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Edited Transcript of RAIN.NSE earnings conference call or presentation 28-Feb-20 12:00pm GMT

Q4 2019 Rain Industries Ltd Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Rain Industries Ltd earnings conference call or presentation Friday, February 28, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerard M. Sweeney

Rain CII Carbon LLC - CEO & President

* Jagan Mohan Reddy Nellore

Rain Industries Limited - Vice Chairman

* T. Srinivasa Rao

Rain Industries Limited - CFO & Chief Risk Officer

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Conference Call Participants

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* Arvind Kothari;Niveshaay;Founder

* Bhavesh Chauhan

IDBI Capital Markets & Securities Ltd., Research Division - Analyst

* Gunjan Kabra;Niveshaay;Equity Research Analyst

* Sarvesh Gupta

Maximal Capital - Founder

* Viraj Mehta

Equirus Portfolio Management Services - Head of PMS and Fund Manager

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Presentation

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Unidentified Company Representative, [1]

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Good evening, everyone. I welcome all the participants to the Fourth Quarter 2019 Earnings Conference Call of Rain Industries Limited. The speakers on today's call are Mr. Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Mr. Gerard Sweeney, President of Rain Carbon Inc.; and Mr. T. Srinivasa 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, and I would request Mr. Jagan to provide an update on key developments within the Rain Group. Thank you and over to you, sir.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [2]

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Thank you, and a very good evening to all of you. Turning to Slide 3 of the presentation. EBITDA of INR 4.54 billion in the fourth quarter was relatively flat compared to INR 4.72 billion during the third quarter. We are pleased with the result in the fourth quarter as we are normally impacted by seasonality of some of our products sold in Europe and North America due to the cold winter months. With consistent earnings during the last 2 quarters, we are slowly returning to a range that is more in line with our historic norm. After a prolonged period of being challenged with a high-priced inventory that were a drag on earnings due to adjusting the business to deal with the India petcoke import restrictions. We are extremely pleased with the company's safety performance as we completed 2019 with a total recordable incident rate of 0.29, which is by far the lowest in our history.

Looking ahead, like many people, we are holding our breath, literally in our Shanghai office as we wait to see the impact of coronavirus on the Chinese economy. The longer the outbreak continues, the greater the ripple effect it will have on the movement of commodities and infrastructure development in China and rest of the world since nonessential industries have been shut down in China to slow the spread of the virus. Our current estimate is that coronavirus will be an economic factor, at least to the first half of the current year. This combined with early turnarounds at a few of our plants means Q1 performance may possibly fall below our EBITDA target. Overall, however, coronavirus might have -- might not have any major or lasting impact on our operations or business performance.

On the Carbon side of our business, volumes were up about 7%, and revenues were down about 1% sequentially from the third quarter. Despite lower revenues, EBITDA for the Carbon segment was INR 3.848 billion, a 7% increase over the previous quarter. CPC sales drove the volume increase, and we benefited from having worked through high-cost GPC inventory in the previous quarters. Average CPC sales were lower compared to the prior quarter as we secured volumes during the period that we believe will help long-term demand for our product.

The aluminum market continues to struggle with regard to prices for their finished products as the LME hovers around USD 1,700. In response to -- in response, aluminum producers are applying downward pressure on CPC prices, and we are doing the same on the raw material side to protect our margins.

On the pitch side, volumes and revenues were down compared to the previous period. As you recall, the previous quarter benefited from a sale to a nontraditional market that was not expected to be realized again in Q4. Volumes of other carbon products were down, primarily related to seasonality that we see with our creosote and carbon black oil products during the winter months.

Turning to Advanced Materials. Revenue for the segment decreased 17% compared with the previous quarter. This was primarily due to the seasonal reduction in engineered product sales, in particular, our sealer-based products. In addition, during -- in addition, downward sales of our card press specialty binder was the result of ongoing weakness in the steel industry and its downstream impact on the graphite and refractory markets. Elsewhere, resin sales were impacted by continued softness in the global automotive market. Despite sluggish sales, resins and modifiers remain an important segment for us, in particular, at the closure of the Uithoorn plant in Netherlands next month. We have successfully transitioned its products line to our Duisburg facility in Germany. In doing so, we have also improved product quality, and we believe that consolidating production at one facility will allow us to operate Duisburg near full capacity and with reduced operating costs. As a result, we expect this restructuring will increase resins profitability in 2020.

Moving on, petrochemical intermediate volumes were down as a result of reduced throughputs due to increased raw material costs. Finally, sales of naphthalene derivatives were impacted by customer outage during the fourth quarter and lower sales of certain modifiers that are going through a sunset cycle as products such as carbon less paper dipped towards obsolete.

On our Cement business, revenue decreased by 6% compared with the previous quarter. This was primarily due to a decrease in realizations in all the key markets as a result of sluggish market conditions.

