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Edited Transcript of AFKS.MZ earnings conference call or presentation 29-Aug-19 2:00pm GMT

Q2 2019 AFK Sistema PAO Earnings Call

Moscow Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of AFK Sistema PAO earnings conference call or presentation Thursday, August 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrey Anatolyevich Dubovskov

Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director

* Nikolai Minashin

Sistema Public Joint Stock Financial Corporation - IR Director

* Vladimir Travkov

Sistema Public Joint Stock Financial Corporation - VP, Chief of Financial & Investment Department and Member of Management Board

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Conference Call Participants

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* Alexander Vengranovich

Renaissance Capital, Research Division - Analyst

* Anna Kurbatova

Joint Stock Company Alfa-Bank, Research Division - Senior Analyst

* Dilya Ibragimova

Citigroup Inc, Research Division - VP

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Analyst

* Ivan Kim;Xtellus Capital Partners;Executive Director

* Mark Donikian;QBF Portfolio Management;Portfolio Manager

* Sergey Libin

Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Sistema Second Quarter 2019 Financial Results Call on August 29, 2019. (Operator Instructions)

I will now hand the conference over to Nikolai Minashin. Please go ahead, sir.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [2]

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Thank you, operator. Before we start, we would like to draw your attention to the fact that some of the information during this call contains projections or other forward-looking statements regarding future events or the future financial performance of Sistema.

You can identify forward-looking statements by terms such as expect, believe, anticipate, estimate, intends, will, could, may or might, the negative of such terms or similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially.

We do not intend to update the statements to reflect events and circumstances occurring after today's date and to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, future rating, economic and credit conditions; competitive environment risks; risks associated with operating in Russia; rapid technological and market change in our industries; as well as many other risks, specifically related to Sistema and its operations.

Dear ladies and gentlemen, thank you for your interest in Sistema. Today, Sistema's financial and operating results for the second quarter 2019 will be presented by Mr. Andrey Dubovskov, Sistema's President and Chief Executive Officer; and Mr. Vladimir Travkov, Sistema's Vice President and Chief Financial Officer.

With that, I'll turn the call to Andrey Dubovskov.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [3]

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Thank you Nikolai. Ladies and gentlemen, thank you for joining us today. I would like to begin by highlights, our portfolio companies' main achievements in the first half of this year and the key investments we are focusing on at the moment. After this, our CFO, Vladimir Travkov, will go into more detail about our financial results.

I'm very pleased to report the continuing growth of our portfolio's value. All our companies were successful in implementing their strategies and leverage and group competencies, while we continued to focus on strategic investments, cost control and debt optimization as a Corporate Centre.

So let's discuss the performance and plans of our largest asset source. At MTS, revenue rose by 9.4% year-on-year on the second quarter, driven primarily by growth in mobile services revenue in Russia and Ukraine; increased system integration and software sales; and the consolidation of MTS Bank.

Detsky Mir is now by far the dominant specialist retailer in the segment. The market for children's goods has passed the stage of rapid growth but Detsky Mir has not. During the quarter, revenue by 16.3% year-on-year. Growth was driven by the ramp-up to further the capacity of stores opened in 2017, 2018; ongoing improvement of like-for-like sales in Russia and Kazakhstan; and increased contributions from online sales.

The company is gaining market share in Russia, Kazakhstan and Belarus, while also entering new markets. The company recently revised its plans for new store openings by the end of 2019 from at least 70 to at least 90.

Segezha Group also demonstrated strong performance during the second quarter, increased revenue by 17% year-on-year. And packaging their business well, despite weaker prices for sawn timber and plywood. Segezha continues to amplify its production cost advantages by improving the efficiency of sales, and their use and expenditure of fuel oil and electricity and the increase in the proportion of production that uses the company's own loading. These measures has -- have allowed Segezha to increase adjusted OIBDA by 45% year-on-year during the second quarter and deliver strong bottom line net profit of RUB 1.3 billion.

We expect that the pricing pressures that have affected selected Segezha segment, will spread to the paper and paper sacks markets in the second half of the year. However, the underlying trends of Segezha's integrated business model position it's really well to adapt to the external changes and pursue on new growth opportunities.

Revenue at the Agroholding Steppe grew by 24.6% year-on-year to RUB 4.7 billion in the quarter, thanks to increased export volumes in the Agrotrading segment; sales growth in the sugar and grocery product trading segment; as well as the gradual ramp-up of new production in the dairy segment.

