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Edited Transcript of RAIN.NSE earnings conference call or presentation 14-Aug-19 11:00am GMT

Q2 2019 Rain Industries Ltd Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Rain Industries Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerard M. Sweeney

Rain CII Carbon LLC - CEO and President

* Jagan Mohan Reddy Nellore

Rain Industries Limited - Vice Chairman

* N. Radhakrishna Reddy

Rain Industries Limited - MD & Director

* Ryan Tayman

Rain Carbon Inc. - VP of Finance & IR

* T. Srinivasa Rao

Rain Industries Limited - CFO & Chief Risk Officer

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Conference Call Participants

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* Arvind Kothari;Niveshaay Investment Advisors;Analyst

* Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst

* HR Gala;Finvest Advisors Private Limited;Analyst

* Kalpesh Gothi;Valentis Advisors Private Limited;Analyst

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Pratiksha Daftari;Aequitas Investment Consultancy;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and very warm welcome to the earnings conference call of Rain Industries Limited to discuss the company's financial results for second quarter of fiscal year 2019.

(Operator Instructions)

Please note that this conference is being recorded. I now hand the conference over to Mr. Ryan Tayman, Vice President, Global Treasury. Thank you and over to you, sir.

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Ryan Tayman, Rain Carbon Inc. - VP of Finance & IR [2]

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Thank you. Good evening, everyone. I welcome all the participants to the Second Quarter 2019 Earnings Conference Call of Rain Industries Limited. Speakers on today's call are Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Gerard Sweeney, President of Rain Carbon Inc.; and T. Srinivas Rao, Chief Financial Officer of Rain Industries Limited.

During the call, management will be referencing and discussing a slideshow presentation which is available for viewing on our website at www.rain-industries.com in the Investor Relations section. We recommend viewing this presentation while listening to management's discussion.

Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature that could be affected by certain risks and uncertainties. The company's actual results could differ materially from such forward-looking statements. Now if you could turn to Slide 3, I would request Jagan to provide an update on key developments within Rain Group. Over to you, Jagan.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [3]

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Thank you, Ryan. A really good evening to all. During the second quarter we began to see a return of our business to levels that most observers would consider normal for our company. Consistent with the expectations that we laid out during our last call, EBITDA improved to INR 4.5 billion, up from INR 3.6 billion in the previous quarter. The increase was largely driven by increased volumes in all the segments. At the same time, the performance of our carbon calcination operations continued to be impacted by falling prices as well as the ongoing petcoke import restrictions in India.

On the -- referring to the Slide 3. On the carbon side of our business, I would characterize the period as a cleanup quarter. Revenues for the segment were INR 278 million higher than in the first quarter. Though there was an increase in volumes by 13%, and the appreciation of U.S. dollar against rupees by negative 3.7%. Overall, revenue increased marginally by 1.3% due to continued decline in CPC prices. The good news is that during the quarter we were able to flush out most of the remaining high-cost GPC inventory that has been a drag on our Carbon segment's profitability for the last 3 quarters. This was in line with the expectations, and with the high-cost inventory out of our system, we are now well positioned to achieve more normalized margins going forward. The impact on the CPC business was partially offset by an increase in volumes in our coal tar-based carbon products, primarily related to the demand from existing customers.

Turning to Advanced Materials. We continue to build on the improvements in sales margin and lower raw material cost that we began to see during the first quarter. In particular, second quarter demand was strong for our engineered products, driven by seasonality in our [sealer-based] products and our specialty coatings used in the lithium-ion batteries, energy storage and other applications. This was partially offset by reduced demand for our other coating products that are used by the steel and [graphical] floor industries which are being impacted by weak demand for their products.

Petrochemical products were supported by strong demand in the fuel market and our petrol-based resins enjoyed solid demand. However, the positive momentum was offset by the decline in automotive sales in China, Europe, the U.K. and Japan, which is impacting demand for raw materials that we produced for tile manufacturing, aluminum production and adhesives.

Cement business performance improved due to increase in volumes and realization in all markets except, for Andhra Pradesh, Odisha and Kerala. However, with the onset of the good monsoon season and all the major dams reaching their full reservoir capacities, we expect there will be bumper harvest which should give strong impetus to where -- rural economies. This, combined with a strong focus by the newly-formed government towards housing and pending litigation projects, should result in strong demand for cement starting fourth quarter 2019. With this business update, I will now turn over the call to Gerry to take you through the industry and other business updates on Slide 4. Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [4]

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Thank you, Jagan. And good evening, everyone. It is a pleasure to speak with you all once again. On Slide 4, we see some shifting of global aluminum production volumes outside China to other Asian countries as a result of slowing demand. Although, LME aluminum prices remained range-bound, around $1,800 per metric ton during the quarter. The lower cost of aluminum and other raw materials enabled most smelters to improve their overall profitability. Global aluminum stocks remained steady at roughly 60 days of consumption, which seems to be a comfortable level for the industry. Demand outlook for aluminum remains strong at 1.5% globally, excluding China, and 2% in China itself. This demand is mainly being driven by the increased production of electric vehicles, which on average, consume 30% more aluminum than a standard car. We also anticipate higher usage of aluminum in nonelectric vehicles to facilitate weight reduction needed for improved fuel efficiency standards. We're finally seeing a capacity ramp up by North American smelters due to increasing demand for aluminum and the import tariff protection levied under Section 232 on primary aluminum imported into the United States. The increased production of primary aluminum as well as improved vehicle sales contributed positively to incremental demand for all our carbon products.

