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

Half Year 2019 Gruppa LSR PAO Earnings Call (IFRS)

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Gruppa LSR 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 Molchanov

PJSC LSR Group - CEO & Director

* Dmitri Gontcharov

PJSC LSR Group - Chairman of the Board

* Dmitry Vladimirovich Kutuzov

PJSC LSR Group - CFO

* Igor Tsoy

PJSC LSR Group - Director of IR

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Conference Call Participants

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* Andrey Pavlov-Rusinov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Barry Lee Ehrlich

Citigroup Inc, Research Division - Director

* Elena Jouronova

JP Morgan Chase & Co, Research Division - Research Analyst

* Mikhail Ganelin

Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the LSR Group 1H 2019 Financial Results Conference Call.

At this time, I would like to turn the conference over to Mr. Igor Tsoy, Director of Investor Relations. Please go ahead, sir.

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Igor Tsoy, PJSC LSR Group - Director of IR [2]

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Good afternoon, ladies and gentlemen. We are pleased to welcome you to our conference call on the financial and operating results of first half 2019. Let me please introduce our speakers. Mr. Andrey Molchanov, Chairman of the Executive Committee and the CEO; Dmitri Gontcharov, Chairman of the Board of Directors; Dmitry Kutuzov, Chief Financial Officer; and myself, Igor Tsoy, Director of Investor Relations and Sustainable Development.

Please note that the presentation of the results is available on our website in the Investor Relations section, Reports and Presentation subsection. After the presentation, we will be very happy to answer your questions.

I now give the floor to Mr. Dmitri Gontcharov, Chairman of the Board of Directors. Dmitri, please go ahead.

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Dmitri Gontcharov, PJSC LSR Group - Chairman of the Board [3]

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[Interpreted] Good afternoon, colleagues. I will begin with a brief overview of key corporate development, and my colleagues will then speak in more detail about the key financial and operating results.

In the first half of 2019, we delivered an excellent operating performance. This, in particular, is due to our consistent efforts to enhance our positions in the key segments with a focus on market requirements and customer needs.

As you might know, we continued to adapt our business to the new industry environment, and the shift in demand in the real estate market after amendment to the law on shared equity construction that introduced last year.

As a systemically important real estate developer, the company underwent inspection for compliance with the Ministry of Construction's criteria and secured submission to apply those regulations to most of our land bank. In the next few years, this will give us a considerable competitive edge and ease the transition to project financing.

Our achievements in the construction industry have received recognition, both in Russia and abroad. Two projects, the premium-class Russky Dom, or Russian House, residential development in the heart of St. Petersburg; and Tyufeleva Roscha Park, created as part of the ZILART project in Moscow, have the won the 2019 International Architecture Award, and now ranked among the world's best architectural projects created over the past few years. Tyufeleva Roscha Park was also shortlisted in the Landscape – Urban projects category at the World Architecture Festival.

We are also happy to announce that starting from the 20th of September, 2019, LSRG shares will be included in the Moscow Exchange RTS Index.

We remain committed to implementing sustainable development principles with a view to reducing cost and improving efficiency. Since joining the UN Global Compact earlier this year, we have published our second Sustainable Development Report in compliance with international GRI guidelines and plan to continue this effort going forward.

Our newly established business unit in charge of sustainable development has been working with the company's Board of Directors and the management to set out objectives, coordinate and monitor sustainable development activities, draft internal regulations and engage relevant stakeholders and structural units.

In conclusion, I would like to emphasize that we will continue with LSR Group's strategy and efforts across our development of key segments by relying on our existing business model.

Thank you, and I am now passing the floor to Andrey Molchanov, Chairman of the Executive Committee and CEO of LSR Group.

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Andrey Molchanov, PJSC LSR Group - CEO & Director [4]

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[Interpreted] Good afternoon, ladies and gentlemen. In the first half of 2019, new contract sales totaled RUB 38 billion, which is a growth of 6% year-on-year or 368,000 square meters in volume terms. This increase came mostly on the back of our robust performance in Moscow, which recorded the largest amount of new contract sales. The value of the new contracts in Moscow rose by 49% or 117,000 square meters, which is a 28% increase compared to the first half of 2018.