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 & President [3]

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Thank you, Jagan, and good morning, everyone. I'm sorry. Good evening, everyone. It's a pleasure to speak with you all again.

Turning to Slide 4. Global aluminum production in 2019 was relatively flat year-over-year. Looking closely at the upper left-hand graph, you could see China had the largest decline at 0.75 million tonnes less production. From a pricing perspective, on the upper right side of Slide 4, the market remains relatively weak, with the LME price falling to the low $1,700 per metric tonne and even dipping into the high $1,600s this week. As we noted on our last call, the restart of the largest North American smelter and the resumption of production by a Brazilian smelter, coupled with reduced alumina costs following the resolution of Brazil's mining situation was expected to put downward pressure on aluminum prices. On the lower left of Slide 4, you can see that exports from the U.S. declined by more than 500,000 metric tonnes in 2019 versus 2018. This is, in large part due to the India ban on imports of CPC, which interrupted our India blend strategy. We had blend -- excuse me, we had planned to export at least 300,000 metric tonnes of CPC from the U.S. to India had the ban not been in place. China exports were relatively flat, and India naturally declined year-over-year.

On the lower right-hand side of the commodity prices for the major industries affecting our Advanced Materials business. Interestingly, the new IMO regulations went into effect in January. But throughout the fourth quarter and to this point in the New Year, we are not seeing a strong upward effect on the price of 1% fuel oil from these changes. This could be due to sufficient preparation of stocks to feed that demand, or demand for 1% fuel oil just might not be what was expected. We'll certainly see which is most accurate as we approach midyear 2020.

On Slide 5, we have provided an update on the situation in India with regard to import restrictions that have been imposed on green petroleum coke. The most significant development here is that Rain was granted an additional 104,000 metric tonnes of GPC allocation for the period April 2019 through March 2020. This means Rain's 12-month allocation has increased to 657,000 metric tonnes, which meets nearly all of our GPC requirements for our existing rotary kiln facility. This is positive, and it is a trend that we expect to continue each year.

Given this reality, coupled with the successful importation of our first shipment of Anhydrous Carbon Pellets in December, we are aggressively pursuing the completion of the ACP plant in the United States to supply feedstock for our new Vertical Shaft Calciner in the Andhra Pradesh Special Economic Zone. I will discuss this more in a moment.

Moving to Slide 6. Regarding our major capital projects. Construction of 1 of the 2 lines of our shaft calciner, which will be the most environmentally friendly plant of its kind, is complete, and we have begun the pre-heating process. We expect to complete our first commercial sale before the end of March. In addition, the first shipment of major components for our ACP production facility we are installing in India, arrived earlier this month. As we discussed during our third quarter call, ACP, which will be produced in India and imported from a second plant being installed at our Chalmette, Louisiana facility, will provide us with more than half of the feedstock to eventually run the new shaft calciner. We expect both ACP production facilities to start up during mid-2020.

Turning to our major project. The Hydrogenated Hydrocarbon Resins facility in Germany is expected to begin commercial operation by May 2020. We're very excited about the potential for the advanced resins that will be produced from this new plant, which is pictured on Slide 6. They will position us as a leading European supplier of water-white resins for contaminant free adhesives in food packaging and hygiene products as well as technical applications, such as high-strength moves. While start of the commercial production is just around the corner, there will be a period of time before we see meaningful contribution to earnings since we will have to ramp up the plant and then complete customer qualification programs that will take several months.

Commercial operation of the HHCR facility will also mark an important step in the evolution of our Advanced Materials strategy, enabling us to supply essential raw materials for today and tomorrow and transition away from raw materials of yesterday. This is a 2- to 3-year strategy that we are executing, and it includes the development of our proprietary ACP product as well as the closure of our Uithoorn resins facility in the Netherlands next month. Once this reorganization is completed, we believe Rain will have a much better opportunity to expand our market share, add to our customer base, and most importantly, increase our profitability. At the same time, we are not pinning our hope solely on the materials of tomorrow. While some of our resins and modifiers have become obsolete, many of our legacy products are still critical for many of our customers and will remain so for countless years to come.

When it comes to these well-established materials of today, the trick for us is to increase our profitability by continuing to take cost out of our system, while improving efficiency and productivity. One of the ways we are doing this is through our global excellency center. During the past year, our research experts have helped us to realize cost savings with concentrated efforts on energy optimization, reliability, sustainable resources and capacity debottlenecking, which helps to offset margin pressure. In addition, this team has enabled us to switch to more efficient modern technologies in our plant operations, allowing us to focus on data and analytics rather than our reliance on operator knowledge.

So whether it's construction of Advanced Materials plant with the 21st century applications, the development of a new carbon-based material that should help anode and aluminum customers move closer to carbon neutrality or our efforts to update and maximize our legacy operations, the 2-year -- 2- to 3-year evolution that we are going through will be transformative for our company. At the end of the day, we believe these efforts and investments will benefit our shareholders, customers, communities and our planet.

