The theme for IVL in the 2020’s involves the intersection of two defining, but critical attributes: firstly, the increasingly important aspects of the global, circular economy and IVL’s leading role within this ecosystem; and secondly, IVL’s portfolio transformation and expansion, to ensure the business remains durable to perform under all conditions, a portfolio of all seasons if you like.
2019 Introspection / Reflection
Globally and socially, there is unprecedented pressure on plastic. The truth is that our key product, PET, remains the only 100% recyclable plastic and produces a much more environmentally friendly bottle compared to materials such as glass and aluminum. Following China’s ban on waste plastics in 2018, a number of places around the world banned ‘Single Use Plastics.’ This social and political pressure on plastics and their recyclability actually creates a tremendous opportunity for IVL to enlarge our recycling investments and create a positive impact on global circular economy initiatives. I have personally made a pledge to the Ellen MacArthur Foundation to achieve 750,000 metric tons of recycled content by 2025. It is important for our stakeholders to understand that this will not negatively affect our existing PET resin business, which has grown by 1,000,000 tons per annum, and will continue growing together with the recycled material.
In 2019 many global chemical companies had challenging results, including IVL; however, our overall business outlook remains positive with growing consumer needs and increasing urbanization supporting polyester and its value chain. IVL remains well-positioned to leverage our global footprint, customer focus and diversified businesses.
We also saw a slowdown in economic growth in 2019 due to a number of global, geo-political events: the China trade war escalation; Brexit uncertainty and the increasing risk of a global recession. The combination of these macro-economic factors translated into reduced consumption growth and subsequently the global chemical and petrochemical market experienced lower growth than during the chemical cycle upswing from 2015-2018. However, this cyclical change was not consistent across the value chain and IVL’s portfolio is, to some degree, resilient to many of these headwinds. The effect of trade wars is a redistribution of global trade flows of many commodity petrochemicals and this creates an opportunity for IVL to increase our market share having a well-matured, regional presence across the globe.
Our US Olefin portfolio of Integrated Oxides provides IVL with a cost advantage over Asia, and our integrated PET also benefits from import parity premium pricing. The seeds of this excess capacity were planted during the top of the chemical cycle and means lower operating rates and profitability across the petrochemical sector in the short term; however, IVL’s strong position on the cost curve combined with our geographic diversity means that we remain one of the most cost competitive players from a total delivered price perspective.
IVL’s Performance in 2019
IVL’s volumes grew from 10.4 in 2018 to 12.4 million metric tons in 2019, a 19% year-on-year increase. This represents our highest ever-operating cash flow, growing from US$1 billion to US$1.38 billion in 2019E. The company now has 119 operating sites, in 33 countries, across six continents, with 23,851 employees. TRIS has reaffirmed our AA- rating after the announcement of the Spindletop acquisition from Huntsman and remains a testament to our prudent financial policy. We successfully refinanced our perpetual debentures of THB 15 billion at a 200 bps lower coupon rate and received our first Green financing in Thailand from Mizuho Bank, at a lower interest rate and this has further motivated us to scale up our sustainable business model. Although Thai baht appreciation in the second half of 2019 affected our earnings translation, we have a robust risk management policy in place to manage our exposures in various regions of the world.
Looking at our 2019 financial figures, it is evident that we did not deliver on our earnings targets. What are the reasons for this and what step are we taking? We already began working intensely on making IVL fit for the future.
- With the sharp decline in industry prices and margins quarteron-quarter in 2019, we suffered unprecedented inventory losses. Going forward our management team is adopting and modifying our operational strategies to reduce inventory days and thus avoid future mark-to-market adjustments.
- Unplanned shutdowns in some of our western assets adversely affected our performance. Our operational excellence teams have geared up to drive asset reliability through machine learning tools, Lean Six Sigma principles and enhancing predictive maintenance, while continuing to focus on improving manufacturing costs.
