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Edited Transcript of ETLNGq.L earnings conference call or presentation 15-Jul-20 2:00pm GMT

Half Year 2020 Etalon Group PLC Earnings Call

NICOSIA Jul 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Etalon Group PLC earnings conference call or presentation Wednesday, July 15, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gennadiy Fillipovich Shcherbina

Etalon Group PLC - CEO & Member of Management Board

* Ilya Kosolapov

Etalon Group PLC - CFO

* Maxim Berlovich

Etalon Group PLC - Head of Moscow Operations & Executive Director

* Petr Kryuchkov

Etalon Group PLC - Director of Corporate Investments & Head of IR

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Conference Call Participants

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* Andrey Pavlov-Rusinov

Goldman Sachs Group, Inc., Research Division - Research Analyst

* Artur Galimov

Sova Capital Limited, Research Division - Analyst

* Marat Ibragimov

Gazprombank (Joint Stock Company), Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Etalon Group First Half and Second Quarter 2020 Operating Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on the 15th of July 2020.

I would now like to hand the conference over to your first speaker today, Petr Kryuchkov. Please go ahead, sir.

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [2]

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[Interpreted] Good afternoon, ladies and gentlemen. I'm happy to welcome you on our today's call. The speakers today are Gennadiy Shcherbina, Etalon Group's CEO; Ilya Kosolapov, the company's CFO; Maxim Berlovich and Yuri Borodin, Heads of Etalon Group's Moscow and St. Petersburg operations, respectively; and myself, Petr Kryuchkov, Head of Investor Relations at Etalon Group.

Today, we're going to present Etalon Group's operating results for the first half year 2020 and the second quarter 2020, discuss how the industry was impacted by the spread of the coronavirus and elaborate on the ongoing developments and future opportunities for growth. At the end of the call, we will be happy to answer your questions.

Now I would like to pass the floor over to Gennadiy Shcherbina, our CEO, who will take you through our performance for the first half year and Q2 2020.

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [3]

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[Interpreted] Good afternoon, ladies and gentlemen. I would like to start today's presentation with an overview of external factors, which have had a significant impact on the industry over the past few months. As you all know, in Q2 2020, Etalon Group and all the other industry players faced a number of restrictions imposed in response to the spread of COVID-19.

Slide 4 of the presentation provides all the relevant information about the latest developments in the group's key regions of operation and the restrictions put in place there. Today, Russia is witnessing a slowdown of the spread of the infection. After peaking out in May, the number of new active cases has been decreasing to date. As a result, the government have been gradually removing the restrictions put in place before. In mid-May, the temporary ban on construction in Moscow and the Moscow region effective since the 13th of April was lifted. Suspension of operations in Moscow metropolitan area did not affect our construction schedule materially. St. Petersburg saw no similar restrictions and construction operations continued without any disruptions. In addition to giving the green light to resume construction, the authorities also softened restrictions applying to sales offices. In early June, after a few months of full downtime, our sales offices returned to work.

Importantly, alternative sales channels became a key tool to support and maintain sales during the lockdown. Shortly after the lockdown was announced, we launched our online sales service. We're going to keep this remote option for our homebuyers going forward as we see that a substantial part of our customers still enjoy online purchases even after the lockdown was lifted. For us, this represents an alternative sales channel with extremely low commercial costs.

In the current challenging situation, we view government support measures listed on Slide 5 as a crucial growth driver. Clearly, the decision to subsidize mortgage rates and keep them at 6.5% became one of the central incentives. As you may well know, initially, the limit for mortgage available under the program was set at RUB 8 million. But in June, it was restated and increased to RUB 12 million.

Needless to say, we saw this decision as an encouraging step as our company works primarily in the middle to upper price range. As of now, some 86% of our properties meet the criteria set out in the approved subsidized mortgage program.

