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Edited Transcript of MAGN.MZ earnings conference call or presentation 29-Apr-20 11:00am GMT

Q1 2020 Magnitogorskiy Metallurgicheskiy Kombinat PAO Earnings Call (IFRS)

Magnitogorsk, Chelyabinsk region May 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Magnitogorskiy Metallurgicheskiy Kombinat PAO earnings conference call or presentation Wednesday, April 29, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrey A. Eremin

Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director

* Veronika Kryachko

Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR

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Conference Call Participants

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* Andrew Ian Jones

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Yuriy A. Vlasov

Sova Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the MMK Group conference call on the first quarter of 2020 IFRS financial results. (Operator Instructions)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [2]

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Good day, ladies and gentlemen. My name is Veronika Kryachko. And on behalf of MMK Group, I would like to welcome you to our conference call on the first quarter of 2020 IFRS financial results.

I would like to introduce the MMK team that is presenting today. Andrey Eremin, Chief Financial Officer; Maria Nikulina, Director for Financial Resources. We'll start our call with update on key financial results and market overview presented by Andrey Eremin. Please sir, go ahead.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [3]

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Ladies and gentlemen, good afternoon. We're pleased to welcome you to our conference call. Thank you all for coming to this presentation of the financial results of MMK Group for the first quarter of 2020.

Let's start with Slide #3. The outbreak of novel coronavirus has had a significant impact on our sales profile on a global scale. However, the company showed solid results in the first quarter of 2020. MMK Group sales decreased by 1.3% compared to the previous quarter, amounting to 2.7 million tonnes, while the share of sales of HVA products increased by 1.1 percentage points and amounted to 47.7%.

Compared to the previous quarter, the group revenue saw a slight decrease of 0.7%, amounting to $1.7 billion. At the same time, EBITDA, for the first quarter of 2020 jumped by 31.9% to $442 million. EBITDA margin also increased and amounted to 25.8%, up 6.3 percentage points quarter-on-quarter. Relative to the first quarter of 2019, EBITDA remained almost at the same level, showing a slight increase of 0.5%. EBITDA per tonne steel products grew by 30.5% against the previous quarter and reached $154 per tonne. While in comparison to the first quarter of 2019, the growth was 4.0%.

Free cash flow for the first quarter amounted to $110 million, which is 59.6% lower than last quarter.

Let's move onto a review of the macroeconomic situation in the world and in particular, in China. Slide #5, please. Economic activity in China in the first quarter of 2020 showed a sharp decline amid the development of the coronavirus pandemic. Chinese GDP fell by 6.9%, the first decline in 28 years. Despite this, the Chinese government continued to stimulate the economic growth by easing monetary policy and issuing special government bonds as a part of fiscal stimulus package. To counter the impact of COVID-19, Beijing has preallocated a special municipal bond worth CNY 1.2 trillion, ahead of the National People's Congress. This move could drive more investment in so-called new infrastructure, which wouldn't only support growth, but would also be aligned with Chinese longer-term goals to move up the value chain and become an innovation-driven economy.

The next slide, please. Despite the significant fall in demand for steel products on the back of the coronavirus situation, the capacities of Chinese metallurgical companies saw practically no change in utilization. Also metal exports from China remained at the same level as the first quarter of 2019. Chinese historically high growth in stocks was ultimately affected.

Let's move on to macroeconomic situation in Russia. The next slide, please. The economic activity in the first quarter of 2020 is expected to marginally decline on the back of slumping in the global oil quotes and ruble devaluation. According to the consensus focus, the GDP growth in the first quarter is expected to slow down to 1%.

During the second half of April, the Central Bank of Russia decreased the key rate by 0.5 percentage points in order to support the economic activity negatively affected by coronavirus outbreak, as real disposable income pointed 0.2% decline in the first quarter.

Next slide, please. The growth in demand for metal products in the first quarter saw a slight slowdown when compared to the same period in 2019, amounting to 3.2%. In the first 2 months of 2020, demand was mainly supported by positive dynamics in 3 sectors: the pipe industry, automotive industry and construction. Federal budget spending on national infrastructure projects at the beginning of 2020 was comparable for the first several months of 2019, and we expect it to get the momentum closer to the year-end.

