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Edited Transcript of NLMK.MZ earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Novolipetsk Steel PAO Earnings Call (IFRS)

Lipetsk May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Novolipetsk Steel PAO earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Grigory Fedorishin

Novolipetsk Steel - Deputy Chairman of the Management Board and SVP

* Oleg Vladimirovich Bagrin

Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director

* Sergey Mikhailovich Karatayev

Novolipetsk Steel - Acting CFO

* Sergey Takhiev

Novolipetsk Steel - Head of IR

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Conference Call Participants

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* Andrew Jones

Wood & Company Financial Services, a.s., Research Division - Research Analyst

* Carsten Riek

UBS Investment Bank, Research Division - Executive Director, Head of European Steel Research, and Equity Analyst, European Steel Research

* Ksenia Mishankina

UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst

* Laura Gardner Cuesta

* Nikolay Sosnovskiy

* Vahe Ovasapyan

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Sergey Takhiev, Novolipetsk Steel - Head of IR [1]

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Thank you. Good morning, and good afternoon, ladies and gentlemen. This is Sergey Takhiev from NLMK Investor Relations. Thank you for joining today our conference call to discuss NLMK consolidated financial results for the first quarter of 2017. As always, elements of our presentation are forward-looking and based on our best view of the world and our business as we see them today. We are going to have a brief presentation from Oleg Bagrin, Chief Executive Officer; and acting CFO, Sergey Karatayev. Plus, today, we are joined with Senior Vice President, Grigory Fedorishin. And we'll have a brief Q&A session following the presentation.

With that, I would like to hand over the call to Mr. Bagrin.

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [2]

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Thank you, Sergey. Good day, everyone, on the call. Welcome to NLMK's First Quarter 2017 Results Conference Call, and thanks for joining. I'll start today with an overview of the markets we operate in and how we performed.

As always, I'll give you a quick take on our strategy execution and outlook. Sergey Karatayev, our acting CFO, will conclude the call with a financial update. I'll start with Page 4 of our results presentation, covering global steel markets. Latest steel demand forecast for this year marginally improved on better global macro. In particular, Chinese demand outlook was revised from negative to stable. As we show on the charts on this page, demand in both Europe and the U.S. continue a steady recovery. We maintain the view that Russian steel demand this year will end up in a positive territory. Stronger demand in China, along with protectionism elsewhere in the world, finally led to a modest slowdown in Chinese exports. Stronger commodity prices earlier this year, strong demands and slowing Chinese exports led to a high single-digit growth in steel prices.

On Page 5, we show how our exposure to markets of Russia and Europe and in the U.S. helps us to grow sales and achieve better pricing. So please turn to Page 5. In Q1, over 60% of sales came from our home markets, which as you can see, on the top chart, we continue to offer highest price premiums relative to the emerging market. Being close to our customers, we aim to improve our product mix and increase sales in the local markets, where prices are higher. In Q1, we continue to gain share in our core markets, with sales growth anywhere between 6% in our Russian flat division and 33% in our U.S. division. Our European operations increased their sales by 15%, significantly higher than the local market growth rate. We're pleased that our local customers chose NLMK for the quality of our steel and our service.

We discuss our operational performance on Page 6. We picked up where we left off, finishing another quarter with higher sales. Demand in our Russian market was seasonally weak, but this was fully offset by continued sales growth by our U.S. and European operations. Our product mix improved further, driven by a 7% increase in finished product shipments. As you can see, on the left chart, all NLMK divisions increased shipments, except Russian Long Products business, where underlying demand was particularly weak.

Now I'll give you a quick update on our strategy execution discussed on Page 7. In the first quarter, we continue delivering on our strategic projects with cumulative gains of $57 million or 9% of Q1 EBITDA. The pelletizing plant in Stoilensky, our flagship investment project, is gradually ramping up, delivering structural gains of $44 million this quarter. Today, the pelletizer is close to full capacity. In April, we had a few days of 20,000 tonnes of daily production. So we reiterate our full year target of 5.5 million tonne production. Operational efficiency projects contributed a further $10 million in Q1. As the number of new improvement projects continues to grow -- and this you can see in the right-hand chart on the bottom, we expect a pickup in operational gains in the second half of the year. Our targets for 2017, which we announced during our CMD, remains unchanged. And we expect total contribution from investments and efficiency projects of about $260 million this year.