Our healthcare provider, Medsi, is well on track to scale up its operations by continuing to increase capacity utilization. For the reporting quarter, the company have posted strong double-digit growth in the number of patient visits and the number of services provided.

Combined with this growth of the average check, this resulted in a revenue increase of 34% year-on-year. In line with its strategy, Medsi continues to invest in capacity expansion in the Moscow region. Notably, the company is constructing a Multifunctional Medical Center in Michurinsky Prospect, with a total floor space of 34,000 square meters. That facility is scheduled to open next year.

Our portfolio companies are finding new opportunities for business development and increased efficiency by leveraging synergies in their group.

For example, Steppe and Ozon are partnered to sell sugar and the cereals under Segezha brand. And they have launched a product aimed at the digital transformation of Segezha's Group business. The digital management platform duplicated on a private cloud service -- server created at MTS-owned Data Centre and it will make it possible to significantly improve the efficiency of productions processes.

SmartMed, a joint project of MTS and Medsi in telemedicine is quickly increasing its user base and expanding functionally of there. While Segezha, Steppe, Medsi and Ozon have clearly established themselves as market leaders, our pharmaceutical business, Binnopharm, until recently, didn't have the necessary scale. Now with this initiative a new company, Alium, is being created through the merger of 2 entities, Binnopharm and OBL Pharm.

We acquired OBL earlier this year as part of a bigger investment consortium. Upon completion of the merger, the combined company will have a differentiated diversified product portfolio comprising about 200 proprietary and generic drugs.

After the end of this reporting period, we increased our scale in this industry even further. We made a strategic investment in Sintez, a top 10 market player in Russia. Together with Alium, the new acquisition will provide -- produce more than 500 products across its production facilities in Russia. The combined entity, therefore, forces the potential to become a top 3 Russian pharmaceutical company in the commercial segment.

With increased focus on important substitution and strong potential from our consolidation, we believe that pharma could be one of the most important drivers of the growth in value of our portfolio.

We also continue to deleverage our portfolio. Earlier this month and after the reporting period, we completed the sale of our remaining 49% Leader Invest to Etalon Group, thus bringing Etalon's share in the company up to 100%.

This has allowed Etalon to fully unlock synergies between the 2 businesses and position Etalon is a leader in Russia's 2 largest residential real estate markets, Moscow and St. Petersburg. And as I stated previously, the proceeds from this transaction will be used over debt reduction.

With that, I'll now pass the floor over to our Chief Financial Officer, Vladimir Travkov. Please go ahead, Vladimir.

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Vladimir Travkov, Sistema Public Joint Stock Financial Corporation - VP, Chief of Financial & Investment Department and Member of Management Board [4]

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Thank you, Andrey. And thanks to all of you for joining our call today. Our second quarter numbers reflect further solid progress achieved by Sistema as we continue to pursue growth, realize efficiencies and strengthen our financial profile. Sistema's consolidated revenue for the quarter increased by 9.6% year-on-year to RUB 194 billion. Adjusted OIBDA grew 1.3% year-on-year, reaching RUB 66 billion with an adjusted OIBDA margin of 33.8%.

During the second quarter, we saw some OIBDA pressures related to robust margin expansion of Alium where we continue to see excellent growth potential. At the same time, most of the assets in our portfolio demonstrated solid and resilient OIBDA trends despite a cyclical and competitive challenges in their markets.

While MTS still represents over 80% of the group OIBDA and continues to contribute strongly to its growth, other assets are now driving group's dynamics. Segezha Group was the biggest contributor this quarter. At Segezha, we see benefits of sustained investments into expansion in the [realizations] of the company's production capacities.

It gives us adjusted OIBDA for the quarter increased by 44.8% year-on-year, resulting in an adjusted OIBDA margin of 24.4%. The increase was driven by increased margins of paper sack sales and reduced energy costs.

And Detsky Mir increased adjusted OIBDA by 15.2% year-on-year in line with its robust revenue improvement. Such a formidable performance comes from the company's status of one of the fastest-growing and most efficient retailers in Russia.

Medsi's adjusted OIBDA almost tripled year-on-year with the margin reaching 29.7%. The increase in profitability also impacted by release of provision increase in previous quarters, was primarily organic. It was delivered thanks to significant growth and utilization of in-patient facilities and further increases of revenue per square meter.