Let's move onto the steel market key price trends. The next slide, please. Prices for rolled products showed recovery growth at the end of the fourth quarter of 2019 and the beginning of the first quarter of 2020. As a result, its HRC's average quarterly prices, which are based on FOB Black sea quotes, rose by 20.8% to $488 per tonne. However, in the middle of the first quarter of 2020, the market environment took a sharp dive as the coronavirus pandemic started to unfold around the world. At the beginning of 2020, coking coal prices rose due to continued demand from Chinese steel producers. But by the end of the quarter, Chinese coal production have recovered while the rest of the world saw a decrease in metallurgical capacity on the back of the spread of the pandemic, which put significant pressure on prices.

In the first quarter of 2020, iron ore quotes remained unchanged from the previous quarter, amounting to $89 per tonne. Key drivers for this included stable demand in China and limited supply in the global market amid the rainy season in Brazil and quarantine restrictions in exporting countries limiting production.

Let's now move onto the production results for the first quarter. Slide #11, please. Coal concentrate production in the first quarter increased by 12.9% in comparison with the fourth quarter of 2019 and totaled 814,000 tonnes. The turn in concentrate production was mainly driven by higher demand for concentrate at MMK.

Pig iron production in the first quarter fell by 9.6% in comparison with the fourth quarter of 2019 and amounting to 2.4 million tonnes, on the back of the capital overhaul of blast furnace #2, which was initiated in February this year. In comparison with the first quarter of 2019, pig iron production fell by 1.7% as a result of longer maintenance work at blast furnace facilities. At the same time, maintenance work at converter facilities and scheduled construction of Hot-Rolling Mill 2500 brought crude steel output down to 3 million tonnes. This is a 1.6% fall on the previous quarter.

In comparison with this time last year, output decreased by 2.7%. During the first quarter, the operating capacity of high value-added production units remained at the high level.

Please turn the next slide. Finished product sales in the first quarter saw a fall of 1.3% in comparison with the previous quarter on the back of planned repairs at rolling facilities. Despite this, the share of high value-added products in total sales was up by 1.1 percentage point and reached 47.7%. This was driven by higher sales of coated steel and thick plate from Hot-Rolling Mill 5000. In comparison with the first quarter of 2019, the sales share of high value-added products marginally slipped by 0.5 percentage points as a direct result of a more complete output mix at Hot-Rolling Mill 5000.

Please turn to the next slide. Thanks to stable demand from tube and pipes and building and construction sectors, the share of sales from the domestic markets in first quarter soared to 88%, totaling 2.4 million tonnes. However, this increased domestic market sales volumes, along with the ongoing repair works at Hot-Rolling Mill 2500 led to limited export volumes during the reported quarter.

Please turn to Slide #15 now, where I will cover the financial results for the first quarter 2020. The higher share of domestic market sales falling price increase largely offset the negative effects of reduced sales volumes during the quarter. As a result, revenue marginally decreased in comparison with the previous quarter and amounted to $1.7 billion. Revenue in the first quarter was also shook by the devaluation of ruble, which fell in the second half of March.

Next slide, please. The decrease in sales volume paired with a correction in the prices of key raw materials drove up the cost of sales during the first quarter, leading to a reduction of 6.8% to $1.2 billion. On the topic of cost structure trends in raw materials, the higher operating capacity of electrical furnace in the first quarter resulted in growth in the share of scrap when compared to the previous quarter. At the same time, repair work was performed at blast furnace No. 2, limited the share of blast furnace charge, which ultimately manifested itself as a lower pig iron output in the first quarter.

Please move onto the next slide. This slide show us that the basic oxygen furnace slab cash cost decreased by 5.7% to $267 per tonne. Effect on the decrease in iron ore and coal concentrate price, the slab cash cost was also given a boost by the high share of sinter in our blast furnace charge and the increase in sinter iron content after sinter plant No. 5 got closed the region with tin plate capacity in the first quarter.

Let's turn to the next slide. The increase in sales volumes of domestic markets, along with finished product price increase gave the impetus for the company's profitability of the past quarter. The Russian steel segment EBITDA increased by 28.7% to $421 million in comparison with the previous quarter. The EBITDA margin of steel segment Russia amounted to 26.3%, a 6.6 percentage point boost. The Turkish steel segment EBITDA also increased in comparison to the previous quarter and totaled $3 million. The gradual EBITDA uptick is down to the diversification of our product portfolio of the Turkish market. The coal segment EBITDA shooked up by 60% to $16 million, again in the previous quarter, driven by higher coal concentrate sales and lower costs associated with ongoing repair works.

On the course of the next few slides, I would like to cover our capital expensive dynamics.