- We have successfully started-up our Louisiana cracker operations since mid-December 2019, satisfying revised emission norms imposed by the local authorities. Operations should ramp-up to full capacity in the first quarter of 2020.
- Our Fibers business portfolio was severely affected by the global slowdown, especially in the automotive sector, and has yet to deliver the returns that we expect. The leadership team has developed an aggressive but achievable business plan to turnaround low performing assets and increases the synergies from integrating with IVL.
STRATEGIC Thrust – Portfolio Transformation
In 2019 we made IVL’s largest ever acquisition – the US$2 billion Integrated Oxides and Surfactants business of Huntsman across the USA, India and Australia. This acquisition closed in Q1 2020 and supplements our already well-balanced chemicals portfolio of involving the polyester value chain and specialty fibers. Huntsman’s assets help us to enlarge our customer focus with a broader product offering under one umbrella. It marks our entry into the large and growing space of surfactants in customer segments catering to personal care, detergents, paints, agriculture, adhesives and food processing, with additional opportunities to enter into the polyurethane and oxyfuels businesses. This transformational portfolio is the anchor for our aspiration to generate 15% ROCE by 2023.
|Value Chain||Capacity in MMT||No. of Sites||Manpower||Net Capital Employed (US$M)|
Our portfolio expansion includes the following:
- Two recycling assets acquired in the US that have a combined capacity of 71,000 metric tons, namely Custom Polymers PET LLC and Green Fiber International (GFI). These strategic acquisitions enhance IVL’s capability to drive closed loop sustainable solutions and embrace the Circular Economy. While Custom Polymers will provide us with secured supply of rPET flake and food-grade 100% rPET pellets in US, the second asset GFI, a recycling company offers high-quality recycled PET bottle flakes to support our customer’s efforts in creating a circular economy.
- We made a debut into the fiber business in Brazil, by adding M&G Fibra, Brazil’s largest Polyester Fibers plant, with total capacity of 75,000 metric tons per annum. It provides IVL a unique opportunity to establish its presence in South America’s largest economy and achieve synergies between M&G Fibra and Brazil’s largest PET asset that we acquired in late 2018.
- We completed the acquisition of specialty assets of Invista Germany, this provides us intellectual property rights for specialty resin that can be marketed globally and fits neatly with its sister facility in South Carolina, which we acquired back in 2012. These sites serve as our PET R&D hub.
- We completed the share purchase in Indo Rama Synthetics (India), which is a strong strategic fit with IVL’s Fiber strategy in the home and apparel market. India is the second largest polyester market in the world after China with consumption growing at about 7.0% per annum.
- We have further consolidated our packaging portfolio position in the African market with the acquisition of Bevpak Nigeria, with a production capacity of 18,000 metric tons per annum.
- Finally, we completed the acquisition of Sinterama, a leading Global polyester automotive interiors and high performance colored yarns manufacturer with facilities in Italy, Brazil, China and Bulgaria.
With the expansion of our Integrated Oxides Portfolio via the Spindletop acquisition, IVL now has a strategic and sizeable portfolio of businesses under the three differentiated value chains of Aromatics, Olefins and Fibers. This diversity and resiliency transforms IVL into a unique and diversified chemical company versus a pure play petrochemical company.
Climate Change / IVL Drives towards a Circular Economy
IVL achieved several important milestones in 2019. We were ranked second among the top global chemical companies in the DJSI World Index and included in the DJSI Emerging Markets Index for the third consecutive year. We maintained the MSCI ESG at level BB, similar to last year, wherein we have received the highest ESG score out of all chemical companies from FTSE4Good Index Series in 2019. We received the Coca-Cola Sustainability Award from the Coca Cola’s Supplier Summit 2019, given to our FuTuRePET Single Pellet Sustainability Solution (SPSS). The achievements reflect IVL’s operational excellence regarding our sustainable development supporting our vision of being a world class chemical company making great products for society.
