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Edited Transcript of TRMK.MZ earnings conference call or presentation 13-Mar-17 2:00pm GMT

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Q4 & FY 2016 Trubnaya Metallurgicheskaya Kompaniya PAO Earnings Call (IFRS)

Moscow Mar 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Trubnaya Metallurgicheskaya Kompaniya PAO earnings conference call or presentation Monday, March 13, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Vladimir Shmatovich

Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development

* Sergey Alekseev

Trubnaya Metallurgicheskaya Kompaniya PAO - CMO

* Piotr Galitzine

Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations

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Conference Call Participants

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* Igor Kuzmin

Morgan Stanley - Analyst

* Stella Cridge

Barclays - Analyst

* Maria Radchenko

BCS Capital - Analyst

* Vladimir Sergievskiy

Barclays - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to TMK Fourth Quarter and Full Year 2016 Financial Results Conference Call. Today's speakers will be Mr. Vladimir Shmatovich, and Mr. Piotr Galitzine. I will now hand over to your host, Mr. Vladimir Shmatovich. Sir, please go ahead.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [2]

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Good morning and good afternoon, ladies and gentlemen. Thank you for joining us at TMK earnings call conference. So today we announced results of fourth quarter 2016 and full-year results as well. As usual, I will make introductory speech, then we'll have a brief review of Russian market by Head of Marketing, Sergey Alekseev, and then review our US business by our US team led by Piotr Galitzine, CEO and Chairman of US division. And then we'll go to questions and answers. So speaking of fourth quarter and full year 2016, we should say that we view our results positively under the circumstances. We saw improvements in revenues and EBITDA in fourth quarter, and at the end of the day, our EBITDA margin stay basically the highest in the world amongst public reporting pipe companies, so it's 16%. And we saw quite healthy increase in shipments in US division, over 60% in second half of 2016. And although there are certain delays but already at the end of 2016 and especially beginning 2017, we see our American business starting generating positive EBITDA and our American team will speak in more details about it.

Russia, as always is island of stability in our business. Last year, Russia was the leader globally in drilling, drilling was up 12%. And that resulted in increase in the strategic markets and improvements of our position; on this market we, basically we're capable of increasing our market share partially due to active import substitution strategy and policy by major Russian customers. So as a result, our market share in seamless OCTG in Russia exceeded 70% and the market share in premium connection exceeded 80%. And that obviously helped us and contributed to those high margins that I mentioned at the beginning.

At the same time, we had to circumvent, we had to offset a number of negative trends. One of them was the continuing softening of Russian ruble and our EBITDA have been essentially earned in rubles last year. This obviously optically decreased EBITDA in our financial statements. So average exchange rate ruble/dollar was 10% in favor of US currencies, so ruble softened 10% and that obviously impacted our EBITDA in presentation currency, which is US dollars. Besides that, after all-time record breaking 2015, we saw a considerable decrease in large diameter pipe market in Russia, and that of course also contributed to decrease in Russian volumes and Russian earnings.

In addition, financial recovery of our US division started happening somewhat later than we expected and shifted more towards 2017, so it's happening now. Another challenge that we faced was the increase of fuel prices in second half of 2016, so different steel products ranging from scrap to flat products, we saw price increases 50% to 60%.

And to compensate that, we started increasing our prices end of last year, both in Russia and US, and in US just a couple of weeks ago, we had another major increase in prices, which again our America team will highlight.

And in Russia, we even publicly announced that we increased our prices 5% starting from March. And overall, given our pricing approach, we expect 2017 prices full year exceed full year average 2016 prices by 5% to 10%, which will help us pass the cost increase to our customers. All that is given the further flat steel prices, so steel prices go up further, which we doubt they will, we will increase our prices again. So that's on the operational front.

On the financial fronts, we stayed very disciplined on CapEx. So having promised to keep CapEx less than $200 million a year, we spent only $175 million, so discipline is there. And going forward, we don't have any major CapEx projects, we started new heat treatment projects in Romania and on Seversky plant in Russia, but they are broadly small-scale and fast payback projects. Other than that, it's small things here and there, completely manageable.

We also disposed Scrap Collection Company in the last year, which again helped us improve our cash flow. And finally, we have conducted secondary public offering of shares last month. Essentially, we used our right to buy our shares back from VTB and we sold corresponding block of shares from the market. We consider the deal successful, we sold about [13%] of our shares, the key goal to improve liquidity, to attract investors and we had over 60 new investors in our book.