Moving on to Slide 5. We are evaluating various options for minimizing the impact of restrictions on the import of petcoke into India. Based on last year's decision at the Supreme Court on pollution-related matters, the company remains restricted on imports of GPC to produce at full capacity. We are still work -- excuse me, we are still working on getting an allocation of GPC import for the shaft-calciner project coming onstream this year.

Our calcining facility in Vizag is 1 of only 2 calciners in India equipped to scrub at least 90% of sulfur from its air emissions and our new vertical-shaft calciner under construction in the Special Economic Zone will be similarly equipped. We recently filed a petition with the Honorable Supreme Court of India to clarify the requirement for Indian calciner to have flue gas desulfurization equipment, which can scrub a minimum of 90% of sulfur from its air emissions and also seeking a clarification on the allocation of GPC to the new vertical-shaft calciner on construction -- under construction in the Special Economic Zone. Pending legal resolution of our petition, we continue to pursue other alternatives of procuring anode-grade GPC from Indian refineries, and also commercializing our patented proprietary technologies by using non-anode GPC and other materials in producing CPC.

With these initiatives, we expect to minimize the loss of production volumes for our existing CPC and the new CPC plant. At the same time, we are expanding our North American sales directly to end consumers since blending in India is no longer a viable option. It has taken some time to pivot and change our sales channels and we expect these direct sales to continue to increase during 2020.

We remain hopeful that a positive outcome will be achieved by continuing to work on alternative plans and research the potential options to optimize operations at both our plants.

Moving on to Slide 6, regarding our major capital projects. As mentioned, we are nearing completion of our vertical-shaft calciner in India. The new plant is expected to commence operations during the fourth quarter of 2019. Once it is fully operational, the shaft-calciner will provide our company with additional capacity, lower production costs, and another quality of our -- of CPC in our portfolio of CPC products to meet customer requirements of improved density and the anticipated growth in aluminum demand in one of our fastest growing geographies.

With regards to our HHCR project, we will be celebrating the first step in a phased commissioning of our new hydrogenated hydrocarbon resins facility in Germany, this Thursday, the 15th of August.

When this plant achieves commercial production during fourth quarter, it will become cornerstone of our Advanced Materials business.

Our NOVARES pure water-white resins will be part of a portfolio of products that are essential to today's cleaner, faster and lighter 21st century applications. The facility's strategic location in Western Germany offers European customers a shorter and more cost-effective supply chain for their hydrogenated resins and other advanced materials currently imported from Asia, especially China. Tariffs stemming from the trade dispute with the United States have left many Chinese products shifting to the European market. We also expect this state-of-the-art facility to open doors to new markets in certain high growth areas for us.

In a related move, we recently announced plans to close our Uithoorn resins plant in the Netherlands by the end of March 2020. This closure is unfortunately necessary due to eroding profitability for hydrocarbon and C9 aromatic resins, particularly for the printing inks and adhesives areas. We are consolidating our resins and modifier sales into our Duisburg Germany facility and into our new hydrogenated resins plant. Duisburg facility is undergoing a $10 million modernization to enhance the quality and reliability of production going forward.

These investments and the plant closure will allow us to optimize production cost and improve our profitability. Our transition plan also includes expanded technical service and product development teams to ensure that the customers have uninterrupted and locally-produced supplies of high-quality DCPD C9 resins based on our newly developed proprietary technology.

Before I turn the call over to Srinivas, who will take you through the second quarter financials, I would like to reiterate comments from our call in May. Specifically, the fundamentals of our business remain strong. And the raw materials that we produce will be essential ingredients for a growing number of products and industrial applications for years to come. Moreover, our financial condition is good with adequate liquidity and we are prudently investing resources to grow and strengthen our Carbon and Advanced Materials businesses over the long term. Finally, as I mentioned during our last call, our EBITDA levels are trending towards the expected range after the sales disruption experienced in India due to the regulatory changes last year. We remain focused on managing our balance sheet and balancing our investments in cash generation to effectively manage leverage and liquidity, while preparing for what we see as a very bright future.

With that, I'll now turn the call over to Srinivas, who will take you to the consolidated financial performance of Rain. Srinivas, over to you.

