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Group CEO Message

 

Dear Shareholders,

2011 was a year of expansion in response to the goals we set ourselves in the previous year through our Aspiration 2014 business plan. I expect 2012 to be a year of consolidation, to build on the gains we have made in the past year and create greater profitability.

We remain the Polyester Value Chain industry leader and have consolidated our position in 2011 with a record increase in production volumes of 37% to 4.36 million tonnes and increased net sales up 100% to $6.1 billion with consolidated EBITDA up 28% to $558 million and core net profit after tax and minority up 38% to $297 million. This unprecedented high volume growth and earnings has been achieved through completed acquisitions that have been successfully integrated into the IVL portfolio.

Our 39 operating sites in 15 countries across 4 continents provides us a global footprint that offers economies of scale, immediate reaction to customers’ needs and greater cost savings on logistics. Moreover, we now have an integrated portfolio designed for growth. Our exceptional management not only has a proven track record but sets the benchmark in operational excellence; we are now becoming recognized internationally as a top player in the industry. Our success is largely due to an ability to marry cultures to work in harmony for common goals.

Our firm commitment to shareholder value has led us to follow a path of strategic growth through diversification. By developing a strong R&D platform for new product development and process innovation we have diversified our portfolio into value-added and differentiated products and services. Innovation is the key to gaining the hearts of customers, who themselves wish to differentiate themselves. Through innovation we can gain industry leadership and market growth by keeping our own customers in the lead. Through innovation, we can enhance IVL’s offering proposition and create enviable margins.

The year was not without its challenges. It began with a swift and exciting ride for the industry due to the exceptional peaks in the cotton business that led to sharp rises in both Polyester and PTA prices, followed by rapid normalization in the second half of the year. The fact is that cotton and other natural fibers are limited by their requirement for land and water and that farmers have other cash crops to choose from. Inclement weather that can lead to crop shortages have meant that Polyester fiber is expected to continue to replace cotton and other natural fibers each year as there is no hindrance to the expansion of Polyester production while there is limited upside for cotton. As the world faces economic uncertainty, expect people to favor Polyester, the lowest cost material. Similarly, PET has achieved global recognition as the lowest cost form of packaging and is expected to continue to gain share against glass and metal. Not only is it by far the most affordable packaging material but its recyclability makes it one of the most sustainable materials.

As if to highlight the resilience of our business, tornadoes hit Alabama in the USA, where we have our Alphapet plant. Though the storms did not damage the plant, electricity was cut throughout the state and production was forced to close for two months. Fortunately, the geographical diversity of the company in North America meant that our Spartanburg, Queretaro in Mexico and Starpet plants were still up and running and able to serve our customers. In Thailand, the end of the year saw the country underwater, submerged by heavy flooding. Like many industries here, IVL was affected and our complex at Lopburi, with PET, Wool and packaging firms, was forced to close and was itself flooded. As our risk management policies dictate that we have full insurance coverage for such events, we are fortunate that not only will all damaged equipment be repaired or replaced, but we will also receive comprehensive compensation from our insurance for business interruption.

Acquisitions

By acquiring the right businesses and driving their organic growth, we have created shareholder value, with healthy financial returns and exceptional performance. Our acquisition strategy has objectives such as growth through expansion into all economic regions where our customers are present. This includes growth into emerging markets where we see urbanization leading to double digit growth. We intend to leverage our truly world class product capabilities and focus more on the sustainability of the company and its products.

Our business growth model rests on finding the pieces of a jigsaw that, once interlocked, create more than the sum of their parts. In January 2011, we started with our first acquisition in China through Guangdong IVL PET Polymer in Kaiping City, Guangdong Province. This provided us with entry to a vast market but we deliberately chose a location in China’s fastest growing province and close to a reliable feedstock supplier. The population of 104 million represents 7.79% of the entire country and is larger than many countries of the world! Production there is expected to increase and adjustments we have made to the plant, including changing the fuel for its power generation from expensive fuel oil to lower cost coal and adding another SSP line, will create greater efficiencies and cost savings. Capable of producing both PET and Polymers, the plant is expected to lower its conversion cost for better returns following the changes we have made.

In March, we entered into the fast-growing Indonesian market with the acquisition of SK Chemicals’ businesses there and in Poland. PT Indorama Polyester Industries and PT Indorama Ventures Indonesia produce fiber and PET. The country is not only growing rapidly, but with low gas prices, electricity cost is lower than both China and Thailand. Its population of 238 million people makes this a target market for IVL. The lack of a clear leader in the polyester business is an opportunity for us to consolidate the market at the key moment that its economy is growing. For this reason, we have more recently acquired both a PTA company, Polyprima, in November, with a joint venture partner, and 100% of a neighboring PET manufacturer, Polypet, that is fully integrated with Polyprima.

With the acquisitions in Indonesia, we also acquired Indorama Ventures Poland. This PET producer fits our strategic profile in that it is virtually integrated with a third party PTA supplier and therefore is able to keep its costs down through savings in logistics.