In addition, the industry greatly benefits from continuous interest rate cuts by the Bank of Russia. The Bank of Russia pursues a monetary policy, which, on the one hand, makes it clear about long-term demand growth drivers and on the other hand, puts pressure on the most conservative investors forced to look for instruments with comparable risk and return profiles versus their previous practices.

Finally, yet importantly, it helps reduce the cost of financing and creates opportunities for larger players to rely on more available capital for project portfolio expansion and business growth and development going forward. Moreover, some regions put forward an initiative to extend the current construction permits and offer holidays on mandatory payments related to investment and construction projects. As we mentioned earlier on our call on operating results for Q1 2020, we were not and are not planning to tap into these new options, including permit expansions until 2021. Yet they do offer some flexibility in managing our liquidity.

Importantly, the COVID-19 driven restrictions again gave rise to a debate about releasing cash from escrow accounts on a phased basis. This time, this was initiated not by the developer community, but by certain representatives of the Council of Federation, who originated a bill to authorize developers to dispose off cash on escrow accounts phase by phase as the construction progresses.

In an uncertain environment, such incentives will encourage economic recovery, boost consumer activity and create certain advantages for such systemically important companies as Etalon Group. We already see these initiatives starting to give effect also translating into our operating results, which I will present on the following slides.

Slide 7 shows the volumes of residential property deliveries. Thanks to our flexible cast in-situ construction technology, direct engagement of general contractors and subcontractors and longterm partnerships with external suppliers, we rapidly mobilized our workforce and ensured continuous supply of construction materials for our projects in Moscow and the Moscow region. As a result, we delivered 4 projects in Q2 including 2 projects in Moscow commissioned in spite of suspension of operations in the Moscow metropolitan area. In the first half 2020, we delivered a total of 177,000 square meters in 5 projects exactly as was planned.

The next slide, Slide 8, to be more precise, gives an overview of our performance in the first half 2020. Despite the expected decline in performance versus the high benchmark year-on-year, driven by the outstrip in growth of the housing demand early last year and given tougher restrictions in the wake of the COVID-19 spread, Etalon Group, however, delivered strong operating results. In the first half year 2020, sales in money terms and cash collections amounted to RUB 30 billion and RUB 32 billion, respectively. This is to note the second best result in our history. Sales and volume terms exceeded 221,000 square meters.

It also stands to note that cash collections in escrow accounts reached RUB 8 billion or 26% of total cash collections, which has already helped us reduce the cost of project financing across our projects to as low as 3% to 4%. Speaking of Q2 2020 results shown on Slide 9, we have sold 95,000 square meters of real estate worth about RUB 11.6 billion in April through June. Over the same period, cash collections nearly reached RUB 14 billion, including legacy installments receivable when due. As I mentioned earlier, lower sales are due to the lockdown and tougher restrictions in effect during this period.

If we take a look at the regional breakdown of our metrics on Slide 10, it's going to become clear that Moscow region was affected by the decline in demand to a greater extent due to more stringent restrictions applied locally, including a temporary ban on construction and introduction of a lockdown permit system for the population. The decline in demand in St. Petersburg was less pronounced, both due to fewer restricted measures and better Etalon Group's brand recognition in the local markets. Amid the uncertainty, home buyers preferred to purchase residential property from trusted and well-known companies only. In selecting the developer, buyers can see that both the availability of online sales channels and prospects of timely completion of construction in these changed circumstances.

However, the monthly breakdown shown on Slide 11 demonstrates a gradual revival in demand by the end of Q2. As the lockdown was being relieved, there was a growth in sales. The transactions in June grew twice in volume terms and by 78% in ruble terms compared to those in May. Additionally, we recorded a positive trend, not only within the quarter, but also within its final month. As early as in the last third of June, we saw almost a threefold increase compared to the beginning of the month. A similar trend is observed in July, which makes us even more optimistic about postponed demand and significant recovery of the market in the second half year.

