends are pushing demand for PET products, and our expectation is that PET will continue to be the material of choice due to its several benefits including cost-effectiveness and superior sustainability profile as well as performance and convenience attributes. As collection rates for recycling increase globally, PET's role will only strengthen further. Now let's shift focus to China integrated PET margins, the reference benchmark margins that we are using for a lot of our analysis. While there has been a decline in margins in the first half of 2024, this reflects the broader market pressures we are all aware of. However, CPET is well positioned to operate in this new normal low margin environment. We are already taking proactive steps. To manage this market dynamics, through ongoing asset optimization and very focused cost reduction initiatives, we are ensuring that CPI remains competitive. Importantly, our transformation projects continue to advance, putting us in a strong position to capitalize when the current down cycle is over and market conditions improve. Here we wanted to give you an overview and a quick snapshot of our recycling business, which is becoming more and more a key part of our portfolio and continues to grow. So it is a very unique and promising venture, closely, very closely integrated with our broader PET business. And IGEL is well positioned to succeed with CPET and recycling mutually benefiting each other. As part of IVL 2.0, while reducing debt remains a priority for CPET as well, we are actively investing in sustainability and recycling to reinforce our global recycling leadership. In 2024, we will implement measures to modernize our assets, setting the stage for long-term goals and potential growth. 2024 is also a pivotal year for our recycling enterprise. We are in the process of boosting operating rates significantly. For example, our facility in France, operating rate jumped from 50% to right now 90%. We are now replicating this success across other locations as well. The learnings we had from this, now they are being cascaded and used in other locations. Looking ahead, we anticipate continued improvements in efficiency and EBITDA. Our strategy includes having strong partnerships with strategic customers for developing joint sustainability roadmaps and value creation, expanding our recycling capacity and aiming for double-digit returns on capital by 2026, as you would see from this chart. In this second, this next slide, we'd like to draw your attention to the positive momentum we are seeing in our specialty chemicals vertical. As you can see on the left side of the slide, we have made significant progress in improving our Germany specialty site, Gustafson's EBITDA. We have seen a significant 113% improvement in EBITDA performance. primarily driven by our focus on fixed cost reductions and margin improvements in our sales strategies. Here are some key measures we have undertaken and also plan to continue to effect further change. In terms of yield and plant reliability, we have minimized yield losses by optimizing scheduling, product changeovers, and improving process and quality controls. I'm also pleased to report that we have achieved sub-5% yield losses so far in 2024, and our ongoing efforts to enhance equipment reliability, ensure on-time and on-quality supply. On the fixed cost front, we already implemented manpower optimization and launched Project STAR. which is on track to deliver $7 million in fixed cost savings over 2024-2025, just for this particular case we are talking about. Lastly, our sales and innovation initiatives are set to drive further growth. We are maximizing operating rates, capitalizing on new volume opportunities. We are also intensifying our focus on high-margin specialty barrier materials and other commercialization opportunities. This is further supported by the reorganization of our commercial and R&D teams for the specialty polymers business, which is helping to enhance collaboration and boosting our product development pipeline. The next one we wanted to talk about the packaging vertical, which is now named as IndoVida. And the success and growth potential for this vertical is very high. As you can see here, we operate in eight countries with 19 industrial units, maintaining a dominant position in these key markets. For instance, we hold the number one market position in Thailand, Vietnam, and Philippines, as well as Nigeria, with market shares ranging from 15% to 56%. These countries are also projected to see P&T growth of 4% to 8%, between 23 and 26. This strong market presence allows us to enjoy consistent high margins with an EBITDA percentage margin in the high teens. And our relationship with blue-chip customers, large brands like Coca-Cola, Pepsi-Cola, and Nestle provide a very solid foundation for continued growth. By leveraging these global partnerships, we can ensure sustained demand and further strengthen our market leadership in this vertical. Now, looking ahead, our growth strategy focuses on broadening our geographic footprint, particularly in Africa, with targeted expansions into Tanzania, Tunisia, Algeria. Additionally, we also plan to expand into adjacent product categories, such as home care, pharma, beauty, and personal care, in addition to the large beverage portfolio we have now, which will unlock hidden value and facilitate even higher growth in the future. I'll now hand over to my co-leader, Kumar, who will take us through the rest of the slides. Thank you.