And we were able to increase the prices during the placements, and we saw very positive feedback and two times book over subscription at the final price from the markets, and that obviously helped our liquidity, helped investors be aware of our stock and our performance. And also we were able to make some small profit on this transaction, as we sold shares at a little higher price than we bought them eventually from VTB.

We could not decrease basically our net debt during 2016, and the reason given is our dimensions, these things impacted our operational capacities to earn EBITDA, as I said. However, we still made over $50 million of net repayment of borrowings, so we demonstrate our commitment to reduce debt. However, exchange rate played against us, for example, the exchange rate at the last day of the year, which is used to measure debt was almost 10% higher than the average exchange rate during the year.

So optically, it's impacted our debt expressed in US dollars and therefore the leverage, however, we stay committed to decreasing our debt going forward, and we'll use both organic and non-organic means to do that. So speaking of 2017, we are optimistic as our US division is quickly recovering from the crisis and we keep reopening the plants that had been idle and we see very good demand in physical volumes and we increased prices and improved profitability. In Russia, we see very stable demand for seamless pipes and OCTG. We don't see any impact of production limitation, which Russia is in progress of doing as agreed to OPEC and the import-substitution efforts also continue.

We are very pleased with our co-operation with leading Russian companies. We, for example, we heard that Russian government actually sent a directive to state representatives on the board of directors of oil and gas companies. The state participation actually vote for import-substitution programs aimed at Russian producers producing high-end products and substitution imports. We should mention the very successful experience of Gazprom with whom we signed at the end of 2015 a so called contract on Future Thing, which promises us in eight years up to $1 billion extra revenue from high-tech products and that's a commitment to keep. We sold in 2016 a number of absolutely new products which we never sold before and the revenue from that exceeded $100 million and we will keep doing that, every year we'll be introducing new products to the market with the value exceeding $100 million.

And at the end of three-year period, we want to see our overall share of premium products growing from 30% to 50%. So as a result, we will truly become Top 2 global pipe company, where we are already by number of metrics. So we expect to improve our financial results in 2017, and I already mentioned, the key drivers to doing so. So at this point, I would pass the word to Sergey Alekseev, Head of Marketing at TMK, who'll brief you about developments of the Russian market. Sergey?

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Sergey Alekseev, Trubnaya Metallurgicheskaya Kompaniya PAO - CMO [3]

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Thank you, Vladimir. Hello, ladies and gentlemen, so as for the Russian market in Q4, the overall Russian pipe market increased by 1% compared to the previous quarter as the higher OCTG demand was largely offset by weaker consumption of large diameter pipe and welded industrial pipe as well. But the OCTG market grew by 15% quarter-on-quarter due to seasonable factor mostly. Speaking about as a whole 2016, the overall Russian market declined by 10% year-on-year due to significantly low large diameter demand and the volumes of OCTG consumption increased by 4%, compared to 2015, mostly supported by the growth of drilling about 12% year-on-year.

And at the same time, would also indicate the growth as a result of drilling in 2016, which has increased about 2% and now the share of the oil wells drilled horizontally in Russia has reached 37%. Russian oil production has set a new record in November 2016 reaching 11.2 million barrels per day. And as to agreement with OPEC, Russia has agreed to cut production by 300,000 barrels per day in the first six months of 2017. But we do not expect a significant impact of OCTG and line pipe demand in this year. Production cuts are likely to be reached through decrease in drilling activity [giving] deteriorating well flow dynamics as well as oil wells in Eastern and Western Siberia, which are about 70% of Russian crude oil production have been forcing oil producers to increase drilling activity. So it means that the companies will go on drilling and that will require more tubular for their plans.

We need to note that the current strong market demand is mostly supported by seasonal procurements of the oil companies and for 2017, we expect sustainable market demand for oil [tubulars] in Russia. We also expect a slight better product mix in OCTG sales this year, thanks for stability in oil prices and the results of our qualification programs with our key customers. We need to know that TMK is strengthening position in domestic market in the key segments like line pipe, like seamless line pipe, where our share is very close to 64% by the end of the year, and our OCTG seamless market share is about 65%. The share of complex wells in Russia is also growing, and it's driving the demand for the value-added products, which we can allow to the markets like our TMK UP connections and proprietary grades as well.

As for outlook for this year, according to our market strategy, we keep our market share in key segments, and also increase our presence with the new products, mostly value-added products. As well as we are running a number of programs with our customers, so on import substitution program, where we expect some additional volumes of sales in the value-added segment.