Let's now turn to the outlook, which is presented on Page 8. We expect demand recovery in our home markets to continue. In Russia, we anticipate a seasonal improvement in demand, which is delayed this year due to restocking late in 2016. In Europe, we expect a sustained demand growth, driven by improving fundamentals. In the U.S., solid macro and trade barriers suggest that regional price premium will remain elevated for the remaining part of the year. Overall, demand for our products remains good across the board. However, second quarter pricing environment will have to adjust to softer prices of raw materials. We expect our sales volumes to remain solid, supported by delayed recognition of Q1 sales. We anticipate that in Q2, increased sales and strategic projects contribution will support our financial results.

In summary, we are on good course with all our businesses making progress in their home markets and our strategic projects well on track.

Thank you for your attention. And now, I would like to turn to Sergey Karatayev, who will discuss our financials in more detail. And then, we'll be ready to take your questions.

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [3]

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Thank you, Oleg, and good day, everyone. Let me go deeper into financials and give you more details on our performance and debt management. Let's start here on Page 10 that tells first quarter numbers. NLMK delivered another quarter of profitability growth, well supported by strong operating numbers and strategy execution. We increased our EBITDA to USD 618 million, and EBITDA margin expanded by 3 percentage points to 29%. CapEx was down to $96 million, and our free cash flow grew by 14% for the quarter, reaching USD 208 million. Net leverage remained at 0.4x EBITDA, which is well below our strategic threshold.

Let's look into Q1 performance on Page 11 and growth or profitability growth of our segments. Russian flat steel division enjoyed its EBITDA growth coming from a strong export, better product mix and softer pricing environment. Most of the segments went through a cumulative softer quarter, and coupled with high stocks as our customers (inaudible). This segment's performance is expected to recover in the second quarter. Our U.S. and European operations kept margin expansion on a double-digit sales growth, better product mix and local price premiums. Mining division's results were even stronger because 70% of EBITDA margin -- as we kept ramping up our pelletizing plant and enjoyed better prices.

Let us go to Page 12, where we discuss cash flow dynamics. We reported a significant growth in EBITDA in the first quarter. Operating cash flow was lower due to working capital buildup, which was driven by account receivables normalizing from all levels of Q4, inventories repricing on the back of stronger ruble and higher commodity prices, and higher steel stock accumulated at seaports that will be recognized in our Q2 sales. We should expect that the factors listed above should either stabilize or even reverse. Our free cash flow was up by 14% to USD 208 million, driven by the conservative CapEx.

Moving to the debt position slide on Page 13. Our leverage maintained at 0.4x EBITDA. In Q1, net debt grew by 23% compared to the end of the last year, as we used our cash to pay $50 million of $366 million. Total debt was only 3% higher. We were actively managing our debt portfolio in the first quarter. As a result, our debt maturities extended from 2.6 years to 3.5 years. Our short-term debt, excluding working capital lines, stood at around $700 million. This should convert many counts of ruble bonds maturing this year and Eurobonds maturing early next year.

Our cash position remains strong, and we enjoy easy access to the capital markets. Our robust financial position is well appreciated by rating agencies, and we enjoy investment grade ratings from Fitch and S&P.

With this, I would like to thank you for your attention. And now, we would be happy to take your questions.

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Questions and Answers

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Operator [1]

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And we do have our first question from Laura Gardner.

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Laura Gardner Cuesta, [2]

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I just wanted to ask, I'm calling from Debtwire, so I cover Eurobonds, and I wanted to know if there's a chance that you will tap the Eurobond markets this year? Obviously, you mentioned you've got some maturities coming up, including the 2018 notes. And I was just wondering if there's a chance that you will refinance these or if the Eurobond to repay some part of it.

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [3]

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Thank you for the question. So at the current moment we have for a strong balance sheet (inaudible) at about $1.3 billion. And we are quite opportunistic in terms of going to the market and to issue new bonds. If the market is positive, and if we have a good opportunity to issue new bonds, we will consider the opportunity. But at the current moment, we have enough cash to repay all the debts, all short-term debt for the coming year.

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Operator [4]

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(Operator Instructions) And we'll take our next question from Carsten Riek.