The average price per square meter went up by 18% year-on-year and reached RUB 114,000 per square meter. The share of mortgage sales in year-to-date amounted to 48%.

In line with our plan, completions reached 160,000 square meters of net sellable area, which is a 31% increase year-on-year. We launched a total of 603,000 square meters in new net sellable area. We are entering the second half of the year with sales underway at Morskaya Naberezhnaya, our flagship business-class residential development in St. Petersburg. The projects have a total area of 886,000 square meters.

We have also launched sales of Zapovedny Park, a new comfort-class project in St. Petersburg, featuring a unique technological design. The construction, which is now in its active stage, provides cutting-edge technologies helping to reduce heat loss and saving utility bills.

The forward increase in sales in Moscow was driven by our flagship ZILART project and the Ruchyi comfort-class residential development. Our revenue grew by 108% to RUB 14.5 billion. In line with the group's strategy, we continued our efforts to diversify the company's real estate development assets in Moscow by selling a 50% stake in the ZIL-Yug or ZIL-South project. We believe that concurrent development of the ZILART and ZIL-Yug projects all contribute positively to ZILART. We have also embarked on identifying and implementing new projects in other locations across Moscow.

In keeping up with our policy of restructuring and enhancing the efficiencies of our reinforced concrete facilities, in July, we finalized the deal to sell LSR. Reinforced Concrete. On top of that, in August, we launched a new aerated concrete production line at the plant in Sertolovo in the Leningrad Region, which helped to increase the facility's design capacity from 180,000 to 560,000 cubic meters per year.

We also finalized the acquisition terms of the H+ H aerated concrete facility with a capacity of 400,000 cubic meters. This will enable the company to become the largest producer of aerated concrete in Russia's northwest.

All of this makes us confident that we are well positioned to successfully implement our strategy and maintain our market leadership in the key regions where we operate. Thank you.

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Igor Tsoy, PJSC LSR Group - Director of IR [5]

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Thank you, Andrey and Dmitri. And now I would like to pass the floor to our Chief Financial Officer, Mr. Dmitry Kutuzov. Dmitry, go ahead.

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [6]

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[Interpreted] Good afternoon, colleagues. Speaking of the key financial results in the first half of 2019, I should, first of all, note the following. Our cash flow, our net cash flow from operations, free of tax and interest, increased by 94% year-on-year and reached RUB 13 billion.

The group's revenue for the first half of 2019 reached RUB 46.6 billion, going down by 10% year-on-year. EBITDA totaled RUB 7.8 billion, which is an 18% reduction compared to the previous year. Net profit came in at RUB 1.9 billion compared to RUB 3.7 billion last year.

To preempt any questions you may have about the working of our financial metrics on a year-on-year basis, let me, first of all, say the following. The key reason behind the tweaking is the transition to the new IFRS 15, which is fully completed in 2018.

We would like to elaborate on 3 things. First, the financial results of the first half of 2018 are higher since, in that period, we conduct the financial results from sales contracts signed prior to 2017, and revenue and profit under those contracts were recognized only upon completion.

Second, due to the recognition of the financial results from sales contracts signed prior to the 1st January of 2017, the significant financing component recognized in the first half of 2018 was RUB 1.2 billion higher than in the first half of 2019.

Third, the net profit was down, mainly as a result of changes in the accounting treatment of the significant financing components, which started in the second half of 2018, mostly no longer capitalized, and is attributed to the period's cost of goods sold, which, in turn, caused financial costs for the period to go up by RUB 1.6 billion.

Adjusted for these accounting-related effects, we can say that our financial performance in the reporting period and the first half of 2018 were comparable.

Let me also briefly talk about the company's leverage. As of the 30th of June, 2019, total debt amounted to RUB 88 billion. We are comfortable with our debt repayment schedule, planning to repay RUB 9.6 billion by the end of this year. Of this amount, we have already repaid RUB 1.3 billion. As of the 30th of June, 2019, the weighted average interest rate in loans stood at 8.9%.