TMK also expects lower large diameter consumption in the current year due to completion of some of the projects and re-scheduling a number of the major pipeline construction projects. But seamless oil and gas pipe consumption will remain strong in this year, due to also mentioned factors and we have to also mention the potential for the moderate growth, possible moderate growth this year in this segment as well. Thank you.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [4]

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Thank you, Sergey. So now I pass the word to our American team led by Chairman and CEO, Piotr Galitzine. Piotr?

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [5]

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Thank you, Vladimir, and good day, ladies and gentlemen. In the American division, we have three main things I'd like to stop on shortly, the first one is increasing shipments since February of last year continued gradually until end of this year, when OPEC and non-OPEC reached an agreement on cutting back 1.8 million barrels a day at which point the rig count, which had been increasing already started to zoom up.

We think that this is sustainable, especially as we know today for every barrel OPEC and non-OPEC takes off, the American oil shale drillers are putting on half a barrel, and the producers group is more than 90% on track to reach the desired cuts. So this is all to do good. Right now in Q4, we were looking at rig count increases on the order of 6 rigs a week, that has increased in Q1 to the order of 9 rigs a week, and we are now at 768 rigs compared to the end of May, 2016, when we were at 404 rigs.

Something very dynamic has also happened with the amount of inventory on the ground, and if inventory of OCTG months' demand on the ground a year ago was almost 12 months. It has since come down. We said to ourselves from February of last year that there was something suspect about that statistic, because our pipe was moving faster than that would imply. And so we said to ourselves, at least half of the inventory on the ground has probably fallen out of fashion. In other words, the standardization of USA onshore shale wells has advanced to such an extent that you basically need seven sizes and you are done. So that means that the other half or two-thirds of the inventory was no longer in demand.

And in fact, the months of inventory on the ground, which was averaging over eight months in 2016, is now down to four and if you apply our coefficient, it's really down to two, which explains why pipe is flying off the shelves. In terms of the outlook, we think that although the oil price is dithering between $49 and $54, more and more E&P companies are deciding that their breakevens are low enough that they can get into the business once again. We see, as I said, rig counts increasing, 40% to 45% of all the rig counts increase is falling on the Permian Basin, the Delaware and the Midland Basins specifically. But the Marcellus is also moving quite nicely. Rockies and Midcontinent is also pretty active, I would say the only major shale basin that is still muted is probably the Bakken. We continue to build upon the results of our regional marketing work.

During our London Investor Conference, we talked about having reached 28% of all clients in 2016 in the first nine months were completely new companies that we've never sold a stick of pipe to. By the end of the year, that turned out to be 21%. The reason for the drop is not that we sold less to new companies, it's that older accounts came back and started buying once again. In terms of price increases that Vladimir mentioned, we have had three price increases on the oil and gas type of pipe that we use, OCTG, in November, January and March, totaling $369 on casing and $415 on tubing. In terms of loading, our seamless is running at 92%. We are improving the mix now, so we're moving back of seamless to welded a lot of the products that we made in seamless during the downturn. So we have some improvements that we can do there, especially as regards moving tubing back of seamless and to welded. In terms of the welded side, we have had a number of restarts. We restarted Wilder in the week of Christmas, December 25 and the second shift will come on in April 16, and Blytheville started up on February 26th week and the second shift in the beginning of May. As Vladimir said, the American division has shown a positive EBITDA in December and we are between increasing the volumes and increasing the prices looking forward to a robust and, of course, positive 2017. That's it from me. Vladimir, back to you.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [6]

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Thank you, Piotr. That was very interesting and helpful. So just to wrap it up, we passed through very difficult [two] years with the oil price decrease, but first of all thanks to Russia being now under stability and the Russian companies keeping same cash net back per ton as before. For example, I just looked again at their numbers and I saw that, I think four or some years ago with the oil price being at $100 per barrel, average cash net back was $25 and we have less the $50, now it's $22, so essentially same cash net back. So Russian stability, increase in drilling and steady demand for OCTG, that's one pillar and now source of growth, our American division will help us in 2017. Large diameter will continue being a problem, but it's not our core business, still our core money generator is OCTG. Therefore, we hope to do well. So at this point, we go to questions and answers.

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Questions and Answers

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Operator [1]

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Thank you. Ladies and gentlemen, we will now start our Q&A session. Vladimir Sergievskiy, Barclays.