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

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [4]

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Thank you, Gerry, and good evening, everyone. It is a pleasure to speak with you today. In the fourth quarter of 2019, Rain achieved consolidated net revenues of INR 28.09 billion compared to INR 34.28 billion in the fourth quarter of 2018, a decrease of INR 6.19 billion or about 18.1% reduction. This resulted from a decrease in revenue of INR 5.05 billion or 20.9% from our Carbon business segment and INR 1.13 billion or about 14.2% from our Advanced Materials business and about INR 0.01 billion or about 0.6% from our Cement business segment.

Rain's consolidated adjusted EBITDA increased by INR 2.037 billion compared to prior year. This resulted from an increase in the Carbon segment by INR 2,113 million, offset by a decrease in Advanced Materials by INR 54 million and about INR 22 million decrease in the Cement business segment.

Now turning to the next slide on Carbon segment performance. Revenue from our Carbon segment was INR 19.05 billion at the quarter ended December 31, 2019, as compared to INR 24.11 billion for the same period last year. During Q4 of 2019, the average blended realization decreased by about 20.6% due to changes in market trends, further affected due to the unfavorable impact of depreciation of the euro and USD against Indian rupees by 4.2% and 1.2%, respectively.

Gross sales volume in the Carbon segment decreased by 0.4%, mainly due to a decrease in CPC by 1.7%, offset by an increase in CTP volumes by 2.3% and other carbon products by 0.8% as compared to last year. Overall, due to the aforesaid reason, revenue from Carbon segment decreased by 20.9% in Q4 of 2019 as compared to Q4 of 2018.

Turning to next slide on performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 6.82 billion for the quarter ended December 31, 2019, as compared to INR 7.95 billion for the same quarter last year, a decrease of INR 1.13 billion or 14.2%.

During Q4 of 2019, the decrease in volumes was primarily driven by sluggish demand in the steel and graphite industries, coupled with weakness in the European automotive, adhesive and North American construction industries. During Q4 of 2019, the average blended realization decreased by 6.7% driven by a decline in oil-related products, along with unfavorable impact of -- impacts from depreciation of the euro against Indian rupees by about 4.2%. Due to these above-said reasons, revenue from Advanced Materials segment decreased by 14.2% during December 2019 as compared to December 2018.

Moving to the next slide on Cement business. During the fourth quarter of 2019, Cement sales volumes -- Cement sales decreased by 0.6% compared to Q4 of 2018 due to a decrease in realizations by 1.5%, which is partially offset with an increase in volume by 0.9%. There was a 13.3% increase in sales volume in some of the markets like Tamil Nadu, Karnataka, Maharashtra, Pondicherry and other smaller markets, which is offset by a decrease of 12.4% in markets such as Andhra Pradesh, Telangana, Odisha and Kerala as compared to last year. In spite of volumes remaining relatively flat, operating performance of Cement segment was impacted due to sluggish market conditions affecting realizations and margins.

Moving to the next slide on debt. We ended 2019 with approximately USD 1.1 billion of total debt, including approximately $55 million of working capital loans. Net debt was USD 937 million. And based on the LTM EBITDA of USD 248 million, we ended the year with a net debt-to-EBITDA leverage ratio of 3.8x. Despite the ratio being above our targeted level, we are still comfortable here as our average cost of borrowings stood at 5.14%, and we expect to remain stable since the floating rate portion of our long-term debt is tied to the EURIBOR, which is still negative.

Capital expenditure for the year totaled USD 170 million, of which USD 77 million was for our 2 major growth projects. As discussed in earlier calls, we maintained the promised level of capital expenditure for the year, even though there were new projects such as ACP and incremental CapEx for ongoing projects due to changes in scope and technology.

Working capital has continued to be a source of cash for us in the year. And until prices stop falling and the new projects become operational, we expect this trend to continue.

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

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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 Arvind Kothari from Niveshaay.

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Arvind Kothari;Niveshaay;Founder, [2]

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Good set of numbers, given the volatility in the market. My first question was that if we analyze the copper margins in the CTP division, they have been declining close to 12%, 13% now. And even for the next year, they are guiding for an EBITDA in that division, which is 25% lesser. And also, if you look at calciners, the margins, which are reported in other competitors are pretty dismal or close to negative. I wanted to understand how we are immune from that situation, and our margins are seeing an uptick if we look at quarter-on-quarter?

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

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Arvind, it is not correct to compare the performance of one manufacturer with their competitors. But we can tell you some differences are the capacities of Rain business in the distillation is substantially higher than the capacities of other players, though. So those things will play a role in margins. And also how close we are to the customer and how close we are to the suppliers that also will make a lot of difference in our business because logistics costs are equally important.