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Notably, despite the significant decline in sales, Etalon Group's property prices provided on Slide 12 remain high, which is set to further strengthen our business margins. The average price across all types of real estate was RUB 122,000 per square meter. The housing prices grew by 9% year-on-year, up to RUB 159,000 per square meter. We can see strong price growth in both regions of our operation. In Moscow, because of higher percentage of business class projects, the growth was 23% compared to Q2 last year. In St. Pete, we increased the price by 5% on a like-for-like basis, which is for projects comparable in class and location terms.

As to the down payment, it is still high, coming in at some 86%. This is largely because of the mortgage sales growth and still high percentage of sales in the higher price segment. We are 100% down payments [prevail].

As you can see on Slide 13, with the unprecedented rate cuts in the subsidy program adopted, the mortgage sales grew from 36% in Q1 2020 by 8 percentage points to a record high 44% in Q2 2020. Moreover, this is given the fact that in the first months of the second quarter, mortgage sales were practically effectively unavailable because banks had no practice of entering into mortgage contracts online. Of course, it is important to note that the percentage of mortgage sales, installments and 100% down payments vary across regions and are highly dependent on the portfolio structure. Comfort class projects are purchased primarily through mortgage. However, business class projects and more premium properties are, as a rule, entirely self-finance purchases.

The percentage of such projects in the total sales volume is 23% compared to 18% last year, as shown on Slide 14. Such trend is not accidental. It shows that we have been deliberately and successfully increasing the percentage of the higher-priced segment projects, which are always in demand, even amidst economic turbulence. Diversifying the portfolio by segment gives us extra support in the current market environment. Moreover, our sales are balanced by geography. The ratio of new contract sales in St. Pete and Moscow is 51% and 49% in volume terms respectively, and 50% to 50% in value terms. Galactica is still the most popular residential project with the buyers having contributed 17% of the total sales volume last year -- last quarter, sorry.

Our regional network continues to account for over 30% of the sales. In Q2 2020, the share of regional sales grew slightly quarter-on-quarter maybe due to a lower number of restrictions imposed on sales offices across Russian regions as well as stronger interest in investment properties triggered by the government's decision on a new tax levied on income from bank deposits. In the current circumstances, we view our regional network as an additional competitive strength.

Given the strong revival of demand witnessed in the second half of June and in early July and the record low mortgage rates coupled with additional postponed demand, we expect the markets to recover in the second half year 2020 and have, therefore, decided to release our sales guidance for 2020, as shown on Slide 16. This time, we prepared our guidance assuming 3 possible scenarios that could unfold given the existing uncertainty and divergence such as the worst case, base case and best case scenarios.

It is obvious that this scenario will depend on a wide range of factors and drivers. The record low mortgage rates, the subsidized mortgage program, decreased supply in the markets and strong appeal of real estate as an investment asset count in favor of a significant second half year growth. On the other hand, the accelerated reduction in consumers' real disposable income levels, the potential second wave of COVID-19 and the purely psychological factors related to uncertainty over future could hinder the recovery of demand to the expected levels in the second half year 2020.

The base case scenario is to sell 500,000 square meters worth RUB 67 billion in 2020. The target cash collections stand at around RUB 65 billion. A more optimistic scenario provides for new contract sales of 550,000 square meters or RUB 73 billion.

Yes, it will take several months to develop a better understanding of the path we will be taking. I'm confident that following Q3 results, we will have more clarity on the key scenario. I strongly hope that a set of objective factors and new projects to be put on sale will allow us to outperform the base case scenario towards a more optimistic guidance. That concludes my overview of our operating results and metrics.

And now I would like to pass the floor over to our CFO, Ilya Kosolapov, who will present Etalon Group's financial results.

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Ilya Kosolapov, Etalon Group PLC - CFO [4]

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[Interpreted] Thank you, Gennadiy. Good afternoon, ladies and gentlemen.

Efficient management of the debt portfolio together with the temporary ban on construction activities in Moscow helped us reduce our total debt by RUB 4 billion as of the 30th of June 2020 versus the end of 2019. As you may know, cash collections in escrow accounts do not consolidate into the company's reported cash position. But the charts show that the debt burden on the corporate center is easing, and the amount of cash including escrow accounts grew despite the decline in consumer activity.