Sistema's consolidated SG&A increased by 5.8% year-on-year, which mainly reflects a good pace of business expansion at MTS, Detsky Mir and Segezha. And the Corporate Centre SG&A decreased by 14% year-on-year as a result of lower compensation and administrative expenses.

At the consolidated SG&A, the revenue ratio in the second quarter stood at 18.2%, the same level we achieved in the first quarter of this year.

Year-on-year, we saw a reduction of the SG&A to revenue ratio at Medsi, Detsky Mir, Agroholding Steppe, BPGC as well as our hospitality efforts.

Sistema Group Capital expenditures increased by 4.6% year-on-year to RUB 28.3 billion.

As MTS invested in a network expansion and the Medsi proceeded with construction of a large Multifunctional Center in Michurinsky Prospect in Moscow.

Now I would like to move on to our debt profile and cash position. During the second quarter, Sistema's Corporate Centre repaid an equivalent of RUB 24 billion of a fixed denominated debt as we redeemed our Eurobond issue in May. This debt was refinanced with proceeds from 2 local bond placements that we completed in April and May, as well as the bank financing restructured. As a result, our net repayments of financial liabilities during the quarter amounted to a RUB 9 billion. Total financial liabilities at the Corporate Centre level decreased by 4.2% to RUB 222.1 billion.

At the end of the reported quarter, Sistema's cash position declined to RUB 4.2 billion, mainly due to both the debt repayment and increased interest payments typical for the second quarter as we paid our final coupon on the Eurobond in May. However, in August, the Corporate Centre's cash position was strengthened as a result of the sale of our 49% stake in Leader Invest with Etalon of RUB 14.6 billion. Proceeds from this transaction will be used for further debt repayments, which we will see reflected in our third quarter results.

Debt repayments at the Corporate Centre as well as lower debt levels at MTS and RTI resulted in a decrease of Sistema's consolidated financial liabilities by 3.3% during the quarter to RUB 735.4 billion.

It is important to highlight further progress with our debt maturity and a swift composition. The share of our consolidated long-term liabilities in our total debt portfolio increased by 2.3 percentage points during the quarter to over 81%.

Liabilities denominated in foreign currencies now accounts for only 13% of the total sales as of the end of June, down from 18% as of the end of the first quarter.

Consistent development for Sistema's portfolio companies, along with our effort to further optimize our liabilities and strengthen our credit profile, that will radiate growth and considerable results. We are seeing the cost of our debt going down and markets' appetite for Sistema's risk solution. In July, we completed our third ruble bond offering this year, placing an exchange-traded bond worth of RUB 10 billion at a comfortable interest rate of 9.4%.

I'm also pleased to report that today, S&P upgraded our credit rating by 1 notch to BB- with a stable outlook. The agency cited monetization of our remaining stake in Leader Invest and growth in the value of our portfolio. S&P also underscored our commitment to further deleveraging, using strong dividend flows from our portfolio companies.

With that, I would like to thank you for your attention and hand the call back to Nikolai.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [5]

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Thank you, Andrey and Vladimir, for your presentation. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Igor Goncharov from Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [2]

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Yes. A question on the dividend. So previously, at one of the meetings with investors, you indicated the intention to update the approach to dividend payments in order to remove the existing discrepancy between the formal dividend policy and the actual dividend payments. And as far as I understand, the intention was to do it by the fall -- by the autumn this year. I was wondering if there is any developments in this direction?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [3]

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Igor, thank you. It's Andrey. And so yes, you're right, our previous position was to finalize our approach about our dividend policy to the autumn, but currently, we are not ready to talk about more deeply. But I want to say that we continue internal deliberations to determine the best approach for the achievement in the long term, increase in shareholder value.

And you know that we need to find the right balance between developing our key portfolio companies, reducing debt, identifying new investment opportunities. And all these questions are a little bit bigger than we thought about earlier. And you will more -- you will have more clarity with regard to future dividend payments in the second half of this year.

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Operator [4]

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Our next question today comes from Ivan Kim from Xtellus Capital.

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Ivan Kim;Xtellus Capital Partners;Executive Director, [5]

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Two questions, please. Firstly, since we're pretty much far into the year, what should we expect for Steppe and Segezha OIBDA this year? Any guidance would be very much appreciated.