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [5]

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Thank you, Gerry. Good evening, everyone. It is a pleasure to speak with you today. In the second quarter of 2019, Rain issued consolidated net revenues of INR 33.2 billion compared to INR 37.7 billion in the second quarter of 2018, a decrease of INR 4.5 billion or 11.9% decrease. This resulted from a decrease in revenue of INR 4.5 billion or 17.1% from our Carbon segment and INR 0.6 billion from our Advanced Materials business, offset by INR 0.6 million (sic) [INR 0.6 billion] or a 25.4% increase in revenue from our Cement segment. Rain consolidated adjusted EBITDA decreased by INR 2.4 billion compared to the prior year due to decrease in Carbon segment by INR 2.8 billion and after the increase in Cement segment of INR 0.4 billion and slight increase in Advanced Materials segment. Both Carbon and Advanced Materials segment continued to be impacted by our higher inventory compared with the lower selling prices as well as ongoing softness in the global aluminum production, a sluggish change in economy and the petcoke import restrictions in India.

Now turning to the next slide on Carbon segment performance. Revenue from our Carbon segment business was INR 21.6 billion for the quarter ended June 2019 compared to INR 26.1 billion for the same period last year. During second quarter of 2019, the average blended realizations decreased by 11.5% due to change in market trend, further affected due to unfavorable impact from depreciation of euro against the Indian rupee by 2.1% offset by appreciation of U.S. dollar against India rupee by 3.7%.

The drop in CPC prices was primarily driven by reduced prices in the Asian markets and price pressure in North America. Global sales volume in the Carbon segment decreased by 6.3% mainly due decrease in CPC volume by 12.2% and other carbon products by 4.8%, offset by an increase in coal tar pitch volumes by 14.3%. Overall, due to lower volumes and a decrease in the realization of CPC and CTP, the revenue from Carbon segment decreased by 17.1% during second quarter of 2019 as compared to last year.

The Carbon segment continues to be impacted by petcoke import restriction in India, impacting the ability to compete with the Asian market and resulting in underutilization of our U.S. calcination plant.

Coming to next slide on performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 8.7 billion for the June 2019 quarter as compared to INR 9.3 billion for the same period last year, a decrease of INR 0.6 billion. During the second quarter of 2019, sales volume decreased in engineered products by 13.3% and resins by 5.10%.

Napthalene derivates and Petrochemical intermediate remained unchanged. Volume decreases were related to our specialty binders due to weakness in the graphite industry. And in resins business due to weakness in the adhesives industry. During June 2019 quarter, the average blended realization decreased by 2.1% along with unfavorable impact from depreciation of euro against Indian rupee by 2.1%, partly offset by appreciation of U.S. dollar against Indian rupee by 3.7%.

The decrease in petrochemical intermediate was driven by a reduction by oil-related prices. Napthalene derivates average prices were higher due to changes in customer mix on account of eliminating some lower prices to date, which had a little impact on volumes.

Moving to the next slide on Cement business. During second quarter of 2019, there was a softening trend in sales volume, an increase of 17.3% in our Cement business. Most of our markets such as Telangana, Tamil Nadu, Karnataka, Maharashtra and Pondicherry area increased volumes, but there was partially offset by decrease in volumes in Andhra Pradesh, Odisha and Kerala. Sales realizations increased by 6.9% during June 2019 as compared to last year.

Due to these reasons, the revenue from Cement business increased by 25.4% and EBITDA from the segment has increased by about INR 0.4 billion.

We are working towards reducing costs at our plants by various efforts, the largest of which were in [Vizag kiln], the waste-heat recovery power plants set out at our Kurnool and Nalgonda facilities to enable the plant to produce about 7 megawatt and 4.1 megawatt of electricity respectively from the waste gases generated in the manufacturing process. All the electricity generated by these units are internally consumed. In addition to this, cement mill modernization in Kurnool plant is under implementation to increase the capacity of the cement mill from 50 tons per hour to 155 tons per hour and also with -- contributing by reduction of the power consumption.

On the positive side, the increase in market demand seen in the state of [Karan Nara], Tamil Nadu, Karnataka, Maharashtra and Pondicherry is anticipated to contribute throughout the year [in year 2] infrastructure and housing projects initiated in these states.

Moving to the next slide on the debt position. At the end of second quarter of 2019, our total debt was USD 1,089 million which includes USD 48 million of working capital debt. We incurred capital expenditures of INR 5 billion, about $72 million, during the first half of 2019, which includes $36 million spent on our 2 major expansion projects under construction: HHCR project in Germany and vertical-shaft calcination project in India as well as the expenditures for other expansion projects.

Net cash used in financing activities is INR 3.9 billion during first half of 2019 which includes INR 1.7 billion net flow for the repayment of borrowing and the balance INR 2.2 billion is toward interest payments. The company ended the quarter with a net debt position of USD 956 million and net leverage ratio of 4.2% based on the LTM June 2019 adjusted EBITDA. We believe the company has adequate liquidity to meets its operating needs for CapEx projects, interest expense, and regular operations for the foreseeable future.

Finally, finance cost during June 2019 were INR 1.1 billion, approximately the same as compared to last year. Though there was a reduction in the working capital borrowings in the current quarter, a decrease in interest cost was offset by increase in the exchange rate. Our average borrowing cost stood at 5.6%. We expect net interest expense to remain stable as the floating rate post of our long-term debt is tied to the EURIBOR which is still negative.