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Arvind Kothari;Niveshaay;Founder, [4]

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Correct. But if one of the major player, which is they're in the world of CTP is also projecting a lower EBITDA. So do we also look at the similar scenario? Or we feel that we'll be able to protect the margins?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [5]

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While we actually don't comment on the future projections, but we are cautious -- cautiously optimistic going forward on our carbon minerals and chemicals business. That is what for -- it is for the CTP and our Carbon business, we are actually optimistic so.

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Arvind Kothari;Niveshaay;Founder, [6]

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Okay. Great, sir. Also sir, I recently got a chance to visit China last year. And there, the markets over there and the traders are suggesting that because of the coronavirus issue, a lot of refiners who are there are not able to produce now. And so there is a GPC shortage, which is being projected in those markets. And hence, the prices in the Chinese market have started going up for the GPC. And also the CPC capacities have been impacted a bit, which has resulted in the CPC price also to go up.

So I add up. There are 2 questions related to that. One, our tie up with Sinopec is also there. So would our GPC sourcing be impacted in India? And what percentage do we source from Sinopec for our Indian operations? And second, do we see this as an opportunity of improving our realization or spreads? Because our sourcing also is there from other markets there in the cost of GPC would not have gone up that much.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [7]

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Gerry, you want to address that?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [8]

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Yes, thanks, Jagan. Yes, that's a good question. Obviously, right now, any of the situation with China is an evolving scenario. What I can tell you is, to this point, we have not seen an impact on our supplies out of China, but that remains to be seen because we don't believe that at this point, we can necessarily say the full impact of what may happen has taken place. But we are not completely reliant on China for our GPC supply. And we do have alternatives if we are ultimately impacted in China from a GPC availability perspective. The -- also attached to this is that the development of our ACP production is designed such that it can help us to move away from what dependence we do have on Chinese supply and use more inferior raw materials. So we -- but this is part and parcel of our strategy on ACP to diversify our supply portfolio and be able to move away from the Chinese GPC.

On the price side, the prices of late of GPC and CPC have edged up on Chinese product. We have not seen that necessarily flow through to us to this point. We have our long-term agreement with Sinopec. Also, again, as I really start to come full circle to understand pricing and to see what happens, we really have to look at the long term. A higher price for GPC and CPC in China may not be, as you mentioned, really, in the end of your astute question, sir, it actually could be a positive for us rather than a negative. Because we do have more diversification than others in the industry and a bit higher GPC and CPC price in China could be positive for us from a margin perspective in the long run. But we'll be watching this very closely because there's a lot of facets to this that we're going to have to follow and understand where they will settle as we move forward, and we see how this entire coronavirus situation, shorter or longer, will affect the marketplace.

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Arvind Kothari;Niveshaay;Founder, [9]

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Okay, okay. Great. And sir, also, if you could clarify, going forward, we -- in the commentary, you have said that EBITDA might not in the Q1 be as per our standard margins that we had effected -- we had penciled in. So I mean, is the volume part being affected is what our fear is or the pricing also that we're hearing might be affected?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [10]

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Again, a good question. Sorry, the yes, our -- from a volume perspective -- certainly, first quarter, from a volume perspective, we're pretty comfortable and we've not seen any meaningful interruption. Of course, we're not done with the first quarter yet, but we are entering the last month of the quarter. So from a volumes perspective, we don't have great concern. Where we are watching is, as you know, in our distillation business, we do -- we are tied to commodity prices and we do have a significant amount of WIP, or work in progress, from a product perspective that are pegged to commodity prices. And so we put that out there. Just from an openness perspective, quite honestly, with our stakeholders to talk about it, the recent movement in crude prices could continue to flow over into the various liquid products, commodity prices, and that's really where we're looking at that could have an effect on us in the quarter.

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Arvind Kothari;Niveshaay;Founder, [11]

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Okay. Okay. Sir, Chinese liquid commodities are facing a shortage, I mean, there the prices are moving up. So would that not be positive for us, maybe 2 quarters down the line if we face some issues in a quarter?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [12]

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Yes. That's some of the -- that's some -- that's another facet that we look at, sir, in order to -- what happens down the line really will remain to be seen. But the scenario that you presented, that if we have due to reduced refinery production runs in China, if we see stronger overall refined product liquid prices -- liquid product prices, I should say, then that will be positive for us on the distillation side. What we really need to watch as we're going forward is will these reduced runs be matched with reduced demand because of essentially everyday life stalling in China overall, but we'll be watching that. Because we all know this is a very unique situation. And then how that ultimately flows, we've had a pretty tumultuous week.

So everybody's fingers and hands are feeling a little bit flinched based on predicting the future. So we'll have to watch that very carefully. Because on this coronavirus situation, if it's shortened, if it's lengthened, that will have an effect overall, not only potentially on China, but on other areas of the world. But right now, our volumes are unaffected in large part. And we certainly, certainly hope that continues to be the case.