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Vladimir Sergievskiy, Barclays - Analyst [2]

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It's Vlad Segiesvskiy from Barclays, thanks for taking my question. Actually I have a few primarily on the US business. First, could you please give some maybe quantitative color on how US shipments developed in the first months of this year. What were the monthly volumes and how do they compare to, let's say, 2014 levels. And then on your idle capacity which presumably, there are still idle capacity available. Could you give some again quantitative color how this could develop and how quickly you can ramp it up? This is the first two, please.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [3]

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Thank you, Vladimir, a nice question from you. Piotr, I think that question is to your end.

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [4]

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Yes, thanks very much. We are looking at a, as I said, a very robust market growth, especially starting in November/December. We are looking at - we have already logged and the first quarter is not finished, 30% increase in tonnage from Q4 to Q1 in the American division.

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Vladimir Sergievskiy, Barclays - Analyst [5]

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That's perfect. Any comment on what level of idle capacity you could potentially bring on in the next few months if demand continues like that?

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [6]

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Yes, as I said, we have already brought on two out of three welded mills. We have brought on Wilder and Blytheville and we are already running beginning to start a second shift in both. The only mill that we have not brought back on yet is Camanche but we are working on that as well.

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Vladimir Sergievskiy, Barclays - Analyst [7]

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Okay, that's perfect. And on the pricing side, obviously very solid price increases over the past few months. It's still early days to think about 2017, but if we are to assume profitability level for this year, would it be more towards the level of say 2013, 2014, which was about 10% EBITDA margin or should we get back to the level of, let's say, 2010 when the volumes were ramping up very quickly, and you were able to make about 20% EBITDA margin, if I'm not mistaken. Is there any chance you could comment on that?

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [8]

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Vlad, I think the picture today looks more like ramping up of 2010. When you come out of a severe downturn, which we had back in 2009, and which we had just behind us now. When you come out of a severe downturn, the first thing that happens is your volumes go shooting up, your shipments go shooting up and then as the market starts to feel that they can't get enough pipe, then the prices start coming up. We are looking at exactly the same thing. Additionally, we have done a lot of work on production in general in terms of bringing rate first time up, bringing yields up, we have gone from a historical yield on our welded production from 87% of coil ton to pipe ton to over 95% today, for example. We've done similar good work on the seamless side. So hard to give you any guidance on profit, and because it is a work in process and we are ramping up very quickly but it will look more like 2010.

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Vladimir Sergievskiy, Barclays - Analyst [9]

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That's perfect. The last question if I may. On your relationship with the distribution-wide network. At your Capital Markets Day, you highlighted that you are keen to take advantage and gain more distributors and obviously was successful in the past few months on that. Do you think it is translated into market share gains for you in the past few months. In other words, do you this think you are gaining market share now or it's reasonably stable?

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [10]

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We are gaining. We are definitely gaining market share, Vlad. We are seeing that this is happening for two reasons. The first one being that we've done this regional marketing, where we identified 245 potential new customers, of which we already took one-fifth and turned them, converted them into customers. This process is ongoing in 2017 and it is flanked and accompanied by our mantra which is, we are doubling down on distribution. Some of our clients have decided they don't need distribution at all, some of them have decided that they need just a few good companies. We have decided and explained this at length to the market and to our distributors, that we want more from existing distributors, and we are picking up new distributors for areas where we are underrepresented or for niche product and niche markets, where we're not present. This has been very well received by distribution.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [11]

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Vladimir, maybe just a couple of words to complement Piotr's answers. When you asked about capacity reserves, one should not just literally or mechanically estimate that our seamless capacity is almost [loaded] and the only reserve is welded capacities, which historically has lower margins. It's more complicated than that, and that Piotr explained that they tried to move certain mix from seamless to welded, therefore even keeping seamless capacity utilization at 90 plus percent, they improved the mix and improved profitability. So there's reserve growth by just redistributing the mix and leaving the most profitable mix in seamless and then picking up second best choices by welded. So there are - in other words , seamless business also has some reserves to improve earnings and margins. And on top of that, we plan to double our exports from Russia and Romania to the United States in 2017, complementing the range of pipes which in US we have more on the narrow side buy Russian and Romanian pipe, which has generally a large outside diameter. And that's also a very significant reserve for earnings. So thanks for your interest and we are ready for next question.

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Operator [12]

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Igor Kuzmin, Morgan Stanley.

