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Edited Transcript of NLMK.MZ earnings conference call or presentation 26-Jul-19 1:00pm GMT

Half Year 2019 Novolipetsk Steel PAO Earnings Call

Lipetsk Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Novolipetsk Steel PAO earnings conference call or presentation Friday, July 26, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dmitriy Kolomytsyn

Public Joint Stock Company "Novolipetsk Steel" - Director of IR & Capital Markets

* Grigory Fedorishin

Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board

* Shamil Ravilyevich Kurmashov

Public Joint Stock Company "Novolipetsk Steel" - CFO

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Conference Call Participants

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* Anna Antonova

JP Morgan Chase & Co, Research Division - Analyst

* Barry Lee Ehrlich

Citigroup Inc, Research Division - Director

* Boris Sinitsyn

VTB Capital, Research Division - Equities Analyst

* Daniel Harry David Shaw

Morgan Stanley, Research Division - Research Analyst

* Nikolay Sosnovskiy

Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals

* Oleg Petropavlovskiy

BCS Financial Group, Research Division - Metals and Mining Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the NLMK Q2 2019 IFRS Results Call. Today's conference is being recorded.

At this time, I would like to hand the conference over to Dmitriy Kolomytsyn. Please go ahead.

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Dmitriy Kolomytsyn, Public Joint Stock Company "Novolipetsk Steel" - Director of IR & Capital Markets [2]

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Yes. Good morning, and good afternoon, ladies and gentlemen. This is Dmitriy Kolomytsyn from NLMK's Investor Relations and Capital Markets team. Thank you for joining us today on our conference call to discuss our operating and financial performance in the second quarter of 2019. As always, the elements of our presentation are forward-looking and based on our best view of the market. The company's Chief Executive Officer, Grigory Fedorishin, will present key highlights and provide market overview. And following that, our CFO, Shamil Kurmashov, will discuss our financial results in more details. We will then be happy to answer your questions.

That's all on my side. And I hand this over to Grigory Fedorishin.

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [3]

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Thank you, Dmitriy. Ladies and gentlemen, welcome to everyone who joined our conference call today. As always, before we go through the details of the results, I will discuss major trends impacting our markets.

So let's start on Page 4. During the second quarter, steel consumption continued to grow in China, Russia and U.S. European demand remained weak. Russian PMI in April reached the highest level in the past 16 months and was holding high through May, but fell into contraction zone in June, but this strong performance during the second quarter contributed to robust 6% year-on-year growth in steel demand in Russia.

The U.S. PMI remained in the expansion zone that supported growth in steel consumption of almost 3% year-on-year. China continued to post record highs, with steel output increasing 11% year-on-year in the second quarter. Exports however were down driven by better demand domestically as well as production control actions in order to meet air quality requirements. Chinese steel inventories started surging in early June. Distributor stocks spiked 12% during the summer, and currently, they are up 29% year-on-year. Even the widely anticipated decline in Chinese steel markets output materializes in the third quarter, coupled with rising domestic iron ore output and surging exports out of Brazil and Australia. We may see some more pressure on global iron ore prices in the second half of this year.

Let's now turn to Page 5. During the second quarter, we observed a rather mixed steel pricing dynamics on global markets. For the second quarter in a row, Russia continued to be the best-performing geography in terms of where we sell steel, with HRC prices increasing 8% quarter-on-quarter on average.

Domestic price premium in Russia grew above historical average driven by seasonally strong demand. Chinese export prices increased moderately by 1% quarter-on-quarter due to soft demand on global markets. Domestic prices in China were strong, however.

The U.S. HRC prices fell quarter-on-quarter on the back of growing supply of steel following the increase in domestic production and the exemption of Canada and Mexico from Section 232.

Average prices in Europe were lower quarter-on-quarter as well, as a result of weaker demand and pressure from imports.