IVL management continued their efforts on continuous customer focus, commitment and responsiveness to Innovation and Sustainability. During the year, EcoVadis, a prominent industryleading monitoring platform for sustainable procurement recognized us as one of the top 3% of suppliers with a Gold Level recognition. This rating reflects our performances in lowering the company’s impact on the Environment, Labor & Human Rights, Ethics and Sustainable Procurement. Besides this, IVL achieved the highest score amongst companies in the SET50 and GICS100 Chemical Companies on Bloomberg’s ESG assessment. All these achievements reflect the company's excellent performance in taking further steps for effectively reduce emissions, indicating more advanced environmental stewardship.
A keyword for our business remains sustainability: It serves as a beacon of our business strategy, orienting all of our activities and shaping our product portfolio to ensure they make a positive contribution to the circular economy ensure environmental protection, optimize our supply chain, minimize risks, and generate positive employee engagement.
IVL on a journey towards Future Readiness
Our strategy focuses on growth: Our objective remains to grow profitably and sustainably. We invest where we see opportunities for growth and where we believe we have relevant competence. At the same time, we continue to rigorously reduce costs wherever it makes sense. Given our global leadership position in PET, we have set an internal target to drive the circular economy and have formed a dedicated team focusing on the recycling business, under the leadership of one of IVL’s board member. I am pleased to see the commitment of this team and their passion to grow our recycling footprint across the globe, striving to build a global, scaled business with a robust supply chain resulting in an innovative and profitable business model. This year also marks onboarding of two senior executives – a Chief Human Resources Officer and Chief Strategy Officer, thus enriching our leadership bandwidth. We have also created the Indorama Management Council (IMC), consisting of IVL’s most senior and experienced executives. As part of our talent initiatives we have also created the Indorama Business Council (IBC), where the next generation of IVL leaders are provided with a platform to further develop a winning mindset and grow their capabilities. The two structures of the IMC and the IBC also creates an effective pool of top-talent to address concerns on IVL’s succession planning. It is refreshing to find young talented managers displaying their creativity and conviction under the V-Lead program led by our segment CEOs.
Our new strategy encompasses a number of new priority areas: ERP transformation, operational excellence, and digitalization and employee development. In each of these areas we strive to raise the bar and be the pacesetter in our industry. In 2019 we had announced our intention to implement S/4 Hana, an integrated SAP ERP, group wide. IVL has grown tremendously over the last decade and it is now imperative that we adopt a common and fully integrated ERP solution across all functions. The full implementation of the ERP, to be completed in three years, will help drive down costs, improve overall efficiency and make our businesses even more agile.
As the organization has mostly grown inorganically, we have a strategy to enhance the role and value of our finance operations through several transformation projects, partly linked to the single ERP system. We are progressing with back office operations in India and Mexico to get global coverage of our shared services function and improve our interaction with customers and suppliers.
Our Mid-Term Focus
Following on from the highs of 2018, we have experienced a roller coaster ride in 2019. Alongside geopolitical issues, the chemical industry is witnessing a glut of overcapacity resulting in margin pressure across the value chain. Nevertheless, we have experienced such headwinds in the past and our management team remain confident in our well-thought out and executed game plan to fortify our businesses and maximize our resilience to short-term volatility. Our value add is something that is exclusively available to IVL due to our combination of global scale, variety of locations, synergies with rest of the businesses, our specialties, our lean organization, our circular economy mindset and our alignment with customers and suppliers. At the same time, we are also aware of a number of challenges on the horizon and have mitigation plans in place. Our leadership team is already making plans to turn-around underperforming assets and maximum synergies, while growing our market share and maintaining our leading position.
The tectonic shift in IVL’s portfolio was deliberate and executed at scale. I am thankful to our management team for having worked tirelessly on the due diligence and timely closing of the Spindletop assets. This large and complex transaction is nearing completion and it is up to us to deploy our experience to derive the best possible synergies by integrating with IVLs’ existing Integrated Oxides assets and also further develop the downstream surfactants. Once successful this business will emerge as another “core” for IVL, alongside our Integrated PET business. We have announced our new Integrated Oxides leadership team structure and their primary objective remains to implement cross learnings and operational and commercial excellence the IVL way. As the Lake Charles cracker has started and is operating smoothly, we are in the perfect position to maximize the integration benefits between Lake Charles, Clear Lake and Port Neches sites, fully leveraging the cheap feedstock availability in USA Gulf Coast region.