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Carsten Riek, UBS Investment Bank, Research Division - Executive Director, Head of European Steel Research, and Equity Analyst, European Steel Research [5]

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A few questions on the overall environment. You showed correctly that you just enjoyed in your domestic market a significant increase in U.S. and Europe. We'll probably see that for a little longer. However, Russia, CIS and China, in particular, have seen recently quite a significant weakness in steel prices. How do you react to those? Is it already visible in your P&L? Or do you think you can actually, by shifting your volumes even more than you do right now, avoid any significant negative impact? That's the first one.

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [6]

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Okay. Thank you. As we mentioned in our presentation, we actually see the prices in our home markets, U.S., Europe and Russia, showing premium to the merchant markets. And particularly in our Russian markets, our net premium are anywhere between $70 to $80 versus export FOB. Europe is over $100 premium, and U.S. is over $200. So I wouldn't agree that Russia is sort of -- has a soft -- has seen softening in prices. Everything goes pretty much in sync today. And all our domestic markets show price premium versus the export markets. And Chinese market sits a bit different because we don't sell to China.

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Carsten Riek, UBS Investment Bank, Research Division - Executive Director, Head of European Steel Research, and Equity Analyst, European Steel Research [7]

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Got it. I understand this, but China serves the rest of the world, and what I hear is Russia, CIS, at least the market around Turkey, but also Kazakhstan, et cetera, et cetera, they're getting more and more material. And as soon as you get CIS markets impacted, despite being protected by logistics, you are not immune from price movement, let's put it that way. Or do you see it different?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [8]

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Look, we don't see a lot of imports coming into the Russian markets. We see a modest pickup in imports this year after 3 years of secular decline. The imports almost evaporated from the Russian market. Now on the back of ruble strength, we see some of them coming back, particularly from Kazakhstan and Belarus, but this has not much to do with the Chinese exports. We don't see a direct correlation in terms of what's going on in China and necessarily trade flows into Russia. The only sort of -- the only thing which is difficult to argue is that the China sets the global benchmark. But that's a totally different question, right?

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Carsten Riek, UBS Investment Bank, Research Division - Executive Director, Head of European Steel Research, and Equity Analyst, European Steel Research [9]

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Okay, perfect. The second question I have on your free cash flow, you showed that despite a good -- a decent net working capital increase, still positive free cash flow. Do you expect that to continue over the rest of the year? Or do you see any risk in that number here?

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [10]

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Well, we said -- as we mentioned, we had a buildup of net working capital in the first quarter. And for the rest of the year, I think, we should expect some decrease of net working capital. So anyway...

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Carsten Riek, UBS Investment Bank, Research Division - Executive Director, Head of European Steel Research, and Equity Analyst, European Steel Research [11]

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That's rather upside?

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [12]

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Yes, you are right.

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Operator [13]

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(Operator Instructions) We'll take our next question from Nikolay Sosnovskiy.

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Nikolay Sosnovskiy, [14]

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Actually, I have several questions. First, on domestic market, while almost all Russian producers have reported significant working capital buildup, and also they noticed increased talks both at mills and at traders, can you please quantify a bit more on particular products? Where in particular do you see the stocks in long products and flat products and more kind of HSC or more high value-added stuff? And what should truly we expect in second quarter this year in terms of your sales? What can improve quarter-over-quarter? What should happen to product mix, et cetera? That's my first question.

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Grigory Fedorishin, Novolipetsk Steel - Deputy Chairman of the Management Board and SVP [15]

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Nikolay, this is Grigory. Thank you for the question. I think that most of the stocks that was accumulated in the Q1 was in the long products. And the reason for that was a quite intense destocking we saw at the end of last year when distributors accumulated volumes in the chain -- supply chain backed by attractive prices. So in the long products and the stocks are on a higher size comparing to what we usually see this time of the year. In the flat products, I would say our high-level products are relatively not exposed. So it's mainly HSC. But there, then the working capital accumulated is not that different comparing to what we usually see this season. So all in, given that we expect an increase in the consumption in Russia going forward this year, we believe these stocks will be normalized during the summertime of the year.