Overall, global steel prices didn't really reflect the continued rally in iron ore prices during Q2, backed by the view of their short-term nature of this trend. This in turn resulted in further decline in price spreads and steel makers' profits. In the U.S. and EU, average gross profits per tonne of HRC even entered a negative territory.

That's on the prices. Now -- let's now switch to Page 6. Here, I will discuss our second quarter operational results. As we communicated earlier, our numbers were impacted by scheduled maintenance of the blast furnace and BOF operations at the NLMK Lipetsk site. This resulted in lower production volumes and therefore, 7% lower shipments quarter-on-quarter. However, decline in production volumes mainly impacted our slab sales to third parties. The share of high value-added products increased by 2 percentage points to 30%. The 34% decline in intergroup slab sales was driven by NLMK U.S. switching to slabs from the third parties, and this trend will continue in the second half of the year.

We reported 10% quarter-on-quarter decline in sales at the Russian Flat division, which was due to mentioned decrease in the production. However, the mix changed in favor of downstream products. Deliveries of long products were also lower quarter-on-quarter, backed by lower profitability of the export billet market. We ship more to the Russian market to partially offset the decline in exports.

Our sales in the U.S. fell 3% quarter-on-quarter on the back of customers' expectations of further price softening. Shipments from DanSteel were down on lower demand on high stocks, while sales at NBH were up 20% quarter-on-quarter driven by recovery in utilization rates comparing to low base of the first quarter.

During Q2, our internal iron ore needs were lower due to the maintenance at NLMK Lipetsk. We, therefore, sold about 100,000 tonnes of iron ore concentrate to third parties and took advantage of strong pricing environment, and we are going to sell another 350,000 to 400,000 tonnes in Q3.

Let's please now move to Page 7. Let me now update you on the progress of our Strategy 2022 targets that we presented earlier this year. As you remember, we announced that we plan to generate USD 1.25 billion of additional EBITDA over the next 5 years through the implementation of operational efficiency projects, growth across integrated production chain and increased output of high-value products.

Let's turn to Page 8, where I would like to discuss what we have done so far around the first target, operational efficiency. During the first half of this year, we've added $72 million to our EBITDA under this pillar. This is about 70% of our guidance of about USD 100 million per year of operational efficiency effects. The majority of the effect came from the mining and Russian Flat divisions. Of the total amount, $30 million was driven by additional iron ore concentrate production.

Let's please move to Page 9. Our second target is to grow by an additional 1 million tonne of steel production, while maintaining 100% integration in iron ore. We already invested about $100 million in projects that are part of this strategic pillar. The planned capital repair of blast furnace #6 is on track and we plan to complete it in the beginning of fourth quarter this year, and next year, we'll continue with another blast furnace #4 at Lipetsk site. We've begun the reconstruction of the continuous caster. It will enable us to produce unique heavy slabs for processing plates, which are then going to be used for the production of large-diameter pipes, wind power facilities, oil-drilling platform and shipbuilding sector.

We have also launched the construction of additional iron ore beneficiation section that will ensure our 100% integration in iron ore for new steel volumes.

Coal charge stamping project at Altai-Koks is expected to be finalized by the end of Q4 this year.

Completed -- already completed investment initiatives gains, mainly aimed at increasing iron ore concentrate production at Stoilensky contributed about $30 million in the first half of this year.

Let's please switch to the next page, where we discuss the projects -- the progress that we made under the third pillar, focusing on increasing share of high value-added products in our portfolio. While here, we are also busy with investments realizing construction projects, during the second quarter, we've installed the accelerated cooling system at DanSteel that will eventually allow us to produce 250,000 tonnes of advance thick plates in order to get high exposure to the European windmill sector. Currently, this system undergoes hot testing and fine-tuning and our goal is to produce about 100,000 tonnes of premium plate at DanSteel over the next year.

We have also signed contracts for equipment supply for the new reheating furnace at the same plant, DanSteel, as well for the hot strip mill upgrade at La Louvière. At La Louvière, we anticipate to launch the first phase of the production of thinner and high-strength material in 2021.