In addition, we now have several specialty assets in our portfolio in our PET and Fibers businesses with an experienced R&D team that is committed to drive product innovation. We have also made our plans to scale up our business development and branding initiatives with customers to achieve desired growth across the businesses.
Our global asset base of Integrated PET, Integrated Oxides and Fibers businesses have unique and untapped potential to allow IVL to enter into new applications with minimal capex. This presents organic growth opportunities in spaces adjacent to our existing portfolio, further enhanced by potential bolt-on acquisitions that are both attractive and value accretive to IVL’s scale and portfolio diversity.
Marching Towards Excellence, A Better Way
With our balanced business portfolio, further augmented with a positive demand growth outlook, I remain optimistic about IVL’s future prospects. Our leadership team continues to work cohesively on the key issues of resource allocation, capital expenditures, productivity improvement and differentiated enhancements to our procurement leverage, all with the aim of strengthening the pillars of an already robust and sustainable organization. Winning is in our DNA and we will leave no stone unturned to augment value for our stakeholders!
Let me share with you how are we going to deliver the best-inclass performance over the next four years. We have our entire organization aligned on following five strategic priorities. Let me elaborate.
- Cost Transformation: With the launch of project Olympus, IVL is targeting to save around US$350 million cumulatively by the year 2023 through a series of corporate and business-led strategies.
- Asset Full Potential: IVL aims to maximize our growth and margin potential by retaining a razor-sharp focus on realizing the full commercial potential of assets already acquired and operational.
- Adjacency Growth: Our core areas of business are now well established. Leveraging these businesses to their full potential can also come by looking at adjacencies that allow for enhanced customer offerings and also enhanced earnings. More often than not, a move in to adjacencies does not necessitate large financial commitments and at the same time allows for management and business synergies.
- Recycling Leadership: this is a truly once-in-a-lifetime opportunity of combining the inherent strengths of PET as a 100% recyclable material and heightened demand for rPET from leading beverage companies and other industrial companies alike. We are fully committed towards playing our role in addressing the issue of waste management and sizably enhancing circularity.
- Leadership Development: Last but not the least, we need to continually invest in enhancing our leadership resources. In 2019, we recruited our Chief HR Officer and the Chief Strategy Officer. We are enriching the capabilities of our HR organization and our Strategy group to serve as business partners with our existing senior executive to implement effective tools and KPIs. Our culture and leadership development is fundamental as we seek to manage our businesses and lead us sustainably over the next decade.
These five priorities have been arrived at following deliberations involving the leadership teams and esteemed members of IVL’s Board of Directors.
2020 will be an exceptionally demanding year of transformation - economically, politically and strategically. Our goal is to ensure IVL becomes more agile, flexible and customer-oriented. At the same time, we will maintain a balance. We will introduce structural changes while doubling down on what already works. This will require focus, energy and strength – and these are all things we have.
We are at a turning point in IVL history – we are well-positioned to effectively navigate the challenging horizons ahead. We have prioritized and committed ourselves to transforming the business, portfolio and processes to continue to lead in this new era of business and technology in the 2020’s, in order to remain relevant – and highly essential – to our customers, our shareholders and to society
“We have the right strategy, the skills and the passion necessary to make IVL fit for the future.”
Together with my fellow members of the Board, I wish to thank all our stakeholders, and remain grateful to you, our shareholders, for your ongoing and steadfast support.
“The need to shift mind-sets is the biggest block to successful transformations. The key lies in making the shift both individual and institutional - at the same time.”
- By Scott Keller & Bill Schaninger
Group Chief Executive Officer
Indorama Ventures Public Company Limited