With that I will now turn the call over to the operator to start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Nagraj Chandrasekar form Laburnum Capital Advisors.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [2]

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Congratulations on the good turnaround in numbers. My first question is have you now (inaudible) for Indian CPC production and margins i.e., will production volumes not go further down below this? And how long, based on in terms of sourcing GPC, for the new vertical-shaft plant that will come up at the end of the year and what utilization methods can be used here?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [3]

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We actually are -- we had been allocated raw material for our existing plant that we'll wait for this year till March if we have enough raw materials for the existing plant. And so for the new plant also, there was some confusion regarding to some judgment we received some time back so the [DGP] could not allocate any (inaudible) [funding] to that. But we have gone to Supreme Court to seek the clarification and we're hoping that we should get such clarification in next 2 to 3 weeks. And hopefully, after that, they should give us the increased allocation for the existing plant also.

But there are couple of others initiatives we are working on. One is actually we have started procuring raw materials from the local sources. And also, we are actually going to be using an alternate raw material for which we have received environmental clearances also. So we will be announcing that shortly now once we start that. So with all the steps, we are reasonably confident that the existing [India] [plant as well as [existing] plants, new plants will have adequate raw materials for operations.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [4]

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Got it. In CPC overall, I mean the carbon products overall, in CPC margins were normalized in the $60, $70 per ton range that we have seen during the early half of 2017. And is it difficult to [predict] margin now and what do you think is the comparative outlook on carbon segment overall?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [5]

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While we don't give future outlook but we can say that we are coming back to a normalized margins. I cannot give you a comparison of it but overall, if you see our average margins over the last couple of years or so, not in the last 3 quarters which were a little uncertain, you will actually -- we do kind of -- we expect to come back to our normalized margins for both between CPC and GPC.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [6]

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And finally, what is the progress on the lawsuit filed early in the year regarding the stalled water contamination?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [7]

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That is still under progress. We have filed documents but at this point of time, we are pursuing it, but we do not expect much impact from that. But we are -- it's still under [litigation] process. So but we take it as the impact should not be very much because our sales during that period were very negligible or minimal to (inaudible) .

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [8]

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Follow-up on the first question. Is the new source from local refineries (inaudible) with raw material? What is the impact for production conversion cost versus (inaudible) GPC, both GPC and CPC... (inaudible)

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [9]

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That should not -- the cost should not impact much because what we do is we actually use clever blending process, creative blending process to ensure the impact of the cost is not much. Though the cost of locally procured material is higher but we do blend that out with our existing -- the imported materials. So we plan in such a way that our overall blended cost is more at a manageable level.

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Operator [10]

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(Operator Instructions)

The next question is from the line of Gunjan Kabra from Niveshaay Asset Management Advisors.

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Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst, [11]

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Congratulations for reporting a good set of numbers. [The availability of coal tar has decreased because of less production of steel.] Is there any possibility of increasing cost in the coming quarter?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [12]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [13]

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I'm not sure I got all of the question. I heard it's related to coal tar.

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Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst, [14]

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So the availability of coal tar has decreased because of decreased production in CPC. I highlighted [vertical shaft-calciners]. Is there a possibility of increasing cost in the coming quarters?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [15]

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Yes, the -- it's a good question. The availability of coal tar has been affected by essentially the downturn of the steel markets as we've seen and a reduction in overall steel production, which to remind those that are not familiar with our sourcing is essentially integrated steel mills produce tar from their internal metallurgical coke production. And while we are seeing a reduction in the global output due to the impact on steel, we're seeing very minimal impact to our traditional tar sources at this point. We could see it happening going forward, and we have discussed it as a company. We have a long standing -- predominantly long-standing contracts but we have also have availability of alternatives to us throughout Europe and South America that we have access to additional tar streams from both existing contracts and sources that we can go to. So we're not concerned about rising prices going forward. And if we do see increasing prices, we do have the ability to essentially pass that through on a quarterly basis to our end consumers. So it's nothing that we feel that's going to impact us going forward in the third or fourth quarter in any material way.

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Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst, [16]

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Okay, thank you. So my next question is how much cash can we expect to come from the sale of the Moundsville plant which was there in the result in the [presentation]?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [17]

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Can you please repeat the question, please?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [18]

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Yes, the question, Jagan was how much cash can we expect to come from the sale of the Moundsville plant site?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [19]

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See basically we have completely written off that investment. And we will actually disclose it as -- when the sale is completed. We have the agreement but we will disclose it once the sale is concluded. So it should be, latest, we expect to close that in less than 2 months period.

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Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst, [20]

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And sir are we selling the -- only the plant or the entire land, entire facility are we selling? So, what are you doing?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [21]

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We are selling the entire facility please. Because it costs us money, as we do not operate it. In order to maintain that, for the security, for utilities and other things, it does cost almost $500,000, $600,000 for a year. So basically we want to avoid that. So with the sale, we will be able to -- that will also be a saving, apart from the realizations we're going to receive from the buyer.

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Gunjan Kabra;Niveshaay Asset Management Advisors;Analyst, [22]

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So sir, is it towards calciner or the (inaudible)

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [23]

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No, no, it's not for a calciner. We will be selling via third-party, it will be using for alternative purposes.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [24]

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Actually, they are going to use it as actually as a barge facility for import, for local handling of materials. They are not using the plant per se.