At the same time, the cash balance increased by 80% year-on-year. It reached RUB 66.4 billion compared to RUB 36.9 billion as at the 30th of June, 2018. As a result, the company's net debt declined by 29% compared to the 31st of December, 2018, and it reached RUB 21.6 billion. Our net debt to adjusted EBITDA ratio decreased to 0.62.

Thank you.

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Igor Tsoy, PJSC LSR Group - Director of IR [7]

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Thank you so much, Dmitry. Operator, we are ready for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take a question from Barry Ehrlich with Citi.

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Barry Lee Ehrlich, Citigroup Inc, Research Division - Director [2]

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I have 2 questions. First, what is the total remaining investment payment on ZILART? (foreign language)

And second question is how did working capital end the period when compared to the year-end? Maybe you can comment on the major movements in working capital? And what is your expectation for the second half? (foreign language)

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Operator [3]

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And we're ready for our next question.

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Igor Tsoy, PJSC LSR Group - Director of IR [4]

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Sorry, we haven't answered this question yet. Dmitry Kutuzov is going to answer now. Please go ahead.

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [5]

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[Interpreted] In total, we are yet to pay around RUB 10 billion for our acquisition of ZILART. So there are 2 payments, one in 2019 and one in 2020. To date, we have paid around RUB 18 billion.

Regarding your second question. The stronger operating cash flow is due to virtual larger cash collections coming under shared equity construction contracts. That's RUB 43 billion in the first half of this year compared to RUB 38 billion in the equivalent period of last year. This has become the key driver for our stronger operating cash flow year-on-year. Thank you.

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Operator [6]

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(Operator Instructions) We'll now take our next question from [Alexei Korivosha].

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Unidentified Analyst, [7]

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[Interpreted] If I may, I'd like to ask you about the ZIL-Yug project, how much you have listed, what is the -- their value, if you can disclose that?

And my second question is about you can't achieve budgets in H+ H. I'd like to know what is your expectations about the EBITDA and revenue are and also whether you can disclose the deal value.

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Andrey Molchanov, PJSC LSR Group - CEO & Director [8]

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[Interpreted] Thank you. This is Andrey Molchanov taking the question. Regarding the Yug audits, sell our stake and it was at no loss for us, so we received a return on our investments.

As for your question about the H+ H plant, this is a French facility and it used to be our key competitor, and they decided to leave the market altogether. We are planning to complete the signing of this deal in second week of September. And we are not ready to disclose the financials here. But I can say that the deal has been attractive for us, both in terms of financials and in terms of market position because we have increased that significantly.

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Unidentified Analyst, [9]

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[Interpreted] Yes, I have a follow-up question to this. In the first half of 2018, the EBITDA in the St. Petersburg redevelopment segment. In this EBITDA, was the share of the elite segment in any way considerable or can it be called negligible?

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [10]

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[Interpreted] Yes. Actually, that's one of the reasons why we see those changes in our performance on a year-on-year basis. It was in the first half of 2018 that we launched our Russky Dom or Russian House project. And under those rules, it's delivered quite strong financial results in the first half of 2018 because we recognize all the financial results coming from the sales contracts signed prior to the 1st of January, 2017.

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Unidentified Analyst, [11]

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[Interpreted] Okay. That's basically what I thought. And now I'd like you -- I'd like you to give us some color about your expectations regarding sales, given that you had somewhat weak third and second quarter. So what is your year-end expectation for sales, especially in terms of the work in (inaudible) in 1,000 square meters?

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Andrey Molchanov, PJSC LSR Group - CEO & Director [12]

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[Interpreted] Okay, thank you. This is Andrey Molchanov taking the questions. I can say that our sales are totally under control. And today, our key focus and our key aim is to increase the price because that's what we expect going forward. So we aim to focus on our margins. We indeed can sell more, but that's what we don't.

Among other things, under the EU rules, we can't use the cash that we collect until our construction is actually completed. So to reiterate, we are very much focused on a consistent and systemic approach to what we do. But generally, our sales expectations for the year are quite strong.

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Igor Tsoy, PJSC LSR Group - Director of IR [13]

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We are ready for our next question.