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Igor Kuzmin, Morgan Stanley - Analyst [13]

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Hello, several questions from me please. Hi, first question is just to continue on the US economics. I would just like to double check, so first of all on exports from Russia and Romania, can you just clarify the volume maybe in thousands of tons of exports in Q4 and when you say you are going to double it, maybe, then the volume of exports for the full year 2016, so that it relate to 2017 potential estimated number. So that's question number one.

Question number two, we have seen the EBITDA in American division remain flat and it's very clear what sort of reason there could have been which have offset the positive trends in pricing. Do you see this trend to what extent improving. I'm assuming this is going to be improving, but to what extent do you see this improvement in first quarter, the first sort of signals, the first performance in the first couple of months. If you can give any guidance at all, so that's question number two.

And then going back to the comments in regards to pricing, when, if I remember correctly, there was a description of the outlook given for 2017, if I correctly heard you, you said that potentially you expect the prices to increase 5% to 10% year-on-year. What assumption do you use in conjunction with that in regards to the increase in cost of steel year-on-year on average? And can I have the same sort of assumptions on a full-year basis for US, and for the steel costs in US as well. I understand everything is moving very quickly, but maybe just a rough indication. Thank you.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [14]

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Thank you, Igor. Maybe I'll start with the Russian question, so Piotr has some time to regroup on the US questions. Yes, I did say that we estimate and, of course, it depends that on the average prices in Russia, and that primarily means OCTG, and that primarily means big customer relationships, but that's probably most of the prices will grow 5% to 10% compared to average prices 2016, and that, I think, I said that assuming the flat decreasing steel price.

So this price increase basically has the aim to offset raw material price increases that have happened in the second half of 2016. We already increased the prices at the end of 2016, so this 5% to 10% relates to 2017. So that has seen flat steel price dynamics or decreasing because we are not adjusting our prices automatically to steel, however if you see increases in steel prices, then we may increase our prices even further.

And then also before I pass the word to Piotr to answer your questions about US profitability, and maybe a little reiterating the question of Vladimir before, of course, we see that the speed of recovery and positiveness of recovery now is maybe somewhat similar to 2010, 2011, but just to double check, and to match your expectations, we do not guide you guys that we're going to make 20% EBITDA margin in US division this year. That hopefully will come, but maybe in future years.

So the recovery is good, but in terms of earnings given competition and the deepness of drop, depth of drop before, we do not guide you to such a number. We don't give a specific guidance, but in 2017, we still do not expect our margins in US to be 20%. So having said that, I pass the word to Piotr to maybe give some more color on previous questions of Igor, Piotr?

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Piotr Galitzine, Trubnaya Metallurgicheskaya Kompania PAO - Chairman & CEO, American Operations [15]

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Correct, Vladimir, thanks for correcting that. When I said about 2010 Igor, it was more from a shipments point of view, from a recovery, from real low. In terms of exports from Russia and Romania, they run historically between 15% and 25% of our monthly shipments. In a weak market, it is closer to 15%; in a strong market, it is closer to 25%. In Q4, it was 21% which is an indication that -- a secondary indication if you will that the market is coming back. That's to your first question.

To your second question about EBITDA and pricing, as said, we've already announced three major price increases in November, January and March of $60, $85 and $200 on seamless OCTG. This process is going to continue for the simple reason that we are still below historical price levels. For example, on Welded, there is another $400 to $500 to go before we hit historical levels.

In terms of steel costs which is 70% or more of our welded pipe costs, what we did here was put together a very innovative contract with our main steel supplier in the downturn. And in exchange for a good volume, this supplier gave us better prices and when prices do increase, they increase slower for us than the rest of the market. So that has helped and we are expanding this mechanism to other suppliers.

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Igor Kuzmin, Morgan Stanley - Analyst [16]

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Thank you very much. Can I just check, when you export volumes from Russia, where do you believe EBITDA from these volumes, in Russian division or the American division?

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [17]

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Both, our bookkeeping for EBITDA, both management accounts and IFRS is basically driven and reflects the -- say conservative approach that is mostly tax driven by both tax authorities in Russia and US and transfer pricing rules that are basically accepted and expected by them, just to make sure that there is no major shifts in profits from one country to the other.

And that's, basically each division earns what is fair to earn and therefore is taxed in a fair way as well. So as a result, the EBITDA on Russian pipes sold in the United States is basically split and I would say a large or somewhat larger part is attributed to Russian plants. So you see it in -- so in IFRS that would be booked in Russian division.