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Nikolay Sosnovskiy, [16]

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And in particular, have you noticed any changes to the traders' behavior? Because now prices seem to be on the decline. Have they really decreased purchases waiting for lower prices? And can really lower prices trigger additional volumes somewhere in like second quarter, third quarter? Or in terms of volumes and apparent demand and user demand, we are moving more or less in line with what the market can offer at the moment?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [17]

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So we didn't notice any dramatic change in the traders' behavior. So people mostly -- they don't want to miss the high season. They don't want to miss the pickup in construction. And we all remember the story over the last year when beginning of the first quarter, people entered to traders' end of the high season, the actual stocks, that immediately, it led to a sharp jump in the prices, especially for the long products. So I think, ultimately, it will be driven by consumption. So it maybe some fluctuations on a market basis. But if there is a growth in the market, traders keep buying.

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Nikolay Sosnovskiy, [18]

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Okay. And my second question is on cost, actually, on Slide 24. I've noticed, kind of, new breakdown of cost of sales by segment showing, like, flats, longs and international division mining. My question is on international division in Russian flats and longs. You have had quite a big increase on cost, while in the international business, vice versa, some decline, small, but nevertheless a decline. What should we think about this decline? Because I suppose that this cost of sales dollars per tonne represents, like, the inputs. And in each division and in foreign world divisions, inputs is like export, slab or HSC, which was priced higher in the first quarter relative than in the fourth quarter. And the other part, of course, could be like the rolling cost domestically. Have they really declined so much to offset the increase in input cost of fuel, in this case?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [19]

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Look, the increase in the upstream in the steelmaking divisions was driven by the increase of raw material prices. As you remember, the prices of coking coal and iron ore increased in Q4 and Q1. And that affected the prices in the flat products, the Russian flat products. The prices was [cap] increased, and that affected the prices, the cost in the Long Product business. Whereas the international divisions, they purchased slab at market prices. And therefore, if the market price was flat, lags the cost of raw materials, as it happened in Q1, then you see that cost sort of pattern. In the international divisions, the costs were pretty stable.

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Nikolay Sosnovskiy, [20]

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Because I've heard, at least in, like, my prices I received from metal exports, slab pricing in fourth quarter was around $380 and then above $400 in the first quarter. So you don't have such a price increase for input raw materials for international divisions?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [21]

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Well I think another factor here is the course of sales and profitability in a particular quarter is impacted by the stocks, right? So you have a reflection of the market prices sledged, but the sledge accumulated before, beforehand at the beginning of the quarter.

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Nikolay Sosnovskiy, [22]

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So what I'm trying to understand actually, whether this decline has been part of some structural positive change in cost or just fluctuation between quarters in terms of, like, input prices and lags and things. So it appears the latter rather than the structural cost improvement.

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [23]

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That's correct. We show the cost improvements as part of our operational efficiency numbers. And as you can see, that's not a big driver in the international side of the business. So it's more of the pricing environment and the kind of the differences in terms of the prices of raw materials and slabs and stocks.

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Nikolay Sosnovskiy, [24]

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And my last question, probably, you can comment on this. On dividends, actually, all the producers in first quarter in Russia played with high working capital requirements and low free cash flow. But nevertheless, some of them have announced quite decent dividends way above free cash flow generation. What should we expect from NLMK in this respect?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [25]

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We have a board meeting tomorrow discussing a few questions, dividends payout for Q1 among them. So I cannot -- for a detailed guidance in terms of Q1 dividends. What I can only say is that, probably, given the financial position and the performance of the company, the dividend payouts proposed by the management will be above the former dividend policy targets.

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Operator [26]

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And next we'll hear from Vahe Ovasapyan.

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Vahe Ovasapyan, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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I just have 3 questions from my side, just to fall on prices. You mentioned that in your domestic regions that you see domestic prices, I mean, substantially higher than export prices, which is quite reasonable when we talk about -- and of this, we talk about European Union and U.S., given the like all net trade barriers and import jurisdiction in these regions. But if we talk about Russia and current premium of around $100 per tonne, I just want to understand that given that if international benchmark and export prices go down, and domestic prices remain at the current level, which means that we will see a higher domestic premium, could in this case, we see higher -- substantially higher impact from input story from players like, I don't know, from China, for example, from maybe Ukraine. Because I don't understand what should prevent some other players to redirect volumes to Russia because, like, $100 per tonne or even higher would eliminate any cost, higher cost associated with transportation, with the buildup of new relations with traders, so on and so forth. This is my first question. And the second one, it's about your foreign divisions. I just want to understand, do you see any further scope generally for cost reductions? So I want to understand, could we see, if, like, take away for a moment any potential price increase or product mix improvement, of course, we see, any other sources for profitability increase in this division? And my last question is about domestic markets. I do apologize if I missed your comments about -- your expectation of domestic market consumption this year. Just if you could provide your internal expectation of potential domestic market growth in Russia. And the last one, if we see such a high premium domestically, don't you think that we'll see high competition for domestic customers of like largest fuel producers, which mean that, ultimately, which will lead to lower domestic premium? That's it from my side.