Of course, the escrow account and policy caused a slight expansion of net corporate debt to RUB 23 billion, which translated into a debt to pre-PPA EBITDA ratio of at 1.9x. Still, we believe this level is quite healthy and only more so all our banking covenants are at very comfortable levels to us. The collections in escrow accounts amounting to RUB 8 billion grow interest rates on project financing down to a favorable 3% to 4% or indeed something close to 0 for some of the tranches. Our financial expenses associated with the established floating rate loans were further reduced by the Bank of Russia's interest rate -- key interest rate cuts. This includes the loan for the Leader-Invest acquisition. Overall, the average interest rate on our loan portfolio decreased to 9.05% on the back of this performance and our efforts to refinance established loans.

The following pages provide our traditional update on our current projects. As you can see, all projects are in full swing in Moscow and St. Pete, and basically, this is where we finish our presentation and move on to a Q&A session. Thank you for your time. And now we are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Andrey Pavlov-Rusinov.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division - Research Analyst [2]

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[Interpreted] My first question is about the guidance in the base case, the implied dynamics of your sales in the second half means that you expect still declines in their -- in the natural terms or in ruble terms of 9% and 4% year-on-year. So why are you still so conservative on the second half dynamics despite the lower mortgage rates and the recovery in demand in June?

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [3]

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[Interpreted] The question will be handled by Petr Kryuchkov, Head of IR.

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [4]

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[Interpreted] Well, thank you for your question, Andrey. As you know, we are always very cautious and careful, sharing our operational metrics guidance. And this time, we were even more cautious in terms of what information to communicate to the investor community because of the numerous uncertainties that Mr. Shcherbina has mentioned.

So when we say base case, we actually mean a case, a scenario where the real estate selling pace in the second half year will be similar to the pace that was observed in the second half last year. However, we have decided to also share our best case projections because as you correctly mentioned, there are quite a few positive drivers in the marketplace, which will possibly have a positive impact on Etalon's full year numbers. So as we have mentioned earlier today, following Q3 results, we'll come up with an updated guidance, and let's hope it will be more positive.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division - Research Analyst [5]

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[Interpreted] So a couple of follow-up questions. First of all, if you could share the total amount of your land bank at the moment. And also, what are -- are you planning to offer in new sales? What amount of the real estate you're planning to offer in the second half of the year and maybe at the beginning of next year? And finally, if you could share the needs in project financing that you plan to have by the end of this year and maybe next year, if you could share such estimates.

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [6]

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[Interpreted] Thank you for your question, Andrey. The first part will be handled by Petr Kryuchkov on the land bank and sales, and the remaining portion on finance will be handled by Ilya Kosolapov.

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [7]

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[Interpreted] Right, Andrey, thanks a lot for your follow-up questions. As at the 31st of December 2019, our land bank stood at 3.3 million square meters. To date, we have sold out some 200,000 square meters, which effectively gives us -- our today's land bank of some 3.1 million square meters.

So in the second part -- concerning the second part of the question, in early July, we had some 1.2 million square meters of real estate of all types available for sale in the marketplace, in particular, more than 900,000 square meters exempt from the new regulations in the sector. Also, we have some projects in the pipeline that we're going to put on sale in the near future and where we have obtained construction permits already. So this all that I have mentioned adds up to some 1.4 million square meters of real estate to be virtually available for sale in the near future.

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Ilya Kosolapov, Etalon Group PLC - CFO [8]

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[Interpreted] Concerning project finance, up till the end of 2020, we will have to take out some RUB 12 billion in project financing. And in 2021, I reckon we will come up with another RUB 40 billion.

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Andrey Pavlov-Rusinov, Goldman Sachs Group, Inc., Research Division - Research Analyst [9]

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[Interpreted] Do I get you right that the RUB 40 billion that you have mentioned for 2020 is the net increase in the year?