And then secondly, for Segezha, in particular, so how big of a cyclical downturn do you think is going to happen in sack paper business?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [6]

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Ivan, thank you for your question. It's Andrey. And I don't know, fortunately or unfortunately, we have no guidance because both assets are not publicly trading. Talking about our internal approach, of course, we are waiting for some improvements in our durations. But at the same time, let me remind you that we have some kind of problems with the price, especially in the European market. And based on the goodwill of -- in the first half of this year, we are waiting for the stable results based on the full year.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [7]

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Ivan, was it clear? Have we answered your question?

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Ivan Kim;Xtellus Capital Partners;Executive Director, [8]

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Yes. The first one, yes. But what about at the sack paper business? Do you think we will -- we are entering a period of softer demand and softer prices in that business? Or it's only sort of short term, temporary?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [9]

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Yes. That's -- there are the reasons why I'm talking about the good results in the first half of this year, and why I'm talking about the full year potential there. We are actually sure that it will be no long-term situation when the weaker price will pressure on our business. But at the same time, we are ready to support our business during next 1, 2 years, at least.

So based on all this information, I think that -- potentially, that the results of the full year in Segezha, in this segment, will be stable.

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Operator [10]

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(Operator Instructions) And our next question today comes from Dilya Ibragimova from Citibank.

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Dilya Ibragimova, Citigroup Inc, Research Division - VP [11]

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I had 3 questions, please. First is on Segezha. Just considering that your comment -- taking into account your comment that price is -- the price environment is unfavorable -- potentially unfavorable on cross paper and paper sack, going forward, could you perhaps share how much of the capacity that you've planned, how much of the production that you've planned for this year is sold in H1? And is it -- are the contracts 1 year in advance? And is it likely that we'll see the pricing pressure on the revenue from next year?

And also what is the -- have you done -- maybe you could share what is the OIBDA margin sensitivity at Segezha to, let's say, a 10% decline on paper and paper sack on European market considering the modernization that has been done at Segezha?

Second question is just a technical on Medsi. When Michurinsky capacity comes on, how -- what impact will be on overall diagnostics center capacity? Will it double? Or is it slightly? Yes, just maybe directionally, what the -- where the capacity is going to be after launch next year?

And the third question is on Ozon. Was any -- there has been some -- there has been equity injections this year, also a convertible bond issued, as you mentioned in the Q1 results. Is there anything else planned in the second half of the year for Ozon? And maybe you could share a little bit on what is happening?

Is it -- which stage is the company-owned? Are they doing some experimental things to drive sales? Or they have clear model and it's more of just taking a share of the market? Yes, if there's some color on Ozon, that would be very helpful. Hello?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [12]

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Yes. Dilya, thank you very much. It's Andrey. And if I may, I just want to take the question #3 and after that, previous questions.

Talking about Ozon. So just to follow, of course, we are focused on the operational improvements in our business. And currently, Ozon managed to increase its warehouse space by 80%, for example. And in total, Ozon now operates in the fulfillment centres with a combined area of over 160,000 square meters. And this is one of the biggest facilities in the Russian e-commerce area.

And the second achievement, it's developing our marketplace, which has already attracted more than 3,000 active sales. I'm talking about the marketplace. And with an additional 10,000 plus in the process of training or setting up there for France. And the marketplace already accounts for approximately 1/3 of products offered on this site. And this is a really good achievement when compared with our competitors.

And the third step, it's the launching of our Ozon premium subscription. Its subscribers place order 3, 4x more frequently than nonsubscribers. And again, this is a not unique approach in the Russian market, but very sizable.

And talking about the -- our potential investments in the e-commerce, this year, together with Baring Vostok, we already provided convertible loan to Ozon as you know. And talking about the size of this loan, it was around RUB 10 billion. And we are focused on the investments in the infrastructure and the IT. And currently, we don't think additional investments will be needed this year.

So we are assured that this is a real good business for us. And especially, if we take into account the sedation in the Russian e-commerce, I'm talking about their highly fragmented market. I'm talking the -- what is the growth in this market? So I think it's a good opportunity for us to increase our market share value [position.]

And talking about the pricing -- negative pricing in Segezha. Currently, more than 50% of all our current partners in Segezha have a 1-year contract and longer. So it's a good base for us how we can support our profitability and how we can keep this profitability in the near future. Talking about 2020 or talking about [projected] prices, of course, it fully depends on the prices in European market. And as you know, around 70% of our products, we'll arrange it to the European market.