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Operator [13]

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(Operator Instructions) The next question is from the line of [Vikram Sharma] from Meraki Wealth.

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Unidentified Analyst, [14]

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Sir, in last quarter, we guided our HHCR plants operations will start in Q1 '20. And now it has been delayed to Q2 '20. And also commencement of operation in U.S. ACP plant has delayed from Q1 to Q2, and Indian ACP plant from Q2 to H2. So I want to know what major difficulties we are facing in implementation.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [15]

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See, basically, the HHCR plant, we have some equipment that actually has to arrive from Italy and other places, which are the fine lending equipment. So -- but now actually, because of the coronavirus, the areas, the factories that actually produce in Italy actually are not able to move the material now. And we don't know. So that's why we think there may be about a 3-week delay. So that's the reason why we think it will actually go in.

Commercial production means, basically, we may start trial operations as early as early April. But to actually stabilize the plant, it will take a month. So that's the reason why we said May.

And in regard to the ACP plant in U.S. and in India, see, actually, these are the first plants that are being ever built in the world with ACP. So it is actually taking a little more time. Because by the time we understand and we actually adjust the -- tweaking the plants, so that we have the better quality of material, so it's taking a little extra time. So that's why it may take 1 to 2 months, couple of months of delay on the ACP projects.

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Unidentified Analyst, [16]

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Okay. And sir, another question is in profit and loss attribution, share of noncontrolling shareholders reduced to INR 6 crore from INR 18 crore in last quarter. So it is due to our profitability reduction in our joint venture or what is main reason for this?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [17]

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Yes, the only noncontrol interest we have is, as you know, all are 100% owned by Rain, except the Russian operations. And the year-end -- on the Q4 numbers, it will be always audited and take into consideration the certain year-end liabilities like retirement benefits, et cetera. So we can't strictly say that why the numbers have fallen, but operations per se have not impacted in Russia in Q4 of 2019.

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Operator [18]

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The next question is from the line of Viraj Mehta from Equirus Securities.

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Viraj Mehta, Equirus Portfolio Management Services - Head of PMS and Fund Manager [19]

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How much debt repayment do we have in next 1 year?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [20]

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We don't have any scheduled repayment. I think they will start only in 2021 for the Term Loan B that we have. In high yield bond, what is there? It is due only in March of 2027 -- 2025.

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Viraj Mehta, Equirus Portfolio Management Services - Head of PMS and Fund Manager [21]

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And what is the maintenance CapEx for this year, same as you guided?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [22]

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We don't guide, but one thing is we have to complete the -- for the HHCR and the shaft calciner process we have still, but we expect this year to be about $120 million, both including the maintenance and the funds required for the ACP plants and the SEZ and HHCR projects, please.

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Operator [23]

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The next question is from the line of [HR Gala] from Finvest Advisors.

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Unidentified Analyst, [24]

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Sir, I just wanted to know a couple of things. In the beginning remark, you said that the aluminum prices have probably been falling at around say $1,630. How will that impact the capability of aluminum companies to pay good price at CPC, should the GPC and ACP cost should go up? So how are we going to protect our spread between GPC cost and the CPC realization? That's my first question.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [25]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [26]

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Yes, I think -- yes, I've got it, Jagan, thanks. Yes, the -- there's very little historic relationship between the price of CPC that we sell aluminum smelters and essentially, their ability to operate. When we look at the LME and the price of the LME, we don't really -- small fluctuations in the LME do not usually have a large impact on whether smelters are operating or not, first of all. What we look at is, is the price healthy enough for folks over the long term to operate. So we're not terribly fearful that the most recent weakness that we've seen from the LME perspective will be long lasting nor is it at $1,600 or in the $1,600s I should say, at a level that is not sustainable for profitability for most of our customer base.

Getting back to your specific question on protecting our spread. Regardless of the price of CPC in the marketplace, we look to match our GPC to protect our margin. And we do that because of the wide pallet of suppliers that we have globally to supply our global production. So we, frankly, don't care if the CPC price is $800 a tonne or $200 a tonne as long as we can set our raw material price in order to protect our margin in that. And while 2019 was a year that was very much in transition for us in the CPC business because we had very high-priced inventories of GPC that we were working off, and it took us a prolonged amount of time to work them off because of the regulatory change in India, that is not the norm. It normally only takes us 1 quarter to a maximum 2 quarters to really reset our GPC prices. So right now, we're pleased with the fact that we've been able to -- despite the falling CPC price, we're pleased with the fact that we've been able to reduce our GPC costs in order to keep them in line and protect our margin in the business and essentially reestablish it in the second half of 2019 versus the first half of 2019, if you look at the numbers.