However, still quite a healthy part of that is attributable to US division because all or some of pipe has been actually finished in United States and all pipe has been expected, stored, delivered. So, the quite large volume of commercial work that's our division -- each division is doing, so they make money on that as well. So, short answer, it is split, most of it goes to Russian division, but still good part of it goes to US division.

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Operator [18]

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(Operator Instructions) Stella Cridge, Barclays.

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Stella Cridge, Barclays - Analyst [19]

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Good afternoon. Many thanks for the presentation. I have a few questions as well, if you don't mind. Firstly on the Russia business, I saw in the presentation, an expectation for the total pipe market in Russia in 2017, it looks like you expect it to come down a little bit. So I was wondering for TMK's own volumes, when you add all the different products together, are you expecting some decline in those shipments in 2017? That's the first question.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [20]

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Thank you. So, in 2017, we probably are going to see some further decline in large diameter pipe market as we stated and those pipes are heavy pipes. Therefore any change in their volumes; be it growth like it was in 2015 or decline that we see last couple of years, they are quite significant for the market, especially given Russian territory and the length and the size of gas and oil pipelines.

So, let's say Russian pipe market overall is sensitive to large diameter pipes. So that explains this reduction because, as I just said, OCTG and line pipe are, I mean not large diameter line pipe, I expect it to be quite stable. For TMK though, it's not such a big problem because large diameter pipe is not our main business and we are not leaders in this business, we are just one out of four players. And so therefore some other of the colleagues that specialized more in large diameter pipes may have no problems with that.

Our capacity is not that big. And in addition, general welded business is, let's say more resilient to drops in volumes, because it has much lower fixed costs compared to seamless business, especially cash costs because in seamless we have vertically integrated plants, we have like [gas] furnaces. So when volume drops in seamless, which in Russia, never happens; but nevertheless, theoretically that produces quite negative impact on results.

Well, when volumes drop in the welded business, we simply stop buying plates which basically constitutes up to 70%, if not more of -- if we are talking about large diameter or even 80% to 90% in small and medium diameter welded pipe parts of the value. So basically we don't lose much money, we don't lose money at all which just reduce our earnings when this happens.

So yes, we expect another difficult year for large diameter pipe, but same case much less dependent on this business. So that shouldn't be a problem and it's -- we hope it will be offset by growth in exports to the United States, which we estimate may grow up to two times. And so that will help us offset this effect, and almost offset the earnings that we plan to make. Thank you.

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Stella Cridge, Barclays - Analyst [21]

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Okay, that's super. Many thanks for that. And the second question was in relation to CapEx and what do you have in mind for 2017 and how may not be spread across the different businesses?

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [22]

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Thank you. So as we committed, we'll keep our CapEx below $200 million, that's what we can say. And so in 2017, the actual number would really depend on the exchange rate because right now when we don't have major CapEx projects like building new plants where most of the equipment is imported from Europe. Then more and more of our CapEx is in rubles. So of course it will depend on the Russian ruble

But I must say, even given current strengthening of Russian ruble, we'll still manage to keep our CapEx below $200 million at whatever rates it happens to be. So, to put it shortly, it's rather manageable number. In terms of how CapEx is spread, we don't plan any major CapEx in the US at all, so I would say majority of CapEx is still going to be Russia and also European division, where we started heat treatment project, which should really move us to an upper end niche in industrial seamless pipes in Europe.

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Stella Cridge, Barclays - Analyst [23]

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Okay, that's fantastic, thanks. And the final question was just on relation to headline that I saw on Bloomberg, just within the past hour or so saying that [TMK] says it may sell new a Eurobond for refinancing, and I'm aware that the outstanding balance on the 2018 Eurobond is quite small, about $230 million.

So, I was just wondering what's you're thinking there, would you actually potentially more than that that size or would you potentially look to maybe address the second maturities that you've got in 2020, just general thinking around Eurobond market. Thanks.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [24]

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Thank you for your question. Yes, the debt is our key focus both in terms of reducing it and also in terms of improving its structure and maturities. So we have already improved our maturity greatly, having refinanced two major loans from Russian banks which were short-term. So, one of them was refinanced to 2021, another one to 2019.

So the next more or less significant settlement is our remaining -- let's say remaining of our 2018 Eurobonds with which we have done two times buyback from the market, so about $230 million only remaining on the markets, and we have great flexibility, how to sell that, how to refinance, because this size basically is very affordable, more than affordable using our available credit lines with Russian banks.