Let's please move to Page 11. The fourth pillar of our strategy is leadership in sustainability and safety. In the first half of this year, we showed solid progress in this area. Our lost time injury frequency rate decreased by more than 20% in the first half of this year as compared to 2018.

We're also happy to announce the launch of new environmental project of the coke and chemical by-products recovery complex that would allow us to lower air emissions at coke operations at Lipetsk site by 50%.

Our continuous hard work in the environmental, social and governance area was also reflected in improved ESG ratings. According to Sustainalytics, we are now ranked #4 among 136 steel and iron ore producers. And according to FTSE, NLMK's rating increased to 3.9, which is above our industry -- average industry score of 2.5.

Talking about the outlook and the way we see things evolving in the next quarter, we expect demand and prices in Russia to level off after strong seasonal recovery in the second quarter.

In Europe, we expect prices to remain at current levels during seasonally slow third quarter, supported by temporary production cuts by major market players.

In the U.S., steel prices have already started recovering after several rounds of price hikes by domestic producers. Seasonal slowdown in Chinese consumption might negatively weight on local steel pressure during the summer.

We expect NLMK's crude steel output to decline 2% to 3% quarter-on-quarter due to the maintenance -- continued maintenance at NLMK Lipetsk, but this will not compromise our sales mix and we anticipate a further quarter-on-quarter increase in share of finished products.

So this is for my part. Now I would like to hand this over to CFO, Shamil Kurmashov. Please go ahead, Shamil.

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Shamil Ravilyevich Kurmashov, Public Joint Stock Company "Novolipetsk Steel" - CFO [4]

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Thank you very much, Grigory. Good day, everyone. Let me discuss our second quarter results, cash flow dynamics and as well as dividends.

I will begin with Page 14. The key message here is that despite 7% drop in sales volumes quarter-on-quarter, mainly driven by overhaul in Lipetsk, NLMK's group revenue for the second quarter was down only by 3% and EBITDA increased by 6% quarter-on-quarter to $735 million. That's the result of high prices with the Russian market and the increase in the share of high value-added products in total sales. Our integrated business model helped us to mitigate the negative impact in our consolidated results from higher raw material prices, as we are 100% self-sufficient in iron ore and pellets. And we were able to grow our EBITDA margin to 26% on the back of rather narrow global spreads between steel and iron ore prices. Our total debt increased following Eurobond issuance combined with rather lower free cash flow in the second quarter and increase in dividend payments. NLMK's net debt-to-EBITDA ratio increased to 0.39x, but it's still on a very comfortable level.

Let me briefly walk you through EBITDA margin dynamics by division on Page 15. EBITDA at our Russian Flat products division increased by 7% quarter-on-quarter to approximately $0.5 billion. Widening spreads driven by steel prices recovery on the Russian market and increased share of finished goods as well as operational efficiency improvements, all these were the main factors contributing to such results.

Improved rebar to scrap prices spreads in the second quarter held our Russian Long Product division to deliver 4x higher EBITDA than in the first quarter, in addition to increase in the share of finished product sales in the portfolio by 12 percentage points quarter-on-quarter. This was offset, however, by decline in the overall shipments as well as stronger ruble.

In the U.S. division, our EBITDA amounted to $60 million, 6% lower quarter-on-quarter due to the decline in finished steel prices combined with an expensive slab stocks.

In the Mining division, EBITDA margins continued to be strong and rose to 73%, up by 1 percentage point on the back of high iron ore prices and operational efficiency gains.

The next division is DanSteel. EBITDA at NLMK was -- DanSteel was unchanged quarter-on-quarter, was stable. And EBITDA at NBH fell in the second quarter as it included the one-off accrual of nonoperating provisions relating to restructuring costs at NLMK Clabecq in the amount of $23 million. So structurally, it's twice less. That is indicated in our financials.