Talking about the profitability, in second quarter of this year, OIBDA margin in Segezha was in the highest level historically. And unfortunately, I think we have no good potential possibilities to increase profitability more higher, but I hope that we can keep this level at least.

And third question from you was about, could you please to remind me?

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [13]

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How will capacity overall looking of diagnostic centers in (inaudible)? We can get back to Dilya on this, it's more a technical nature.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [14]

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Yes. Okay. I think it will be more comfortable for you if our IR department talk with you about these questions more deeply. But of course, I'm ready to talk about right now.

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Dilya Ibragimova, Citigroup Inc, Research Division - VP [15]

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This is very helpful. Can I just quickly follow up on Segezha? Just when you mentioned 50% of partner, do you mean it's 50% of pulp and paper -- sorry, paper and paper sack revenue? Or is it 50% of partners that have contracts throughout the year at 12 months and more?

And second question is just a follow-up on the -- sorry, second follow-up is just on Segezha margin sensitivity. Maybe just looking at one of the -- one segment which is -- sorry, which is paper and paper sack. If we were to assume that, for example, prices will go down, well, if we were to assume prices 10% lower from the levels in the first half, where, all thing equal, that segment EBITDA margin would be, if you have visibility on that? Or if you've done that exercise, that would help.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [16]

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Dilya, I'm really sorry, but during your questions, it was very noisy. Could you please repeat it again?

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Dilya Ibragimova, Citigroup Inc, Research Division - VP [17]

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Yes. I do apologize. Just on the pulp -- on the paper and paper sack segment, if you were to assume that the prices were to go down by 10%, where do you think EBITDA margin would be?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [18]

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Yes. Yes. Yes. Sorry to interrupt you. Yes, of course, talking about the sensibility and the dependability of the price for Segezha's products and our profitability, I think that we are waiting for the OIBDA margin in Segezha despite all these fluctuations in pricing, no less than 20%, 22%. Of course, it's a very aggressive plan but, at the same time, we think that the current sensibility is more or less stable.

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Operator [19]

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(Operator Instructions) And our next question comes from Alexander Vengranovich from Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [20]

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Again, first question on Segezha, probably. So assuming that you are producing this cyclical downturn on majority of the markets, has anything changed with regards to your monetization plan for the asset? Do you think it's going to be postponed and you will be waiting for the better times in the market in order to monetize the asset? That's the first question.

Second one, can you update us on what's happening with the pulp and -- bland pulp and paper factory in Krasnoyarsk region? Is there any update on that?

And the third question is on your pharma ambitions. So do you think you might be also really become the largest pharma producer in Russia? So do you have this ambition to consolidate further? And what sort of a rationale do you have behind this consolidation. So do you think there's a lot of the synergies between the producers you are consolidating?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [21]

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Thank you for your question. And if I understand correctly, your first and the second questions are more or less simultaneous questions because our potential monetization brought the -- depends on our plans, how we can increase our presence in the Krasnoyarsk region.

And the question, what will be the first step in this process, on the one hand, it will be very aggressive for us to create a new business in Krasnoyarsk, much more bigger business, much more profitable business. But at the same time, it's a very big capital expenditure as you know. And if you'll start this process as soon as possible, it can lead us to the second question, how we can attract more partners and how we can monetize the share in Segezha.

And the second scenario will be to attract partners for monetization in Segezha and after that, to start a new process to create a new business in Krasnoyarsk. Currently, we are placed on the main question based on the -- these approaches.

And talking about my position and talking about the position of Segezha team, I think it will be better if we can start first step to create a new business in Krasnoyarsk. And sooner or later, we can attract maybe partners, maybe where you can monetize share in Segezha, but it will be -- fully depends on our plans, how we can increase our business. So currently, no exact data about this process. But I think that you -- at the end of year, we will be ready to talk about more deeply.

And talking about the -- our pharma business. It's the right question but a little bit too early to talk about the -- our plan, how we can be biggest player in the Russian market because it is much clearer if you combine all our assets in this year, we can be #3 or #5 in the nearer future. And of course, we need to spend a lot of resources. We need to spend a lot of financial resources also to create a strong business in this year. And after that, we will be ready to talk about a more aggressive plan.