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Operator [25]

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The next question is from the line of Pratiksha Daftari from Aequitas Investment Consultancy.

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Pratiksha Daftari;Aequitas Investment Consultancy;Analyst, [26]

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So my first question is around GPC prices. Last call you indicated that the GPC prices were in the range of $175 for a high quality grade. If you could give us an idea about how these prices have stand out now and how much are we -- in terms of the high-cost inventory, we are -- like you mentioned, most of the inventory has gone (inaudible) . Do we expect some impact in the ongoing cost as well? Yes, that's my first question.

And the next question is on Advanced Materials. You have sequentially seen a higher significant number of EBITDA margins for the segment. Just wanted to understand the reason for such increase in margin, and whether these margins are sustainable?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [27]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [28]

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On your first question, we continue to see the low sulfur GPC prices coming down, and much to our pleasure they are coming down still sharply. We believe that they'll level off in a range of $100 to $125 or so. The -- so that's a very, very welcome relief that we're seeing that will help us return to more normalized margin levels that Jagan was referring to earlier. On the Advanced Materials, really, the higher margins is the -- really the result of a shift in our product portfolio to higher-margin customers, what we have been focused on as we transition with the closure of the (inaudible) plant as well as the completion of the hydrogenated resins plant is we are transitioning our customer base and eliminating low and loss-leading products, in particular, in the printing ink and the rubber industries. And so as we eliminate those, it's supporting essentially the profitability and the unit margin of the portfolio product for Advanced Materials. So what you'll see actually going forward is that as we bring up the HHCR projects, you'll see us move away even further, we'll move away from a C9 resins platform that exclusively C9 platform into our NOVARES pure, which again should be a margin upgrade in our products going forward. That, however, will be a 2020 event, but since you asked that question, I just wanted to give you a little bit more insight of where we will be going in the Advanced Materials area moving forward.

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Pratiksha Daftari;Aequitas Investment Consultancy;Analyst, [29]

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All right and if I can have just one more question on cement. I just wanted to understand how the cement prices been in the ongoing quarters specifically calendar year '19. It's seen a significant margin jump in Q2 but do we expect the similar thing to continue for the rest of the year?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [30]

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Yes, basically the margins will be -- the prices will be normally less than Q3 because of the monsoon and lower demand, but we expect the prices to return back to the normal pace starting Q4 and the demand also (inaudible) quite a bit because after 10 years for the first time we're seeing a good monsoon season as well as the reservoirs filling. So this is actually quite a good news for the economy here, local economy.

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Pratiksha Daftari;Aequitas Investment Consultancy;Analyst, [31]

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It's just on -- how -- what kind of realization for are we expecting to see in Q3 that you can share?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [32]

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In this quarter, maybe we are seeing another patterns another will normally fall whereabout, maybe, 3%, 4%.

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Operator [33]

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The next question is from the line of HR Gala from Finvest Advisors Private Limited.

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HR Gala;Finvest Advisors Private Limited;Analyst, [34]

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Congratulations for the entire team of Rain Industry for really a good performance. I just wanted to know, you said that we will be inching towards the normalized margin in Carbon products because of fall in GPC price and other initiatives that we are taking. So what is the range you have in mind from the current level of 12.7% that we have earned?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [35]

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See, we normally don't give you any forecast basically on how the future will be. But normalized means you should be able to calculate from -- just see our last 2 to 3 years of our performance, you should be able to get a good idea on that.

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HR Gala;Finvest Advisors Private Limited;Analyst, [36]

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Yes. So on last 2 to 3 years, if I see calendar year '16, we had 19%; calendar year '17, we had 22.8%; and in CY '18, it came down to 17.7%. And now in H1 we've got 12.2%. So it's very difficult to find out what will be the normalized level.

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [37]

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Yes, I think the way to look at our Carbon products is if you look at percentage, we have a variation over the years that you just mentioned. It is very hard to follow if you look at it as percentage, okay? Because prices were up very high in 2018 and yet we had very profitable, if you look at the first 3 quarters, we had very profitable and high margins, comparatively speaking. When we talk about it from the CPC perspective, and the CTP perspective, we look at a standard margin of $60 to $80 per ton, is a fairly standardized margin for us. So if you look at it in those terms versus percentages that gives you a little clearer idea of what a target is for that versus the percentages. I realize how that can get confusing with the fluctuating prices over the last several years.

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HR Gala;Finvest Advisors Private Limited;Analyst, [38]

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Okay, that's very helpful. My second question pertains to our Advanced Materials. We have seen significant improvement, we've just reached 13% increase in sales, our EBITDA has increased almost by 100%. So to what extent this lithium-ion chemicals would have helped?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [39]

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Yes, it's really, if you're looking at quarter-on-quarter, which I think is what you're looking at there.

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HR Gala;Finvest Advisors Private Limited;Analyst, [40]

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Yes sir.