Let us now move to Page 16, where we can discuss the cash flow dynamics. We generated $258 million in free cash flows during the second quarter. This is expectedly, I would like to highlight that, lower compared to much higher level achieved in the previous quarter. As a reminder, in the last quarter, we had a significant working capital release driven by the sales of inventories accumulated at the end of 2018. So that was the very high base to which we compare our current results.

Let me explain what were the key driving forces behind lower free cash flow and working capital buildup. Our operating cash flow in this quarter was 42% lower and amounted to $494 million due to the growth of working capital, in line with our guidance provided at the previous conference call. And there are key reasons behind the working capital buildup: Growing slab purchases from our -- from the third-parties at NLMK U.S.A.; seasonal stockpiling of scrap, like a seasonal trend; as well as growth of iron ore stocks as a result of lower consumption during the overhaul period -- during the planned maintenance period. We also invested more during the second quarter, which can be explained by the fact that we're approaching the execution phase of our Strategy 2022. Our CapEx, as a result, amounted to $227 million as compared to $178 million in the first quarter, but it's still in line with our $1 billion forecast for the whole year. So we are strictly in line with what we had said last time.

Now I would like to touch upon our debt and liquidity profile at Page 17. Our total debt at the end of the second quarter increased by 34% to $2.8 billion. The increase was driven by the bond placement of $500 million with a 70-year maturity with a coupon rate of 4.7%. By the way, the book was oversubscribed by more than 3x. This drove our net debt-to-EBITDA ratio to 0.39x, which is still a comfortable level that allow us to continue to pay at least 100% of free cash flow in dividends. Our liquidity position remained high and amounted to $1.5 billion at the end of the first half of the year. NLMK's short-term debt requirements remained low with debt maturity profile well distributed over the period of 5, 6 years with solid refinancing and redemption options.

Finally, today, NLMK's Board of Directors approved the recommendation of second quarter dividends in the amount of RUB 3.68 per share, this translates into $350 million or 136% of free cash flow, which is in line with our new dividend policy that was announced earlier this year. To remind you about the key features of this dividend policy, not only we pay out 100% of free cash flow in the form of dividends as long as net debt-to-EBITDA stays below 1x, but we also use normalized capital expenditure level of $700 million for free cash flow calculations, irrespective of what the actual CapEx amount is or was. So therefore, we are more than compatible with what we had declared some time ago in terms of our dividend policy.

This is it for my part, and I would like to thank you for you attention and 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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(Operator Instructions) We will now take our first question from Dan Shaw from Morgan Stanley.

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Daniel Harry David Shaw, Morgan Stanley, Research Division - Research Analyst [2]

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Yes. Just on the first one, you touched on CapEx already. It sounds like you reiterated the $1.1 billion guidance for the full year. Can you just confirm that I understood that correctly? And can you just remind us as well what the key areas of spend will be in the second half of this year?

And then the second one is on the domestic premium. Again, you touched on this too. It remains pretty high and has been for quite some time. What do you see as the sort of the main reasons for it being at its current high levels? How sustainable do you think this is? And do you think this shows again into Q4, both construction season that the likelihood that, that comes down more towards a more normal level of, say, $30 to $50 or so?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [3]

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Dan, thank you for the questions. So let me take both of them. So on CapEx, we will lower our guidance a little bit to the range of USD 0.9 billion to USD 1 billion for this year, which means that steel there, it's going to be high CapEx in the second half of the year comparing to the first one. It's mainly the big maintenance that we have at Lipetsk site, namely the blast furnace and the steelmaking operations combined also with reconstruction of reheating furnace that we have at our hot strip mill, again at Lipetsk, and the continuous caster, the one that will allow us in the future to produce 1 million tonne of steel more at Lipetsk site. So the CapEx is heavily concentrated at Lipetsk. Also, there are bits and pieces across the group.

But with that, we again reiterate our guidance, long term, for $0.9 billion per year on average total CapEx across the strategy cycle.