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Ilya Kosolapov, Etalon Group PLC - CFO [10]

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[Interpreted] Yes, this is the expected incremental increase in project finance announcement.

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Operator [11]

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The next question comes from the line of Artur Galimov from Sova Capital.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [12]

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[Interpreted] My question regards sales dynamics breakdown throughout the second quarter. Could you please clarify how the dynamics on a year-on-year basis looks like month-by-month in the second quarter and in the first half of July?

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [13]

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[Interpreted] The question will be handled by Petr Kryuchkov.

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [14]

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[Interpreted] Thanks very much for your question, Artur. So this is indeed due to a very high benchmark established by last year, 2019. When it comes to March through April numbers, just like the whole of Q2, certainly, the performance was weaker than in the record high 2019. And that year, 2019, was this record break in due to a number of reasons. Firstly, there was strong demand growth in the real estate segment because many customers expected mortgage rates to go up and prices to go up. So they activated their purchasing activity. And as a result, our sales in volume terms added 24%. And in value terms, they added 41% last year.

In the same time, talking about month-on-month numbers, in March and April, we lost some 40% to 50% to respective periods of 2019 on a year-on-year basis. However, as early as in June, we delivered performance, which approximately equals the figure of last year's June. In July, we are already seeing a positive trend, which gives us higher metrics than last year's July.

It's important to note at the end of my answer that in March through April, when we saw the first support program launched, I mean, the program of cofinancing mortgage rates, some 65% of our offer met the criteria of that program because business class properties were excluded. However, as soon as the limit under the program was restated from RUB 8 million to RUB 12 million, as we have mentioned earlier today in our presentation, some 86% of our offer became applicable to the support program. And this does constitute a powerful driver to support our sales going forward, I believe.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [15]

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[Interpreted] A follow-up question. Petr, just one clarification. The numbers that you have provided on a year-on-year basis for separate months, is that square meters?

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [16]

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[Interpreted] No, this is rather money terms. In square meter terms, I think we lost some more compared to those numbers. However, we mostly target sales in value terms because this is more important for our margins.

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Operator [17]

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The next question comes from the line of Marat Ibragimov from Gazprombank.

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Marat Ibragimov, Gazprombank (Joint Stock Company), Research Division - Research Analyst [18]

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[Interpreted] My question is about the average price mentioned in Slide 12. In Moscow, in Q2, this metric lost some -- was 4 something percent as compared to Q1. What was the reason? Was it discounts or your sales mix? I reckon this is rather sales mix because of the mortgage support program, where your business class properties were not in scope at the beginning. And this is why this trend. Please confirm or challenge my understanding.

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [19]

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[Interpreted] This question will be handled by Maxim Berlovich, Head of Moscow Operations.

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Maxim Berlovich, Etalon Group PLC - Head of Moscow Operations & Executive Director [20]

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[Interpreted] Marat, thanks a lot for your question. The reason is indeed twofold. It's first, the next and second, the online channel. Next is because in our portfolio, we have quite expensive projects among others. They do impact the average price, but they are not numerous just vice versa. And now the online component, the thing is that during the 2 months lockdown, we were quick enough to launch our online sales option for customers. And we started providing discounts to homebuyers, bearing in mind the possibility of offsetting these discounts to the sales price by lower commercial costs. So these are the 2 drivers.

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Marat Ibragimov, Gazprombank (Joint Stock Company), Research Division - Research Analyst [21]

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[Interpreted] And my next question is about Slide 11, the monthly sales numbers in square meters. It seems that in May, you lost quite a material share versus April. And I think this was likely because you were unable to make proper use of the mortgage support program, which came into play starting the first of May this year. And it looks like your customers, your home buyers only started applying this program with Etalon Group as late as in June. Could you please comment upon this?

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [22]

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[Interpreted] The question will be handled by Petr Kryuchkov.