So currently, we are in the process of combining all these efforts into the one big business. And the first step, it's a question about our new brand, Alium. Unfortunately, this brand does not -- very important for the Russian pharmaceuticals market. But I think in the nearest future, we need to spend our -- all our resources into this question. And after that, we will be ready to talk about a more aggressive proposition in the market. But of course, we think that it will be very sizable business in Sistema's umbrella.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [22]

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So just a quick follow-up here on the question on pharma. So what is the main rationale for the combination of these assets? And do you believe the combination will bring you a lot of the synergies? Or do think that larger player will be sort of better valued by the market? So just like trying to get your rough idea on the rationale behind this consolidation.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [23]

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Russian pharmaceuticals market currently looks like e-commerce market; highly fragmented market and a lot of independent players operating in the market. And so, of course, it's a very good opportunity, it's first of all, how we can create a much bigger player.

And after that, a question about the synergies. And I think it's a very good combination how we can increase bigger business in the fragmented market, but at the same time, how we can create good synergies between all our assets. And to remind you, our assets are located in the different Russian regions, in Kurgan, Stavropol, Moscow, Moscow Oblast. And geographically, it can be a little bit bigger problem for us how we can combine good strong business in this area. But at the same time, you're absolutely right, question about synergies is one of the important question for us.

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Operator [24]

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We have our final question from [Elvis Marlamov] from -- he's a private investor.

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Unidentified Participant, [25]

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(foreign language)

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [26]

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[Elvis], I'm sorry, I have to interrupt you and tell the participants of the call that your question pertains to the future dividends of Sistema. Could you please speak slowly and I will translate after your each sentence?

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Unidentified Participant, [27]

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(foreign language)

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [28]

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Yes, please. (foreign language)

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Unidentified Participant, [29]

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[Interpreted] Can Sistema shareholders expect to see a new dividend policy with the new formula in the second half of 2019?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [30]

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So I have no possibility to price your -- the new formula, but I think we will be ready to update our dividend policy until the end of this year. And it can be a new dividend policy, but at the same time, it can be a new approach of our current dividend policy. Because we can realize our current dividend policy, or we can leave our current dividend policy without changes. And this is -- there is an open question for us.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [31]

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Yes, I will translate. And Andrey is not ready to provide any new formula with regards to dividend policy, but he believes that until the end of the year, we'll be able either to revise our dividend policy or suggest a new approach within the existing dividend policy.

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Unidentified Participant, [32]

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Okay. (foreign language)

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [33]

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(foreign language)

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Unidentified Participant, [34]

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[Interpreted] We have seen outstanding results from Steppe, Medsi, Segezha, but it's still unclear what's happening with the other businesses such as RTI and the new acquisitions and the projects in the area of mineral water. We would like to hear more details about this.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [35]

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So talking about the -- our new activities. For example, about the mineral water. And Sistema acquired from a private investor, a minority stake in Aqua Invest, a company that brings together a number of assets located in the Northern Caucasus that produce and bottle mineral drinking water. And you know that demand for our mineral water is one of rise in Russia. And the situation will -- water supply remains unstable. And this is on growth potential in this market through consolidation and elimination of counterfeit products. And on the basis of Aqua Invest, we, together with our project partners, plan to establish a large vertically integrated holding across production and bottling of drinking water and mineral water, and with the potential to become a major Russian market player. And apparently, it's a very early stage in this story and no sizable business for Sistema.

And the next question, talking about the Aqua, it's a question about the regulatory policy in Russia because a lot of independent players operate in this market. And unfortunately, some of them does not operating legally. And I think we have good possibilities to consolidate this market based on the legal approach on the one hand and based on the very famous brands in Russia also. So potentially it's a very good business. It can be not a sizable business when compared with all other assets, for example, Detsky Mir or MTS, et cetera. But we are looking for the good stable proposition, talking about revenue and profitability in this area.

And talking about...

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [36]

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I have to translate. Okay. Go ahead.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [37]

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Okay. And talking about the RTI. They have not amused during last period, but if I remember correctly in Spain, we told about the new business in Sistema's umbrella. I'm talking about the company named Element. And let me remind you that this company is a joint venture between Sistema and Rostec. And based on this joint venture, we aim it to create one of the biggest microelectronics player in the Russian market for commercial sale, for B2C and B2B market. And again, this business in a very early stage in development, and we will be ready to talk about this business maybe based on the 2019 results.