On the premium, you're right, it's pretty high now. So second quarter was about $80 per tonne, now it's $85. I would count probably at least 3 reasons for that. So the supply side saw imports decline from Kazakhstan, namely from ArcelorMittal and Severstal plant because of the accidents there, and we also saw some reconstructions at MMK. So that was one of the factors. The second is, it's seasonally very high quarter. And the third one, you are probably aware of increased developers activity due to regulatory changes in the construction industry. So those 3 contributed to premiums. Historically, we saw $30, $40 a tonne. So we expect the premiums to come back to this level, especially pushed down by seasonally weaker quarters.

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Operator [4]

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We will now take the next question from Oleg Petropavlovskiy from BCS Global Market.

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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [5]

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One question from me today. Interfox and earlier some Indian media wrote about your plans in India. Could you please elaborate a bit on this? Is it going to be a processing plant? Or how does you see it now?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [6]

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Well, this project -- well, I can comment on what we plan to do. It's difficult to comment on the Indian media because I have no clue the numbers -- the sources they get the numbers from because the projects we do consider is development of -- further development of our transformer steel, grain-oriented steel production. So the idea was to localize part of the downstream operations in India, which is one of the biggest consumption markets for us. So the project is still under consideration. And yes, we are in discussions with local authorities there to understand the attractiveness of the project. The total investment we consider there is $100 million to $150 million.

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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [7]

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And do you supply transformer steel there right now?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [8]

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Yes, we do. And actually, we are deeply -- our market share in India is 25%, 30%. The way we do this, we supply finished product at the grain-oriented steel in coils there. And there, we have a service center with cutting and slitting that supplies this to the transformer industry locally. So we do have a presence there for service center and the sales operation, but not the production facilities.

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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [9]

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Could you tell us what is the volume of supplies?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [10]

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Indian market is currently 300 to 350. So it's about 8,000, I guess.

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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [11]

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80, right?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [12]

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Sorry, 80,000.

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Operator [13]

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We will now take the next question from Nikolay Sosnovskiy from Prosperity Capital Management.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [14]

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I have got also a couple of questions. First one, you partially answered that maybe you have to have something more on other industries with now just quite remarkable demand growth in Russia in terms of steel consumption for the first half of 2019. Apart from construction industry, do you see any further signs of demand growth maybe from pipe manufacturers, auto manufacturers and someone else? This is my first question.

And second one, it is about your mining division. For the first time in a couple of years, you started selling iron ore to third-parties, and from what we can see from your numbers basically, the average realized price is way above your own internal intersegment shipments. So the question on mining is, what amount of iron ore residual that you don't need internally this or maybe next year you can sell as third-party material? And what would be pricing profitability on this volumes compared to your regular internal shipments?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [15]

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Thank you for the questions. Well, in terms of the consumption growth, we believe it was mainly driven by the construction sectors. So all other sectors were stagnating. So it was driven by distributors and developers activities. We still believe their consumption growth in Russia for the year will be somewhere in the range of 2%, 3%, which means some sort of a slowdown in the second half because of this peak in the first half. So short answer, we don't see other big drivers of the consumption other than construction.

On iron ore sales, well, it's not structural and we always had diverse co-integration as a concept that we follow in our strategy. So we want eventually that all of our iron ore production, both in terms of fines or pellets, to be consumed by Lipetsk, makes much more sense to transform this to bigger iron and steel and sell with low logistical cost and higher margins. So we have these sales now because we link together their repairs of blast furnace and BOF operations, but there are still some months where we have local deficits or excess volumes. So we manage this on a tactical month-to-month basis. Sometimes, we may prefer to accumulate additional stocks and that's what we're doing actually in the third quarter. So you're going to see some buildup in iron ore stocks, concentrate and pellets. Overall, it's going to be probably compensated by reduced slab stocks in U.S. But in physical volumes, we are piling up some stocks because in the fourth quarter already, we're going to have increase in the production, pig iron -- both pig iron and steel. So instead of selling those volumes and then buying from the market, we just keep them for a while. So whatever I'm saying is, it's difficult to give you a clear guidance of how much we are going to sell and with what level of profitability. So it's purely opportunistic. So we will do this on the basis of our stocks, our production plan and attractiveness of external markets.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [16]