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Operator [14]

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We'll now take our next question from Nikolay Kovalev with VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [15]

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(foreign language) I have 3 questions. My first question is on the ZILART projects. Can you clarify what was the net operating cash flow for this project stand-alone in the first half?

The second question is on the land acquisitions. I was wondering how much you spent in the first half. And what will be the budget for the year?

And the third question is a follow-up from [Alexei's] question. We saw a decline in sales in the first half. So I was wondering if the trend was rebounding in July and August.

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [16]

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[Interpreted] Regarding ZILART, I can say that we -- our operating cash flow is positive for the first half, the impairments and cash collections in this project.

Regarding your second question, in the first half of the year, our total investments in land port acquisitions, including here at inland ports and they're established in the previous years, stand at around RUB 5 billion to RUB 6 billion. And in the second half, we expect to have and to incur a comparable level of investments.

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Operator [17]

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Are we ready for our next question?

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Igor Tsoy, PJSC LSR Group - Director of IR [18]

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There is one more question left, and Mr. Andrey Molchanov is going to commence now.

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Andrey Molchanov, PJSC LSR Group - CEO & Director [19]

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[Interpreted] And answering your question about (inaudible), let me once again share that the results that we have seen so far are not bad. We were ready for them. And one of the things here that we need to take into account is that the new rules, the new market regulations only became clear in June. And as I've said before, we do focus on our pricing. And we can see that there is demand in the market also in July and in August. And in terms of statistics, we can see that our Luchi project is the #2 most popular project in the territory of old Moscow. And our (inaudible) project is in the fifth place on that ranking.

So going forward, we are planning to further increase our prices. And as well, we can say that the sales performance that we have seen is quite good. And we expect that to improve further, especially as interest rates on options go down.

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Igor Tsoy, PJSC LSR Group - Director of IR [20]

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We are ready for the next question.

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Operator [21]

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And we'll now take a question from Elena Jouronova from JPMorgan.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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(foreign language) Can you please comment on what changed in the industry, or is the implementation of the law next quarter counts?

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Andrey Molchanov, PJSC LSR Group - CEO & Director [23]

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[Interpreted] In terms of consumers, nothing basically changed. It simply has become safer for them seeing that there have been purchases under the new rule.

So far, nothing has drastically changed for major real estate developments because right now under construction across our country is around 75 million square meters that's inhabited. So in the next 1, 2 years, we are not expecting any dramatic changes to occur in markets. But in 2 years' time, the total amount of players in the markets will certainly go down quite considerably.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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(foreign language) Did the company see any opportunity to consolidate the industry?

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Andrey Molchanov, PJSC LSR Group - CEO & Director [25]

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[Interpreted] Certainly, but this purchase will be mostly done automatically, so to speak. And as certain players are squeezed out of the market, their share will be redistributed among those who remain in the market. But I should say here that the bonus supply in the markets will also go down while prices will be going up. That's what everyone saw in the republic of [dollars] in India and in other countries as well that have significantly changed their [share depth] with construction regulation.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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(foreign language) So my next question is regarding the dividend payment. Should we expect any negative read across for dividends in light of lower net profit in the first half and potentially lower net profit for the full year?

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Dmitri Gontcharov, PJSC LSR Group - Chairman of the Board [27]

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[Interpreted] This is Dmitri Gontcharov answering this question. Indeed, it is too early, much too early to talk about any dividends or any decision with this regard. It was quite recently the result on the dividend for 2018. Certainly, to provide you with more reliable information on that, we need to have full year 2019 results. And after that, the Board of Directors will discuss and deliberate in due course and to come up with any actions that might be necessary. So we need to wait for the beginning of 2020.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [28]

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(foreign language) I'd like to know why you are so cautious about that because for the past 5 years, you have introduced no changes in your dividend, no matter what the external environment was. So now we see that the rhetoric has changed quite significantly. Does that mean you are not willing to provide any guidance? Or does that mean that you are maybe planning to give up on dividend payments at all?