And what else? RTI, Element, Aqua -- what was the next question?

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [38]

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Kronshtadt.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [39]

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Kronshtadt? Kronshtadt. Yes, Kronshtadt. So given the immaterial contribution from this business, the group financial results, Kronshtadt's results are included in the other line, in our financial statements. And fortunately -- unfortunately, there's no sizable business for us. But at the same time, talking about the Kronshtadt, Kronshtadt continues to play out the state's contract, to create the unmanned aerial vehicle, UAV, named Orion, and has also begun to develop a new business segment, both in commercial services with the use of UAVs, including active use in the marine solutions markets. So potentially, I'm sure it will be a sizable business not for the Russian only, but internationally. And you know that there are limited numbers of countries which created their own air program. And I think Kronshtadt can be one of the biggest player in this market internationally. And currently, we're just investing in that business and currently, this business is not profitable. Unfortunately, OIBDA, it is negative. But at the same time, it's not so sizable for our P&L.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [40]

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[Elvis], have we answered your questions?

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Unidentified Participant, [41]

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(foreign language)

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [42]

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Yes, thank you very much.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [43]

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Operator, do we have any more questions?

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Operator [44]

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We do. We have 4 more questions, sir. The next question comes from Anna Kurbatova from Alfa-Bank.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [45]

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My question -- 2 questions are about Ozon. The first one is more technical. As far as you disclosed in the press release, the impact from Ozon losses on your OIBDA number, I wonder whether the second -- the loss of Ozon in the second quarter was like at the bottom in the year? And you expect, like, better delivery in terms of Ozon profitability in the second half? Or you expect that just the entire year will be like very intensive in terms of investments? So I wonder about the -- like what direction the Ozon numbers are going?

And the second question, also with regard to Ozon, about your strategic approach. So as far as we understand, the effort is in a very rapid development stage, and with very high investment needs. And I remember that some statement to media that the company is unlikely to be ready to an IPO in the next maybe 3 years. So I wonder whether you'd be interested in maybe selling your stake because when the deal about Sberbank and Mail.ru was announced also at the same -- more or less same period of time that there were rumors about potential Sberbank interest to Ozon?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [46]

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We just have a short internal considering. And so both questions were interesting for us. And you are certainly right when you are talking about some kind of dualism for us. Do we need to monetize this business based on the, for example, potential IPO? Or do we need to attract new partners? And you're absolutely right. Sberbank is one of the biggest potential partner for us, but at the same, we are not really to talk about the collaboration or some kind of categorization with Sberbank or some kind of other players, because based on our current results, we are looking for a little bit bigger estimation how we can increase our presence and how we can increase our place in this market.

And talking about my position and my team, we think that it's still too early to talk about the monetization in the nearest future or IPO, et cetera. I think we need to increase our resources and simply need to increase market share in the Russian e-commerce. And after that, maybe 1, 2 years later, we will be ready to talk about some kind of collaboration, categorization, or some kind of IPO potential steps, for example.

So -- and your question was also about the negative OIBDA if I heard it correctly, yes?

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [47]

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Yes, generally about the impact on your OIBDA for the second half, so should we expect less negative impact?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [48]

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Yes. You know that in 2018, the negative impact of Ozon on the Sistema's P&L was -- it was very small. But first half of this year, it's the first time when this impact was more or less sizable. Talking about the future, I think maybe it will be the same situation in the second half of this year, but at least no more. I'm talking about the negative impact.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [49]

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Okay. So basically, it means that the pace of investments will -- won't be more aggressive in the second half? It's unlikely to be -- to go higher, yes?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [50]

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Maybe a little bit bigger but not sizable, I think in compare with the pace of the -- with these numbers.

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Operator [51]

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Our next question comes from Sergey Libin from Raiffeisen Bank.

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [52]

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So my question is on Detsky Mir potential sale process. You haven't touched on that on this call. So if you could provide an update where the negotiations are and what has changed since the last update probably?

And so also maybe related to that, is there any changes to your internal debt targets compared to the previous target of RUB 150 billion?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [53]

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There are different scenarios for Detsky Mir and we remain engaged with the interested partners with regards to potential sale of holdings in Detsky. And however nothing pressure as such to dive at our stake at this point as our debt position is comfortable with Detsky's dividend yield. And we are confident that the effort is -- will only appreciate in value this time.