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And just one small clarification on the first question on domestic demand. You mentioned that traders and developers are quite active. To your intelligence, what do you see in terms of stocks at traders? Are they buying, anticipating more demand from developers and there could be some sort of bubble accumulating on their side waiting for much worse second half consumption?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [17]

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Well, I guess, by now, they are done with piling up the stocks and we're already in the second quarter. So the stocks -- the behavior that we see is more like flat in July.

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Operator [18]

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(Operator Instructions) The next question comes from Anna Antonova from JPMorgan.

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Anna Antonova, JP Morgan Chase & Co, Research Division - Analyst [19]

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Just 2 questions regarding your strategy. So you highlighted that the gains from operational efficiency initiative in the first half totaled around $70 million. Do you expect a similar level of gains in the second half of this year? That's my first question.

And the second question is, do you have any updates on the strategy regarding your U.S. division? It has recently been under review. If there are any updates on this one?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [20]

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Thank you, Anna. So on the gains, well, for 6 months, it's about $70 million. So all else equal, you can expect NOI's number close to $150 million. So yes, we do expect the comparable effect the second half and we keep working on the new operational efficiency programs and projects.

On U.S., well, we plan to give the investor community a big update, probably next Investor Day, that we are going to have beginning of next year. The reason for this delay is we believe, by now, we are better off just to play in the market, so we buy slabs from external sources, different countries, Brazil, some locally, some we also buy from Canada on a spot basis. We follow the price dynamics and the stock levels carefully. So this is a spot game to make the structural decisions, how big we want to hedge our slabs supply going forward. We better wait and see how the market evolves because you probably saw there is a huge volatility in the price dynamics currently. So just recently, there was significant drop and then prices peaked up. So by this second half of the year, we have better understanding how market gets into equilibrium after this Mexico and Canada and other updates and we decide on the strategy.

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Anna Antonova, JP Morgan Chase & Co, Research Division - Analyst [21]

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And just a follow-up question. So at least until the beginning of the next year, so at spot prices, for example, do you think that 3% EBITDA margin for the U.S. division is kind of new normal at least for this year?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [22]

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Well, given what I said, the huge volatility we see there, it's difficult for me to guide you on the specific level of the margins.

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Operator [23]

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The next question comes from Barry Ehrlich from Citi.

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Barry Lee Ehrlich, Citigroup Inc, Research Division - Director [24]

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Do you expect the export share and sales mix to rise in the second half due to the slowdown in domestic market demand? And which products, is this mainly HRC and CRC? And also you had mentioned, I think, that you expect, in the third quarter, value-added product sales into the domestic market to rise. Can you just clarify whether you meant on an absolute volume or tonnage basis you expect it to rise or share of mix? And how does that fit with a weaker domestic demand situation?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [25]

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Well, so far, we don't see significant drop in the domestic market consumptions. So comparing to June, it's more or less flat. So we're still in seasonally strong month, seasonally strong period of the year. So I wouldn't anticipate radical change in the structural for our sales. When we're going to enter the fourth quarter, historically, the export share always increase because of the seasonally low consumption in Russia. But the third quarter, it should be comparable to the second one.

Share -- well, in terms of the premium products, I was talking about share in the mix for the second quarter. Does this answer your question? Well, third quarter, question was about third quarter. Well, yes, I mean, we're going to sell that slabs and our downstream product will -- are going to be the same. We are fully utilized. So the maintenance that we have at Lipetsk is not going to be affected -- it's not going to affect the downstream sales.

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Operator [26]

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(Operator Instructions) The next question comes from Boris Sinitsyn from VTB Capital.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [27]

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Three questions from our side, please. Firstly, on the average realized price for slabs in the second quarter looking at the flat division. For what months actually the price of slabs was incorporated into revenue? That's the first one.