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [23]

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[Interpreted] Thank you for your question, Marat. Actually, the answer to that one is pretty easy. This is because of the contract execution procedure. As soon as a contract is signed, this goes on to the Rosreestr authority, Russian registration authority, basically for approval, and this approval procedure takes time. So this is sort of a rolling effect whereas some contracts from March were only recognized in terms of sales in our April numbers. And the lion's share of the decline witnessed in March translated into May sales numbers. Just like I have explained, part of the contracts we have signed with our customers in June, will be only recognized with July sales numbers.

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Marat Ibragimov, Gazprombank (Joint Stock Company), Research Division - Research Analyst [24]

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[Interpreted] A follow-up question. So do I then get it right that you report your sales numbers after Rosreestr registration of title, not after your office sale, is that correct?

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Petr Kryuchkov, Etalon Group PLC - Director of Corporate Investments & Head of IR [25]

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[Interpreted] Indeed, Marat, this is so because real estate title only emerges after the respective real estate contract is registered by the relevant authority, as mentioned.

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Marat Ibragimov, Gazprombank (Joint Stock Company), Research Division - Research Analyst [26]

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[Interpreted] And I have a couple of follow-ups. The first one is about dividend, and the second one is about your buyback program. Now the dividend part. Actually, the Board of Directors is expected to meet and decide on the dividend side and come up with a relevant recommendation, seeking approval of the Annual General Shareholders' Meeting. So the question is when this Board meeting is scheduled to take place? And the second question is about your buyback program announced earlier in the year. What's happening with that? And when could we expect the launch of the buyback program?

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Gennadiy Fillipovich Shcherbina, Etalon Group PLC - CEO & Member of Management Board [27]

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[Interpreted] The question will be handled by Ilya Kosolapov.

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Ilya Kosolapov, Etalon Group PLC - CFO [28]

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[Interpreted] Marat, thanks for your questions. The first one on dividend. As we communicated in April, we are expected to pass the relevant Board of Directors meeting with that resolution by the end of July for the Board of Directors to be able to purely come up with a recommendation for the Annual General Shareholders' Meeting to decide on the size of the dividend. Now it's too early to comment on that. But on behalf of the management, I can say that the results -- the metrics have turned out to be better, and Etalon's response to COVID-19 lockdown and restricted measures has also appeared to be better than our stress scenarios estimated before. So this is basically my comment. And on the back of that, I can't really see any covenant deviations or violations to be linked to our dividend policy in the current circumstances.

Well, now on the buyback, let me remind you that our Board of Directors made a resolution that was further approved by the AGM to the below follow-on effect. The authority delegated to the management is pretty broad in terms of volume and timing of the expected buyback program. So as per the resolution, the company is expected to buy back up to 10% shares within 12 months. So the buyback program is not canceled in any way, and it's volume and timing will depend on such factors as our dividend payout for 2019 and our corporate response to COVID-19 and related lockdown. So now let me reiterate it. The buyback program is still in place, and the timing and volume will be dependent to our cash flow performance.

Let me also say that like the purpose why we are considering the buyback program and why this is important for us, is because this is set to support Etalon Group PLC's market capitalization. So the volume of shares to be bought back as part of this program will also be driven by our stock performance.

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Marat Ibragimov, Gazprombank (Joint Stock Company), Research Division - Research Analyst [29]

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[Interpreted] Follow-up question on dividends. So do I get it right that based on your answers in the coming 2 weeks, we will hear the proposed -- the recommended size of dividend. Is that right?

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Ilya Kosolapov, Etalon Group PLC - CFO [30]

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[Interpreted] Yes, this is right.

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Operator [31]

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The next question and the last comes from the line of Nikolay Kovalev from VTB Capital. Nikolay?

There are no further questions at this time.

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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Unidentified Company Representative, [32]

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[Interpreted] Ladies and gentlemen, thank you very much for taking your time and being with us on this call. This does conclude the telephone conference for today. You may all disconnect now.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]