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [28]

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Thank you, Vahe, for a very relevant and very detailed, actually, questions. A lot of answers to your questions already in them because you presented quite a few links between the moving parts, determining prices and domestic premiums. As we mentioned earlier in this call, Russian domestic premium today is about $70 to $80 a tonne over exports, which is it's a little bit higher than on -- and has been on average over the last 3, 4 years, and it's definitely lower than what we're seeing in Europe and in the United States. But it is that. As we normally discuss, it's mostly driven by the logistics and the netbacks. And also, it is driven by the consistency of supply, which is offered by the Russian producers, as opposed to kind of on-and-off imports coming from different places and, therefore, trading risks associated with that. And finally, it is also determined by the FX. So Q1, for example, as the ruble strengthens, as we mentioned, there was more incentive for imports to start coming back. And we see some of the reversal of the last year's trends, where imports disappeared from the Russian market. Now we see some of them coming back, especially from the neighboring countries, from the CIS countries. So overall, we think that the domestic premium is sustainable at a level of, let's say, we've seen historically, $50 to $60. And that is largely explained by the netbacks. In terms of your second question about the foreign divisions, we do see further room for improvements there in terms of the operational efficiency. We think that we've done a very good job in terms of making the foreign assets more competitive where they were before. All our divisions are profitable. And all our plants, except one, outside of Russia, are profitable on EBITDA level. Most of them are profitable on a cash flow basis. But we do see further improvement opportunities. In particular, in the United States, we see huge room for productivity improvements. And in the -- in Europe, in the European divisions, we do see further room for stability and, again, increase in output. We still have some slack in terms of available capacity, which can and should be utilized in today's pricing environment in Europe and in the U.S. We do -- we are running anywhere between 80% to 90% of capacity. So we do have some headroom there, which we should be able to utilize. I think that largely covers your question. I think your last one was, again, about the Russian domestic premium. Oh, there was also a question about the Russian market growth trends. And as we've pointed earlier today, we expect a reversal in terms of the Russian market growth, the positive territory. We expect sort of anywhere between 0.5% to 1% growth in the underlying demand in Russia, and we're already seeing some of that materializing in Q1. They're still using -- Q1 was up slightly. I hope that answers your questions.

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Operator [29]

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And next, we will hear from Ksenia Mishankina.

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Ksenia Mishankina, UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst [30]

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Most of my questions have been answered. Just I have a last one. Could you please provide CapEx guidance for full year?

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [31]

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Well, you'd like just to confirm the CapEx that we presented during our CMD? So it's $700 million, and the guidance stays the same.

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Operator [32]

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And next, we'll hear from Andrew Jones.

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Andrew Jones, Wood & Company Financial Services, a.s., Research Division - Research Analyst [33]

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A few questions for me. Just a follow-up to that last CapEx question. That's obviously implying over $200 million a quarter for the rest of the year. What are the projects that are going to cause that increase? That's my first question. Then just a few more specific questions on the second quarter, given we're at the end of April now, you've probably contracted most of your volumes for the quarter. Can you give us some guidance on volumes for this quarter? And also, just in terms of cost pressures or reductions, I mean, could you talk us through maybe the average cost of coal you paid in the first quarter, and how that is likely to change in the second quarter, given you've probably already contracted those volumes? And then just on a bit of follow-up to Nikolay's question about slab sales to your own divisions. Could you maybe give us a bit of an idea for the increase in the cost of slabs to the (inaudible) products business quarter-on-quarter between the fourth and the first quarter?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [34]