Now is that margin as high as we would like it to be? Of course, not. We would like it to be as high as it possibly can. But if you look, it is at a more normal level, and we'll be seeking to protect that margin going forward in order to deliver better performance from the CPC business.

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Unidentified Analyst, [27]

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Okay, that really helps, Gerry. My second question is regarding this ACP, how will our total cost of processing ACP will match with the CPC price that we can realize?

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

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Yes. The ACP is a product for us that you -- it's something that you can't look at it in situ and just compare it straight up against regular GPC. If you do it that way, then you will look and just as you're deducing and say, "Well, hey, if we're making ACP, then we're going to add cost. And my concern is, how are you going to make margin against that?" ACP is a product that we've developed for exactly what we discussed in some of our commentary today. ACP is a product that essentially is designed to improve the performance of the anode of an aluminum smelter. And that is through the introduction of ACP into the anode, we should see results here. And our testing has shown it, we should see a lower carbon consumption for aluminum smelter.

While this needs to be proven, we should see better current efficiencies for the aluminum smelter. Also, it helps drive them to the all-important element in today's marketplace of carbon neutrality. And that's an important thing for everyone's stakeholders in the new millennium. And so as we look at it, you can -- there's clearly a higher cost because we're processing GPC, which we don't do in a normal situation. However, with ACP, as we demonstrate this, it should more than warrant the additional cost from the formulation of the ACP product, and therefore, enhance the performance and be a net cost savings and product enhancement for smelters over the long run. But this is a process that we'll have to go through as far as demonstrating that value with our smelter customer base.

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Unidentified Analyst, [29]

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Okay. That really helps. And the last question, what improvement can we see in the Advanced Materials, which has been not performing well due to a variety of factors, which you've explained? So how do you see next year for Advanced Materials?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [30]

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Yes. The -- thank you, as a matter of fact, you're making my job easier with your questions. Because this is you've teamed them up for me and I'm knocking them down the fairway, so to speak, because we're very excited about our Advanced Materials strategy. As you know, over the last several years, we even retitled our Chemicals business to Advanced Materials because it was very indicative to simply call that business a Chemicals business, did not do justice to what we are doing and what our strategy is to produce essentially the products for tomorrow -- for today and tomorrow. And the Advanced Materials strategy, our advance are environmentally sensitive and advanced sealers, our CARBORES product. And now with the HHCR product -- project, that will be our transformative strategy, if you will, on our Advanced Materials.

That -- to put it in cliché terms, should be our game changer, quite honestly. This will take us away from a lot of the obsolete products that go into, you heard in Jagan's comments, carbonless paper product, a lot of rubber applications and extremely simple paint type of applications and put it into advanced glues and other products that are very environmentally sensitive and environmentally responsible and very much the new wave of products that will net us better overall margins and put us on the front line of competitiveness versus those highly commoditized products.

That said, in 2020, we are just going to be ramping that up. So we don't expect the transitional change, but we are very excited about the way that this sets us up for '21, '22, '23 and beyond in that business.

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Unidentified Analyst, [31]

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Okay. And sir, what is our preparedness about the lithium-ion battery chemicals?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [32]

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Yes, the lithium-ion battery is part of that Advanced Materials strategy. I did -- my apologies, I neglected to specifically mention that. This -- the lithium-ion battery products that we're making, the coatings, the -- as well as the highly concentrated carbon products going into that are really exciting and growing very quickly. What we are trying to focus our R&D group on is we've come to create those based on the need for those products, which is largely coming from Asia. And we've been fortunate to be able to quickly modify our products to this highly specialized area in order to meet that growing demand. What we're trying to do there is to now transition to be able to predict where that industry is going and how we can be part of the solutions of where it will continue to go and how we could add value to grow our volumes there. But we're excited about potential in that area, but we'd like to be a bit more established from the R&D platform perspective, and we're focusing there.

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Operator [33]

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

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Gunjan Kabra;Niveshaay;Equity Research Analyst, [34]

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Sir, congratulations for reporting a good set of numbers. Sir, my question is, so when the aluminum demand is so sluggish totally with the low demand from auto sector also. And other calciners and distillers in China also, Europe also, India also, are having a tough time in maintaining their margins. And whereas we have reported -- since last 2 quarters, we have reported very good margins in the Carbon segment. Sir, what is playing out so well for us, is it refiners or is it just the low in the entry cost or -- and what is your general outlook for the year? Are these margins sustainable in long term, for a year or so?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [35]

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Yes, thanks for your question. The -- it's kind of a -- the global aluminum industry is kind of its own enigma. You can use the term sluggish to describe aluminum for the last 10 years. And I don't say that to poke fun. But I say that to really just in many ways, the aluminum -- the global aluminum industry hasn't lived up to any expectations that have been put forth. With that said, remember, we play a role as a supplier to aluminum and the role that we play is to be a competitively -- a cost competitively desired supplier. What we focus on -- well, as I described earlier, while pricing for our commodity, our CPC will fluctuate, what we focus on is really protecting our margin and ensuring that our smelter customer base is the -- are the aluminum smelters in areas of the world that -- where they can compete from a cost perspective. That's not always an easy thing to do, and it's been transitional certainly over the last 5 years. But we try and focus our customer base on those that are properly placed on the cost curve that are strategically -- are considered strategically important to their own nation and, therefore, protected from a tariff perspective.