Detsky has strong potential for growth as it expands in underserved Russian regions like Far East or Siberia or Urals. And develops its online channels, increases sales in Kazakhstan and Belarus and many other countries. So not some kind of changes in our approach currently. If some potential partners will be interested in these assets, of course, we are ready to sell it, but this is talking about the good price for us, at least RUB 35 billion for our share I think.

And the second question was about...

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [54]

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Book debt.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [55]

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Oh yes, it's a question about our debt. Oh yes. So based on our current structure of cash flow, we believe that a comfortable level for us is RUB 140 billion, RUB 150 billion of gross debt, and you're actually correct. And to reach this level, we should be able to organically reduce debt by RUB 10 billion per year. And of course, we understand that it looks like not so aggressive, but at the same time, a more aggressive speed is achievable only through monetization and timing of this -- of each is hard to forecast. And after the end of the reporting period, we realize that the major monetization, divestiture of 49% stake in Leader Invest for RUB 14.6 billion, we aim to use this funds for debt reduction, and I think we can see results of these steps in the next exposure period.

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Operator [56]

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Our next question comes from Mark Donikian from QBF Portfolio Management.

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Mark Donikian;QBF Portfolio Management;Portfolio Manager, [57]

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I have a few questions about -- the first one about, do you have any target for Corporate Centre growth debt target -- sorry, target for the end of the year?

Second one is about shareholder structure of MTS. Currently, you -- I think Sistema are owning 44.60 -- 36% I think, and you're paying tax on dividends to 3.2 yearly. So basically, are you planning to redeem treasury shares in the next period?

And third question is about dividend policy. Is it -- does it depend on monetization strategy? So basically, if you decide to monetize your Segezha on the second -- or the first half of the year 2020, this will be like positive for a dividend policy decision this year or otherwise? So basically, if you will not monetize, you will decide to not distribute dividends on the next year?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [58]

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Yes. Thanks for your question. And talking about the target for Corporate Centre debt. So I told you earlier that -- and told participants that, of course, we are looking for the good level for the -- for Sistema, RUB 140 billion, RUB 150 billion, but at the same time, it really depends on our potential monetization.

For example, if some potential buyers are ready to pay for us for Detsky Mir, of course, it can radically change the situation. And we can achieve this target. But at the same time, if some potential players does not ready to pay our stake in Detsky Mir, of course, this target will be unachievable. And so I just want to say that this is a target but this is not a commitment. And based on our previous stats, you can see that we can reduce our debt organically. There are no very big steps, but at the same time, it's a very, very stable movement.

And talking about the MTS, I think it will be better if you can address your questions to MTS management, to Alexey Kornya and his team. But talking about Sistema's approach, I think it will be better if the [Tesla] shares will be not...

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [59]

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Maybe this is a question which should be directed to [Tesla].

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [60]

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Yes. Yes, okay. I think it will be better if you can address your questions to MTS.

And dividend policy, of course, there are very, very strong dependability of our current monetization steps of dividend policy. And we will be more aggressive on these questions if our monetizations will be more clearer.

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Operator [61]

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Gentlemen, we have a follow-up question from Dilya Ibragimova from Citi. Would like to take this question?

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [62]

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Yes, please.

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Dilya Ibragimova, Citigroup Inc, Research Division - VP [63]

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Hopefully, it will be a quick one. Just on -- what is -- if I may ask, what is your view on MTS's equity or capital market strategy review, your view as a controlling shareholder? If you could share that, that would be very helpful.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation - Chairman of the Management Board, President, CEO & Director [64]

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So the same advice. Could you please too address this question to MTS team?

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [65]

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Dilya, have we answered your question?

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Dilya Ibragimova, Citigroup Inc, Research Division - VP [66]

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May I just quickly follow up? What I was looking for is the view of Sistema as a shareholder of MTS. But of course, I could direct that question to MTS. But that would be their view.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [67]

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Yes. Please do. Thank you.

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Operator [68]

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We have no further questions at this time, gentlemen. I'll hand the call back over to you for any closing remarks. Thank you.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation - IR Director [69]

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Thank you, operator, and thank you, everyone, for participating in our quarterly call. If you have any further questions, please don't hesitate to contact our Investor Relations team.

And with that, I would like to conclude our call and wish everyone a very pleasant evening.

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Operator [70]

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Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation today. You may now disconnect.