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [41]

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You have the element, you certainly have the seasonality of our coatings business, meaning our tar sealers and such, as well as some seasonality that we see related to the lithium-ion battery aspect as well. An added underlying piece of all of that is, well, is just a lower cost in those products in general that we've been able to achieve by pushing down our raw material price. I hope that's helpful.

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HR Gala;Finvest Advisors Private Limited;Analyst, [42]

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Okay, so can we sustain this level of margin going ahead in Advanced Materials?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [43]

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Well, we -- the margin we are hopeful to maintain, the volumes will still be somewhat -- we still have seasonal volumes. Spring is always our strongest volume for the tar sealers and the specialized carbons for us, second and third quarters. So we'll still see seasonality, but yes, on margin, we are fighting to maintain that.

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HR Gala;Finvest Advisors Private Limited;Analyst, [44]

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Okay, so just last question from my side. In Carbon products, we have de-grown the volumes by about 4% in the first half. What is your expectation for the full year? Will there be any volume growth or will it be -- how?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [45]

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It just broke up a little bit. Can you repeat the first part of your question again?

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HR Gala;Finvest Advisors Private Limited;Analyst, [46]

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Yes, sir in Carbon products in first half, we have de-grown our volumes by about 4% -- 6%, correct? So I just get to know for full year, what is your expectation? Will it be a flat year? Will there be a volume growth or it will be a reduction?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [47]

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No, you're talking about '18 versus '19 year-over-year?

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HR Gala;Finvest Advisors Private Limited;Analyst, [48]

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Yes, yes, yes.

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [49]

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Yes, I think year-over-year, well I don't have the -- well, I don't have specific figures for last year in front of me to compare. What I'd say is we're going to be -- we are going to be up in volumes from the coal tar pitch from the distillation business, we'll be up in volumes year-over-year and with the CPC will be down. And the CPC is obvious enough because we're still battling that ruling that happened during the second half of 2018 as far as the petcoke ban and the CPC import ban that impacted the business. So we're still emerging from that, which greatly impacted us in the first half. And so I think the volumes will be down in CPC year-over-year.

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Operator [50]

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Your next question is from the line of Arvind Kothari from Niveshaay Investment Advisors.

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Arvind Kothari;Niveshaay Investment Advisors;Analyst, [51]

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Yes, sir, my first question is on the front of our coal tar pitch business. [Cooper] has highlighted that they are still continuously facing low-cost profitability, but they had one quarter, where the profitability had gone up. And we have seen our realization go down but our volumes have gone up. So is there a strategy that we follow to capture more market share from [Coopers] to bring down the market share of that player and increase our market share.

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [52]

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As far as market share is concerned, the market shares [rose] and work which has primarily been done in prior years in all honesty and that is -- that's not to say that I'm addressing whether it's [Coppers] or anybody else but we had a specific strategy to gain market share and leverage essentially the world-class size and leverage of our facilities. We consciously said, look, a full utilization of our existing distillation facilities allows us to have a lower cost base, and so we have consciously driven at that over the last couple of years. What we feel is, and I guess to take your question a little further, is that the difference that you're hearing between us is our tar sourcing and the fact that we have the ability to really feed our facilities from a number of options throughout Europe and North America. And we can take even from South America in large shipment sizes because of the economies of the scale that we have our plant in proximity to water. So by all rights that allows us to maintain a cost competitive tar supply that other competitors may be more reliant on the local market and therefore have less of an ability to be creative in the way that they source.

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Arvind Kothari;Niveshaay Investment Advisors;Analyst, [53]

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So are the current realizations on CTP side with what -- are your conscious strategy that we will be following in the coming quarters?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO and President [54]

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Yes, we'll maintain the strategy we've been executing really over the last 5 years.

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Arvind Kothari;Niveshaay Investment Advisors;Analyst, [55]

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Okay. Another part is about our Netherlands' facility that we are shutting down. What can be the cost of the closure that we really estimating going forward in the coming quarters?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [56]

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Arvind, we are still making an assessment, there may be -- because the decision was taken on the beginning of August. We need to evaluate all the provisions we need to make to shut down the facility. We can value that in the Q3 finance.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [57]

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But just to give whatever is the cost at this point in time, we're not sure what is the amount but we expect the payback for the same should be about 3.5, 4 years. So whatever rate it would cost, the pay back should be 3.5 to 4 years.

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Arvind Kothari;Niveshaay Investment Advisors;Analyst, [58]

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3.5 to 4 years would be the payback of the shutdown cost that we will be incurring? (inaudible) benefit that will cost. Okay, got it.

And another part of the cash flow side I wanted to understand. So in cash flow statement we see in H1, we have made around from operations some INR 850 crores to INR 900 crores of cash that has been already generated. So I wanted to understand that in the lowering price regime also, we've managed that as the cash flow pretty well in terms of inventory management. So is that something which we can tie up cash flow per year or is that an internal target that we are wanting to achieve? And how we plan to physically go forward and maybe reduce debt or maybe use those cash flows to maybe streamline more of our operation on the Advanced Materials or the new site in Germany that we're coming up. What exactly is the plan of the management?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [59]

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As you can see, because of our reduced working capital, because of the falling prices, there has been more accumulation of cash into the system. But we really use most of our cash, we've been using for our capital expenditures. Because we have not been borrowing any additional funds for all the new CapEx. So once that's online, then basically all the cash that will be accrued, will actually can be used for debt repayment of our other processes.