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Okay. Thank you for the questions. First, on CapEx, as we mentioned earlier, we have a few things to do this year. One is the completion of the pelletizing facility. We have certain payments in their arrears that we have to make. Now the facility's fully commissioned, so there will be final payments for that. And then we're starting the pulverized coal injection facilities in May, June this year. So there'll be some payments associated with that. That's actually our second largest investment project in our program after the pellet one. And then, finally, we are working on restarting a program pertaining for the capital maintenance of our blast furnace and BOFs in '18 and '19. So we're starting some advanced payments associated with those big repairs upcoming over the next year and the year after. So that will drive our CapEx budget this year. In terms of shipments for Q2, we see a fairly good sort of stable shipments. Q2, nothing unusual. We see actually better shipments from our Long Products divisions. And all our other divisions are running high. In terms of costs, you mentioned coal, and we have coal contracts for Q2 concluded at prices about 40% lower compared to Q1, 40% to 50% lower quarter-on-quarter. And I'll hand it over to my colleagues to take your final question.

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [35]

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As I understood, you're correct -- or in your question was about the cost of slabs for our foreign divisions. So as Grigory mentioned that we have stock effect and some slabs that we use for production in Q1. They were bought in Q4. And at that moment, the prices were lower than the prices in Q1. So if you talk about Q2, then you should expect some increase roughly by 15%, 20% from Q1 levels for the sales in Q2 due to stock effect that I mentioned before.

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Andrew Jones, Wood & Company Financial Services, a.s., Research Division - Research Analyst [36]

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Okay. But just on the coal prices, you're saying that they should be 40% to 50% lower quarter-on-quarter in the second quarter? And then can you tell us what you're paying for coal in the first quarter on average?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [37]

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Well, the price was over $200. I don't have a number on top of my head. But definitely, it was over $200 a tonne.

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Operator [38]

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And I'm showing no further questions. I'm sorry. We do have one more question, a follow-up from Andrew Jones.

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Andrew Jones, Wood & Company Financial Services, a.s., Research Division - Research Analyst [39]

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Just since there's no other questions on the line, just on -- just a question on working capital. I mean, how -- we've talked to Severstal last week. And they were talking about one of the main reasons for the increase in working capital was due to the higher cost of those inventories due to rising raw material prices. I mean, of your $220-ish million increase in working capital, I mean, how much of that is kind of price-related? And how much is kind of -- is independent of that? And broadly, how quickly could that be released over the next couple of quarters? I mean, is there going to be a large reversal in the second quarter? Or is that going to be gradually spread through the year? Can you give us any more specific guidance on working capital movements that you expect in the second and third quarters?

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Oleg Vladimirovich Bagrin, Novolipetsk Steel - CEO, President, Chairman of the Management Board and Director [40]

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Well, yes, that's right. The key driver for working capital increase was a rise in cost inflation. And I think to this factor presently, (inaudible) even more percent of this increase. The increase is driven by more than 50% due to this factor. And in terms of release of working capital, it will be highly dependent on our pricing situation. We expect that the price will all go down, and also the price for iron ore will go down. Then based on that, we will see some release in Q2, Q3 and further.

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Andrew Jones, Wood & Company Financial Services, a.s., Research Division - Research Analyst [41]

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And just another follow-up on the CapEx question. I mean, you, obviously, mentioned a number of projects you're planning for the rest of the year. But given how low the CapEx number was in the first quarter, I just want to get an idea. You're sticking with the $700 million guidance, but is that a conservative figure? Or do you think it's likely that you will actually hit that figure by the end of the year?

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Sergey Mikhailovich Karatayev, Novolipetsk Steel - Acting CFO [42]

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For the second quarter, we plan CapEx somewhere in between $150 million to $200 million, given it's high construction season. So that'll be a little bit higher than compared with the first quarter. I think you can treat $700 million as a number on the conservative side, but you have also to account for ruble appreciation inference in this number. So you may think $650 million to $700 million is a broad range.

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Operator [43]

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And I show no further questions in the phone queue, gentlemen.

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Sergey Takhiev, Novolipetsk Steel - Head of IR [44]

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Okay. So I would like to thank all the participants for their participation in this call. And if you have further questions, Investor Relations Department is happy to take the questions and give you prompt answers, okay? With this, we would like to thank you and to say have a nice day. Thank you.