Innovation will provide our customers with delight and keep them loyal to us and our brands over time. In March we closed a deal to acquire the polymers assets in North America from INVISTA. Auriga Polymers in Spartanburg is one of the jewels in our crown as it is a center of research and development in innovative PET polymers and is already the envy of the industry with products such as Polyclear, an Extrusion blow molding grade resin that can be recycled in the clear PET stream and OxyClear, which protects the quality, freshness, and taste of oxygen-sensitive foods. Such patented and branded products give IVL an edge in global competition.

Indorama Ventures Polymers Mexico, part of the same acquisition as Auriga, provides us with our first entry into Latin America. This allows us to extend our reach into Central and South America as well as expanding in fast-growing Mexico itself. Its broad and diverse product offering is particularly appealing to our key customers in the region.

In line with this strategy of diversification into value-added products, in June, we acquired 75% of Trevira in Germany with our strategic partners Sinterama of Italy. Probably one of the most famous brand names in Europe for polyester fibers, Trevira is also Europe’s leading producer of specialized fibers and filaments; just to give one example, Trevira CS Flame Retardant Polyester Fiber, which is widely used to create covers for the seats on cruise liners and airplanes.

There is no doubt that recycling is now an essential part of our industry and will only increase in importance over time. While there are many companies working in recycled polyester, there are only a handful of manufacturers who are able to make the quality of recycled product suitable for premium applications, and there is still unmet demand for recycled products. At the end of the year, we were fortunate to acquire Europe’s largest recycler of post consumer PET, Wellman International. Its production is based in Ireland but it has collection points in the Netherlands and France.

In this case, we believed that our product offering could be widened into related areas and acquired the company FiberVisions in January 2012. The acquisition significantly enhances IVL’s position in the world’s most specialized fibers business for hygiene products and other growing fiber applications. This is a world leader in the production of polyolefin fibers with a global footprint that includes production in North America, Denmark and China.

The world has not fully utilized the potential of polyester in combination with other fibers. The industry is moving towards composites of polymers which address specific functionality and performance. There has been a vacuum in the R&D focus for such developments since the Western majors vacated the market. Most Asian producers have been harvesting the gains from the earlier developments without investing in future product pipelines.

We intend to invest further into the Thai market with a bicomponent fibers project for hygiene applications. Hygiene products utilize high technology that requires top class manufacturing and close ties with customers to be able to provide the exacting specifications required for products that remain in close touch with the skin such as baby diapers, feminine hygiene, etc. The new project will produce one of the key components of such applications by tying up technologically with a well-known company in this field, to make bicomponent fibers for hygiene end-use. Similarly, we will invest in another strategic project to make high quality bicomponent yarns at our Indorama Ventures Indonesia (IVI) plant in Tangerang, Indonesia. IVI owns unique technology to makebicomponent yarns (called FINNE) through a single step process. The company enjoys significantcompetitive advantage over companies who currently use a two step process and has secured a leading market share in this segment.

As the industry leader, IVL attaches the highest importance to sustainably unlocking the latent potential of polyester and related polymers through continuous investment in application development to serve the evolving demands from global customers. In line with these objectives, IVL has acquired the most valuable pieces in the industry, like the polymer assets of INVISTA in the US and Mexico, Trevira and Wellman International in Europe, and now FiberVisions in the US, Denmark and China. All of these companies are active mainly in the non-woven industry with a focus on fiber composites and functional fibers for hygiene, automotive and industrial applications. Just as the acquisition of Wellman International pushed IVL to the forefront of the recycled PET and Polyester fibers industry in Europe, our company plans to extend its reach by populating its global franchise with technological innovations in line with its commitment to sustainability.

Going forward with our strategy of backward integrating into our key feedstocks, IVL called attention to the fact that there is no international player integrated into both key feedstocks; PTA and MEG. With the announcement that we intend to acquire Old World, a US manufacturer of monoethylene glycol (MEG), IVL becomes the first to take this step. The opportunity to enter a market that is on an upswing where margins are expected to almost double over the next few years is both exciting and a game-changer for the company. The ability to capture margins in both major feedstocks maintains the sustainability of the company while broadening its consolidated spread for greater profitability.

We are looking at the last pieces of the puzzle. Potential projects to build greenfield integrated plants in the Middle East and India are being studied as they meet our growth criteria. Either of these projects can take us to 10 million tonnes now. Just as importantly, we can meet these objectives with no recourse to the shareholders.

I would like to convey my gratitude to the management and employees of Indorama Ventures for their sincere hard work that has allowed the company to prosper and wish to thank our customers for allowing us to serve them with efficiency and value. We have been greatly supported by the authorities and the constituencies around our plants all around the world with whom we have a mutual respect and working relationship and of course our sincere thanks to the financial community for their trust in us, without whom this enterprise would have not fully realized its potential.

© 2010 INDORAMA VENTURES PUBLIC COMPANY LIMITED

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