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Arvind Kothari;Niveshaay Investment Advisors;Analyst, [60]

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And time line. We have, sir, in our mind that -- or maybe just yearly taking a call on the opportunity in business that we have. Are we working the timeline to reduce the debt or partly offset the debt in the scenario where we are seeing a lot of corporates doing that actually and that's one thing that's most of the analyst community is hoping for that simply because on operating front, we see just recovery happening. So is the -- finally, you can say it's just that we all want is the debt reduction. Is there any timeline on that that we can have?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [61]

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It's not the timeline. [What you're seeing is written out.] Our average cost of [rentals] now is 5.6%. Whereas, when we actually built this new product, the rate of return is in the range of about 12% to 18% or 20%. So there is a better reward by actually investing in CapEx and actually improving our ability to sustain our profitability going forward and become a leader in whatever we're doing. So we think that is more important. And so while debt repayment is important, but at the same time, now we are actually working on improving our bottom line. So overall, our debt leverage ratio should actually come down going forward.

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Operator [62]

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The next question is from the line of Pratiksha Daftari from Aequitas Investment Consultancy.

I do apologize.

The next question is from the line Kalpesh Gothi from Valentis Advisors Private Limited.

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Kalpesh Gothi;Valentis Advisors Private Limited;Analyst, [63]

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Most of the -- my questions have been answered. So one question regarding the high cost of inventory. Are we seeing a similar kind of inventory to be booked in Q3?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [64]

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No. We actually -- we think that we have -- most of the high-cost inventory has already been consumed, and we do not expect that there'll be an impact of the past high-cost inventory, please. So it will be, basically, the new inventory, what we have been procuring will be (inaudible). So we have actually -- we do not expect the 3Q to be impacted by past [inventory].

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Kalpesh Gothi;Valentis Advisors Private Limited;Analyst, [65]

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Great, sir. Sir, one more thing, the closure of the Netherlands plant. What was -- what was the cost of the closing the plant? And did we book in the...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [66]

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As we said, we will be announcing the -- in the next 1 or 2 months about -- once we have more clarity. But as we said, the payback period for the -- whatever the shutdown cost will be about 3.5 to 4 years.

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Kalpesh Gothi;Valentis Advisors Private Limited;Analyst, [67]

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Okay. And sir, what was the loss they have booked in last year from this particular...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [68]

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It is not a loss. Making unit does produce EBITDA positive. But the thing is, there has been reduction in demand for those parts because they make printing ink and other things. So we are moving with -- so we are operating the plant at much lower capacity. So we can actually produce the -- whatever we produce in there at (inaudible) and also at our plant the HHCR plant. So there was no reason for us to operate one more plant. So that was the reason why we decided to shut down that plant.

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Operator [69]

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The next question is from the line of [Rajvir Anand], an individual investor.

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Unidentified Participant, [70]

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Just a couple of slightly longer-term ones. So firstly, just building on one of the questions you got earlier. Mr. Reddy, when you look at this business over the next 3 to 5 years, is there a target leverage level that you are aiming to get the company towards even in terms of absolute net debt or a leverage ratio?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [71]

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Yes. Our target is to be at the 2.5, please. 2.5 net debt to EBITDA.

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Unidentified Participant, [72]

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Net debt to EBITDA. Okay, okay. That's great, sir. Good to get the clarification. And can you just guide us towards what your CapEx plans going -- to reach those levels might be for 2020 and 2021?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [73]

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So at this time, basically, after completion of the current projects, we don't have any major CapEx plans at this point of time. So as we mentioned earlier, our maintenance surplus -- maintenance CapEx is somewhere above $65 million, $70 million per annum. So hopefully, with the completion of the projects, both the shaft-calciner as well as this -- the HHCR project and (inaudible) and other things. Thereafter, we don't expect major CapEx unless something really comes, which is good, which we are not sure. But at this point of time, we are not [undertaking] any new projects.

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Unidentified Participant, [74]

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Okay. Got it. And just finally, can you give us some color? Business-related party transactions in the last couple of annual reports received with a company called Arunachala Logistics. So can you just give us some color on what's happening over there? Why is that -- why are we specifically entering into these transactions with this...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [75]

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Okay. See, basically, we have 2 similar plants. One is in Nalgonda, one is in Kurnool. So basically, what happened was, these are really remote locations, and we actually tried for (inaudible) , and this happened almost about 15, 20 years back. We were actually trying to get trucks to go to the cities from there towards our end markets. And there was nobody placing the trucks. So we actually, we used to give advances to the truckers. And then basically, they were actually going in to (inaudible) they were actually moving away the truck because of the non-driven cargo, [risen] loads and other things. So finally, we actually decided to start something on our own. So this was about 15 years back, we started as a captive logistics service. So what we do is, every year, we actually call for tenders and based on that, and we actually have agencies like E&Y who does the transfer pricing. And actually we see that though it is the related party, our prices are actually at least (inaudible) lower than the market's availability. So we do actually follow the very strict code of related party. But the issue is we have no other option. It's not that we want to do it, but we're not able to find trucks. And this is the same case, not only us, but majority of the cement companies in Andhra do that. So...