Second question is on expected working capital turnover in the third quarter, assuming like no change in prices, FX or whatever, so What are your expectations for turnover of inventories and account receivables and payables?

And the third quarter -- sorry, and the third question is general one. There was some news in the media that the government plans to introduce some export restrictions for scrap in Russia. So in this respect, 2 like small questions, do you see currently any scrap shortages in Russia, in fact? And the second, do you think that were the restrictions to be introduced, this might somehow effect your profitability of long division?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [28]

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Thank you, Boris. And may I ask you to repeat the first question about slab pricing.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [29]

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Sure. The question was about basically the lag in slab price realization in your revenues. So basically looking at the revenue line and the average realized price for slab, for which month the price of slab actually was reported in the revenue?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [30]

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Yes, Boris. If you are just taking into account the turnover, it's more or less prices from March, April and May, predominantly. And the turnover is about 20 days on average, plus/minus.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [31]

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I will just repeat second question on like expectations for turnover of working capital for the third quarter?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [32]

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Yes. So as you remember, the working capital release in the first quarter was $250 million driven both by additional efficiencies on how we manage the working capital because we kept the finished products at a pretty low level in ports and at sites, both for flat and long products. But we also saw the stocks accumulated in December last year. So it was $250 million. The second quarter, it's minus $150 million driven by sort of a different factor, so as Shamil said, scrap seasonal buildup, more slabs of third-parties in the U.S. Those 2 main ones.

So I -- so now the balance is sort of plus $100 million to the last year and I would expect some sort of additional release in the third quarter, probably up to $50 million because we're going to see 2 opposite trends. One, the iron stock buildup to be used in production of fourth quarter that I mentioned to be offset by using the slabs released in the slabs in U.S., excessive slabs that were overhead into the production. So it should be either neutral or up to $50 million release in the working capital in the third quarter.

And your third question was on export restrictions. Well, first, we don't see shortages. We get the scrap we need. Also, the price is rather high. One of the reasons is mills already started to accumulate the stocks for the winter season, but there are no shortages in the market. And in terms of the effect, we don't see and we don't expect to see significant effect from these export restrictions. The main reason is geographical diversification of our scrap collection. So the main beneficiaries of these change, if it happens, is going to be mini-mills located in south (inaudible) ports. Well, probably there will be some positive effect on the overall scrap balance in the country, but nothing dramatic.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [33]

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And in terms of your integration in scrap, if I'm not mistaken, it's quite high. And do you think that steel might see some effect in your scrap costs in this case?

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Grigory Fedorishin, Public Joint Stock Company "Novolipetsk Steel" - President, CEO & Chairman of the Management Board [34]

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The integration means that we collect the scrap and we process it ourself and send it to the mill, right? But the scrap we collect, it's still not owned by us. It's collected, how we call it, from the earth by someone else, which means that the prices are high. They are high for everyone. We take some sort of additional margin in the scrap collection network, but it's not that significant comparing to the price level. Yes, the integration is relatively high. So we can collect up to probably 80% of our needs. Sometimes, we do lower than that because it makes more sense logistically just to buy scrap -- purchase scrap from the market rather than collect it ourself. So I think, if you look at the profitability of the long product division, the rebar prices in Russia and the billets market dynamics and how quickly export orders in Europe are going to be exhausted, those factors are going to have much more significant influence on the profitability comparing to the scrap restrictions -- scrap export restrictions.

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Operator [35]

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As there are no further questions signaled, I now turn the call back to your host for any additional or closing remarks.

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Dmitriy Kolomytsyn, Public Joint Stock Company "Novolipetsk Steel" - Director of IR & Capital Markets [36]

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Okay. Well, thank you very much everyone who joined our today's call and we're looking forward to seeing you in about 3 months. Have a good day, and have a good weekend.

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Operator [37]

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That will conclude today's call. Thank you for your participation. You may now disconnect.