If you look the most vulnerable places -- well, the most vulnerable place for aluminum in the world is in China. Because comparatively, China, a majority of China's aluminum capacity is higher placed on the cost curve, and therefore, more vulnerable. So right now, that kind of gives you a view of the industry for the last several years. But as we look forward, the weakness and the concern that we're seeing from the aluminum perspective is more focused and concentrated in China. And we think that reductions that would take place will likely take place due to demand in China and therefore, production in China. If you look, most of the rest of the world has done an effective job over the last 5 years of protecting their aluminum industry from dumping out of China, up against their domestic industries. We expect that trend to continue. And we expect that if China is pressured due to their own consumption and demand, given that they produce roughly 55% to 60% of the global aluminum produced in the world, that it will be China that takes it off. And I would just add to that, from our perspective, we do not supply any of our calcined petroleum coke into the Chinese market. Rather, we are focused on North, South America, Europe, Africa and really Southeast Asia.

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Operator [36]

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The next question is from the line of Bhavesh Chauhan from IDBI Capital.

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Bhavesh Chauhan, IDBI Capital Markets & Securities Ltd., Research Division - Analyst [37]

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Sir, my question is on Anhydrous Carbon Pellets. Should we assume that after it gets into production from H2 CY '20, the problem of this GPC imports will go away as we'll be producing CPC in India and even in U.S. from this material rather than GPC?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [38]

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I think it should address to a good extent. The ACP should address the concerns -- immediate concerns, but it will not meet the full capacity. But our plan is to produce partially in India and partially in the U.S. than move it here. But it should address to a certain extent in this year. And going forward, we have to see -- and one more thing is the Ministry of Environment and Forests is supposed to, as per Supreme Court orders, file revised environmental emission standards for calciners in India. And the requirement of FGD by March 13, that is 6 months from September 13 when the judgment was came out. So we are expecting that the Ministry of Environment and Forests should do that. And we are hoping that then maybe that Supreme Court may actually reconsider this -- the entire scenario. So we're just waiting for the standards that will be filed by Ministry of Environment and Forests.

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Bhavesh Chauhan, IDBI Capital Markets & Securities Ltd., Research Division - Analyst [39]

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Okay. And sir, also our back testing on this Anhydrous Carbon Pellets, how cost-effective are they compared to GPC?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [40]

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See, that main advantage of Anhydrous Carbon is basically, you can use inferior-grade raw materials to produce a very high-quality material. So we can use and still produce a very high-quality material. So there may be some cost actually for producing of Anhydrous Carbon Pellets, but the quality we are going to get and the ability to supply actually will compensate for that. Because this is more or less -- it makes the entire process carbon neutral. Because when you actually produce calcined petroleum coke that there's a lot of carbon particles that actually burns and there is a lot of carbon dioxide evolved, which -- so -- but here, basically because of the pelletizing, there will be no more carbon here or carbon burning and these entire volatile that will be evolved is basically hydrogen, which makes it cleanest power generation, making it carbon neutral. So that is a benefit actually for all the smelters that are also looking to make more carbon footprint -- to reduce their carbon footprint. So we think ACP going forward will be a very strong material in our portfolio to be able to service the customers -- aluminum customers around the world.

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Operator [41]

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The next question is from the line of Sarvesh Gupta from Maximal Capital.

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Sarvesh Gupta, Maximal Capital - Founder [42]

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So first thing, because there is heightened level of environmental concern around the world. And as you were mentioning that the new product, ACP would help us reduce some concerns on the same -- even from the point of view of our customers. So does that mean that going forward, we would want to convert our entire capacity into some sort of ACP rather than the current products?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [43]

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See, it's not -- see, one thing is ACP is a different plant, it's not a regular calciner plant. So it's -- actually, it's an engineered product. So the investment to make ACP is also quite high. But what the ACP can form is that ACP will become a good blend for the green petroleum coke. Because if we can blend it, then actually the quality of -- the average quality of the calcined petroleum coke will increase because I don't think any customers will ask just for ACP products, but they will ask for a combination so that they get best of the both worlds from a cost perspective as well as addressing the quality perspective also. So we think that while we may add -- based on out of these 2 plants, we may add in 1 or 2 plants more, but I don't think we'll be -- every plant will be actually replaced with the ACP. And let us see basically how things go. But we think, but it's a very important product because last week also, we had this metallurgical society meetings, the TMS Meetings in the U.S., where there was a lot of interest from a lot of customers actually on this and looking to test this material. So we think it's a good product and it will be a product of the future so.