But also we may contemplate issuing Eurobonds as well, because we have very positive relationship sentiment with fixed income investors, our Eurobonds trade very well with very healthy premium and very competitive yields. So, of course we'll look at the markets how to do, and as I said, we'll compare it to our committed credit -- undrawn credit lines, which are over $600 million.

But we may well issue Eurobonds. So Bloomberg is right, and also that will depend on the interest rate, because obviously those interest rates are almost two times as low as the ruble rates. On the other hand though, we'll look at our exchange exposure, because still most of EBITDA is made in rubles, so everything else being equal, we would rather borrow in rubles than in dollars.

But again, Eurobonds has its own positive features by clearance and size, so we may use this balanced approach to also keep banks in good direction, just showing them that we can borrow from capital markets as well, just to make sure everybody stays competitive. And so, Eurobond is possible, but of course we will analyze what's optimal from our standpoint in terms of currency structure of the debt, maturities and interest rates.

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Operator [25]

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Maria Radchenko, BCS.

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Maria Radchenko, BCS Capital - Analyst [26]

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Good afternoon. Thank you very much for the presentation. And I have a question with regard to your debt position. Now your debt repayment schedule for 2017 looks very comfortable now really, but leverage is quite high. It's above 5% in terms of net debt-to-EBITDA. So as you see market conditions improving now, do you expect leverage to decline this year? Could you maybe give us any guidance where you see the leverage at the end of first half 2017, let's say? Thank you.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [27]

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Thank you. First of all, of course, different analyst have different ways of calculating EBITDA and debt, but still the common and most regular approach shows our average, it's a lower than you said, it's area of 4.7%, 4.75%, not above 5%. But having said that, it is of course our concern and we will be decreasing our leverage and the ways that you get leverage is very simple, to increase EBITDA and to reduce debt.

We could not give exact guidance for first half of 2017, because this effect of raising prices in Russia and US, they need some time to flow down the bottom line and down to cash flows. So, most of the effect of price increase will see in second, third and fourth quarter. However, we should say that since we plan to increase our EBITDA in 2017 and to keep our discipline on CapEx and to try to keep more or less flat our working capital, we expect earnings. So that's source number one.

And of course, all free cash flows will go to reduce the debt. Generally, through the cycle, we typically have a target of -- area of $200 million got decreased over the year used in operational cash flow. Again, some years it works, some years it doesn't. As I said last year, certain conditions were against us. But this strategy remains through the cycle and we also mentioned that in three years, we want to reduce our debt below three times. And this plan is still on.

In case, our operational efforts won't be enough, we already announced and still stick to it. We may sell some non-core assets to reduce the debt as we sold the scrap company end of last year. And we have just done SPO and obviously we have, as usual, look up agreement with the banks and do not plan any offerings in the near future.

Nevertheless strategically, we have understanding with our Board and majority shareholder that we can use this source of cash, this source of debt reduction as well in mid-term. So we are ready to complement our organic efforts with non-organic, which is sell our non-assets, and in some future time, selling shares to reduce the leverage. And again, in six months it's difficult to say, but if market conditions play it right and do fulfill our plans, in 2017 of course, we'll see reduction in leverage maybe to the level of four times. Thank you.

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Stella Cridge, Barclays - Analyst [28]

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Thank you very much for very detailed answer. Thanks.

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Operator [29]

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(Operator Instructions) We have no further questions. Dear speakers, back to you for the conclusion.

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Vladimir Shmatovich, Trubnaya Metallurgicheskaya Kompaniya PAO - VP, Strategy & Business Development [30]

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So, ladies and gentlemen, thanks again for your interest in TMK. Again, there were there was two difficult years, but we are through. We are on a rising mode at the moment, and we hope that we'll basically support belief of our investors in us and we will not disappoint, but please them. We had very positive feedback from our SPO, experience from investors, they really appreciate the earnings potential of Russian market, which we may not have realized before, and of course, we are very keen to see the US recovery.

So we think a better life is ahead of us. As we have said, we confirm our commitments to the leveraging. And of course we'll also keep our eye and line-up our plans of both fixed income investors whether they maybe in Eurobond markets and for equity investors, which is always our priority.

So, thank you very much for your interest and goodbye.

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Operator [31]

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This concludes today's conference call. Thank you all for your participation, you may now disconnect.