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Unidentified Participant, [76]

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Okay, understood. So just in view of that and considering I think that you run a fairly clean and very tight ship, would you consider making the financial statements of this entity public for the investors to see?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [77]

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See there are several pieces. It's not just we while one-off, a couple of family members own something but they're even other outside investors also in that. It's not just only our family members. We are informing it as a -- but we actually can -- we do actually make because our Board actually does go through this process of logistics study. So basically on the transfer pricing, so we actually have EY, an outside agency doing this and helping us on a regular basis to ensure that we are [successfully maintaining the possible business].

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Unidentified Participant, [78]

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Congrats on a good set of numbers. I think in a tough environment you guys did a great job.

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Operator [79]

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The next question is from the line of [Vivek Pansovia], an individual investor.

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Unidentified Participant, [80]

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First of all, congratulations for a good set of numbers. And my question is related to like more general business related to balance sheet. As you are aware that goodwill is contained almost like 50% or 60% of our network. So I'm just wondering as our first initial plan was to import the CPC and blend it in Andhra Pradesh in our Indian facility, and then again, export that CPC to other countries. So now that the plan has got collapsed due to the -- some restriction, so did we have done any [adjustment] in our goodwill because it is affecting right? This whatever we assumed of the -- what will the cash flow from this type of arrangement, it is not realizing now.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [81]

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Actually the goodwill you are seeing in the consolidated balance sheet of Rain Industries is on account of liquidation that was done in 2007 and 2013, the RÜTGERS operations in Europe and the calcination business in U.S. that we acquired. By having the blending facility, we invested some money but if it is not [depleted], it becomes useless. As and when the regulatory changes takes place, we can continue to use the blending facility in India. It was built within the Visakhapatnam plant itself. We did not build somewhere else. And apart from blending the CPC, we can also use the same facility for blending of our raw materials. So from that point, we can't conclude that this asset has not carrying any value and it doesn't have any impact on the goodwill numbers that you see in the balance sheet. And [topline] with our auditing standards. All the assets that are acquired by the company, constructed by the company will be tested for impairment. That is a duty [capped] on the auditors and they will carry out the debt every year. And if there is any impairment like in one year, we shut down the Moundsville facility in 2014 and we have written off whatever is the value of those assets. Now when we shut down this Netherlands facility also, the auditors will test for impairment and any provision required to be made, they will make in the books.

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Unidentified Participant, [82]

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No actually I was not saying it is useless. I was just saying that is there any kind of requirement or adjustment needed to do...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [83]

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No it is not required, blending was (inaudible) when we acquired the company, blending was not part of our overall strategy. Subsequently, we came up with this -- the impact of not blending does not impact the overall goodwill.

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Unidentified Participant, [84]

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Yes. So this following question. So just want to get your thoughts like we've made [no] more acquisitions, right? The inorganic growth that like in CI, carbon and the RÜTGERS in Europe. So are that acquisition is performing with our expectation line or it is better or worse? If you can just share some thoughts.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [85]

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I would say it's better than our expectation at least. While I agree that the last 1 year performance of the calcination was somewhat weak because of various extraordinary factors, but I think overall I think we are now quite happy with our acquisitions, both acquisitions.

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Unidentified Participant, [86]

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And just last question. So is there any update on our -- we have filed a petition regarding CPC in Supreme Court. Is there any update or something you want to let us know?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [87]

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We expect the case to come up in the next 2 to 3 weeks, please. And we will keep you updated.

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Unidentified Participant, [88]

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Again, congratulations.

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Operator [89]

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Ladies and gentlemen, due to time constraints that will be the last question for today. I will now hand the conference over to Mr. Jagan Reddy Nellore for closing comments.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [90]

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Thank you, [Nirav]. As we discussed earlier, during the second quarter, we saw earnings trending positively, strengthening demand for our carbon distillation and Advanced Materials products and first half's most significant, the crossing out of our remaining high-cost GPC inventories. We are now focused on startup of our Advanced Materials brands in Germany and the commercial rollout of our NOVARES pure water-white resins as well as the completion of our vertical-shaft calciners in India and the successful resolutions of our petcoke situation in India. While our financial performance during the past several quarters has been disappointing, the women and men of Rain have worked tirelessly to drive out our costs, improve efficiencies, develop new products and markets and safely complete our 2 major capital projects. All told, I believe that we have taken necessary and appropriate steps to help secure the long-term strength of Rain and return the company to profitability as our second quarter results indicate.

Thank you for joining us on today's call, and we look forward to speaking with you again in November to discuss the commercial operation of our advanced resins plant and the pending startup of shaft-calciners. Have a good day, and please be safe. Thank you.

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Operator [91]

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Thank you very much. On behalf of the Rain Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.