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Sarvesh Gupta, Maximal Capital - Founder [44]

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Understood. And then secondly, on the margins front. So right now, we are at a normalized EBITDA margin, EBITDA overall as INR 450 crores for the company. Now with this new expansion that you are taking and which is going to get operationalized in this calendar year, what is the increase in our normal overall absolute EBITDA that we can hope to achieve once all these plants start working on full utilization, maybe from 2021?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [45]

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As you are aware, we don't give future guidance. But we think it should improve, but we cannot give any future guidance.

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Sarvesh Gupta, Maximal Capital - Founder [46]

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Okay. And I think somebody also mentioned on the call that we are planning to do around $100 million, if I heard correctly, of CapEx in CY '20. Is that right?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [47]

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It's not $100 million, it's $120 million.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [48]

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We said $120 million.

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [49]

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That is on the project -- expansion projects towards ACP, vertical shaft kiln and HHCR, these 3 expansion projects plus the regular maintenance CapEx.

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Sarvesh Gupta, Maximal Capital - Founder [50]

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But how much is the regular maintenance CapEx out of this?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [51]

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We think it will be somewhere about $60 million.

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Sarvesh Gupta, Maximal Capital - Founder [52]

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$60 million?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [53]

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Yes, $60 million.

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Sarvesh Gupta, Maximal Capital - Founder [54]

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Okay. And that looks to be on the higher side, any particular...

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [55]

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No, because we have 19 plants. So basically, and we have environmental expenditures and all these things. So with all this put together, our maintenance CapEx, not only this year, will be going forward also it'd be in that range.

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Operator [56]

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The next question is from the line of [Nandan Madiwala from Madiwala Investments].

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Unidentified Analyst, [57]

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Congrats on a good set of numbers. Sir, I just wanted to know that we've started with the import of ACP. I believe that do we have to prove that ACP is different from GPC, so that it does not form part of the allocation that has been given? Or it is considered as different?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [58]

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No, actually, it was brought under a different HT code. Basically, petroleum coke is imported under HT code 2713 or 2711, but this was actually under 3801. This is similar to sort of briquettes, which is actually under 3801 category and anodes, which actually as well brought under 85. So we think this is a different product, but this is always subject to -- available for scrutiny and the government agencies can check that and they can ask queries. And we are here to provide the information.

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Unidentified Analyst, [59]

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Okay, okay. All right. And just one more question on the aluminum side. I see that over the last almost 5 years, the aluminum inventory has been going down. So we've seen an uptick in the last quarter. So do we see that to sustain or any thoughts upon that?

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [60]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [61]

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Yes, thanks, Jagan. Thanks for your question. That's -- there's actually been virtually no commentary about that. I did notice that there was a slight uptick. However, the inventories are so low at this point that the last 5 years has -- as to actually the last 10 years has shown just a greatly diminishing trend of LME inventories. And I think it's more representative of companies working off their stocks and not keeping their stocks on the LME as much as they had from, well, historically, quite honestly, before 2010. But with that said, I'm not seeing too much concern. And while we're not in the aluminum industry per se, we've not heard much in the industry for any concern about excess inventory overhangs and such. Again, I think at this point, there's more concern -- there's probably more concern about the long-term effect of the coronavirus and how this could affect aluminum versus the LME inventory levels at this point.

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Operator [62]

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We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Jagan Mohan Reddy Nellore, Rain Industries Limited - Vice Chairman [63]

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Thank you. After an improved second half performance in 2019, we entered 2020 cautiously confident. While the challenges of the past year are mostly resolved, except the ban on India petroleum coke, which is still to be resolved, we believe that our new HHCR facility in Germany and the shaft calciners in India, along with the ACP plant that is also being constructed in India, will provide new revenue streams and open new markets for us starting second half 2020 and 2021. At the same time, given the continued sluggishness of the Chinese economy as well as in some key markets, such as automotive, graphite and steel, we know fiscal discipline is imperative. And of course, we will need to see the unknown impact of coronavirus in the long term.

In this environment, we are committed to driving optimization and efficiency and those things within our control. That means continuing to improve every aspect of our business and ensuring that our accomplishments are sustainable. When it comes to our financial performance, we must continue to aggressively manage our spending and eliminate expenses that do not add significant value for our company, customers or investors.

During 2020, we are committed to building on what we started during this past year, improved financial performance, completion of our major capital projects and the introduction of new products like ACP and our Novares pure water-white resins, which should be real differentiators for us. By building on these achievements, carefully managing our costs and successfully completing the 2- to 3-year strategy that I described earlier, we will be well positioned to meet the increasing rigorous expectations of our shareholders, customers and communities and the planet we share.

Thank you very much for joining us today.

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Operator [64]

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