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Dmitri Gontcharov, PJSC LSR Group - Chairman of the Board [29]

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[Interpreted] Well, if you take a look at our previous announcements that we made on dividends, you may see that we have never historically made and announced any guidance on our dividends going forward. Indeed, our dividend history is quite -- well, it sort of speaks for itself, but let me reiterate again that previously, we have made no guidances on that.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [30]

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(foreign language) And my last short question to Mr. Andrey Molchanov. Do you consider, at any point in time, to reduce your share in the company to below 50%?

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Andrey Molchanov, PJSC LSR Group - CEO & Director [31]

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[Interpreted] No, I'm not considering that, at no point in time. And let me add on the dividends, to what Dmitry said. Our mission is to earn money and to pay out dividends.

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Igor Tsoy, PJSC LSR Group - Director of IR [32]

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We can take a last question.

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Operator [33]

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We'll now take our last question from Mikhail Ganelin from Aton LLC.

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Mikhail Ganelin, Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport [34]

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(foreign language)

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Unidentified Company Representative, [35]

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[Interpreted] I have 1 question on your obligation figures regarding the short-term ones. I can see that there was some (inaudible) rights due around RUB 30 billion. So my question is, how are you planning to repay those in the next 12 months? Are you planning to use your cash and balance or maybe new cash collections? Or are you going to refinance?

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [36]

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[Interpreted] Well, some of these repayments will be based on our operating cash flow and partly through refinancing. We have also (inaudible) credit, which have not been drawn out yet. You could say RUB 5 billion. And I should say that banks are quite willing to continue working with LSR Group as they are. And also, we have a [rich fetish] for exchange-traded bonds, which hopefully we'll be utilizing this year. Thank you.

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Igor Tsoy, PJSC LSR Group - Director of IR [37]

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As I can see, we have some more questions and we are happy to answer them.

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Operator [38]

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We will now take a question from Andrey Pavlov-Rusinov from Goldman Sachs.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [39]

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(foreign language) My question is just about the profit margin in Moscow. It seems to be -- to remain below average for the group and also quite flattish year-on-year despite the high ZILART share. So what was the reason and what is the outlook?

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [40]

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[Interpreted] Well, first of all, this one contributed to our results in the first half of the year, which was achieved at our comfort-class project. Its contribution to financial results increased to as much as 45%.

The second factor here is the fact that we are honoring our social commitments in the Moscow region. As we are talking housing, we recognize the cost of social infrastructure. And also, we should remember that right now, we are mostly talking about the first phase of ZILART that we are recognizing and those were sold under, well, lower prices. In the second phase of this project, the prices are considerably higher. And also we expect the margins in this project to go up.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [41]

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(foreign language)

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Unidentified Company Representative, [42]

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[Interpreted] And a follow-up question. When can we see stronger margins in your financial statements? Can we expect that next year or some other time?

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Dmitry Vladimirovich Kutuzov, PJSC LSR Group - CFO [43]

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[Interpreted] We should be looking at financial fitness for 2020.

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Operator [44]

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Are we ready for our next question?

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Igor Tsoy, PJSC LSR Group - Director of IR [45]

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Yes we are.

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Operator [46]

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Okay. We'll now take a follow-up from Barry Ehrlich with Citi.

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Barry Lee Ehrlich, Citigroup Inc, Research Division - Director [47]

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As Etalon said that they expect to be in sales at ZIL-Yug at the end of 2020, based on your knowledge of the project, is that realistic? And how do you think that sales process might negatively impact your sales at ZILART? Or you don't see that project as drawing away potential customers? And if not, why not?

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Unidentified Company Representative, [48]

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(foreign language)

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Andrey Molchanov, PJSC LSR Group - CEO & Director [49]

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[Interpreted] This is Andrey Molchanov taking your question. Indeed, there is a possibility that Etalon will indeed begin that in early 2020 or maybe at the end of the year because there is still quite a lot of work to be done in that project. But we are actually interested and willing to see that taking place as soon as possible because it will actually support our project.

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Operator [50]

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And it appears there are no further telephone questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

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Igor Tsoy, PJSC LSR Group - Director of IR [51]

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Colleagues, thank you very much, and have a good evening. Bye.

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Andrey Molchanov, PJSC LSR Group - CEO & Director [52]

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(foreign language) Bye.

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Operator [53]

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And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.

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