Next slide, please. Capital expenditures during the first quarter decreased by 46.5% in contrast with the previous quarter and amounted to $129 million. The demonstrated dynamics are on track with the approved investment program and the company strategy. During the quarter, the company continued to work on key CapEx projects dedicated to cost efficiency and environmental performance as well as decrease in production volumes and the fine-tuning of our product structure. Along with the capital overhaul of blast furnace No. 2, which was initiated in the first quarter, the company is carrying out the construction of that exhaustion units as the casting house and stock houses, a move that will help to improve the environmental efficiency of the company.

Could you please go to the next slide, where I would like to comment on the progress of these key investment projects. Firstly, sinter plant No. 5 is continuing to step up to its full design capacity of 5.5 million tonnes per year of sinter. The project is already posting goods resulted and environmental efficiency and cost reduction. The expected decrease in the cash cost of the slab predicted at $9 per tonne. As the first quarter, Hot-Rolling Mill 2500 was temporarily put on hold to perform the final stage of its reconstruction, during which the finishing train should be installed. While this project is finished, hot-rolled steel production at the initial stage will be lifted by of 0.8 million tonnes. We will see a higher product quality and also the product range will be expanded. Works related to the construction of new coke and chemical complex continued in the first quarter. Unfortunately, due to the coronavirus pandemic, it was decided to postpone the arrival of foreign experts at some project works until the station normalizes.

Over the next few slides, I would like to give an overview of the financial standing of the company.

Next slide, please. The group's total debt as of the end of the first quarter stood at $899 million. The balance of cash and deposits of the company's accounts at the end of the first quarter amounted to $859 million. While the net debt-to-EBITDA ratio of the end of the quarter was 0.02x. MMK Group's credit rating have also been confirmed at above the sovereign rating.

Next slide, please. To summarize the slide, high cash balance and affordable credit lines of $1.3 billion constitute a significant liquidity reserve. We follow a comfortable payment schedule which doesn't imply onetime large payments. In addition, our debt rate evidences the stability of the financial position of MMK Group.

Let's move on to cash flow on the next slide, please. This chart shows the free cash flow for the first quarter amounted to $110 million, a decrease of 59.6%. This is the result of the working capital build up in the amount of $141 million as a result of higher advances from customers received at 2019 year-end.

The next slide, please. Given the current unfavorable and unpredictable situation in the steel markets all over the world and in the broader economy, it was decided to postpone any decisions on 2020 interim dividend until autumn. On the basis of strengthening financial position and the recovery of the group's markets, the Board would fully expect to reinstate an appropriate and meaningful dividend once this huge disruption has past.

We see the following indicators as signs of recovery in the Russian economy and MMK's business: one, the normalization of epidemiological situation; two, business operations are back to normal across Russia; three, MMK's capacity utilization rate is at least 70%; and four, MMK's EBITDA margin reached at least 20%.

By the way, in conclusion, I would like to share the company's outlook for the second quarter of 2020 with you. Please move to the next slide. In the second quarter of 2020, the company foresees a risk of lower sales volumes amid slowdown in business activity while the current situation outrages the world and Russia. During the second quarter, the company will continue scheduled equipment repairs, which will lead to a decrease in production volumes. Steel prices will be placed under significant pressure due to the uncertainty of the market in the wake of the coronavirus pandemic. Nevertheless, capital investments are expected to exceed the level of the first quarter once the construction works at Hot-Rolling Mill 2500 are completed. This all fully consistent with our investment projects schedule as outlined in the company's strategy. The measures already taken to increase operational efficiencies will provide an additional layer of support to the company's results. Management continues to take active measures to prevent the spread of the coronavirus infection and to minimize risk to both staff and our business.

With that, our presentation has come to the end. I would like to thank you for your attention. If any questions have arisen during the course of this presentation, please feel free to ask them now. And we will answer them to the best of our ability.

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [4]

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Thank you, Andrey. Ladies and gentlemen, we are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will now take our first question.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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This is Andy Jones from Wood & Co. I have a couple of questions. First of all, in order to cancel the dividend, how bad do you expect 2Q to be? Can you give us some idea on volumes on -- if current prices persist in the next few weeks, what sort of level of EBITDA are you expecting just broadly as a range? How will that be? And my second question is more the conceptual one. You have basically a clean balance sheet and ample liquidity, and you changed your dividend policy not very long ago. What is the point in having a dividend policy, if you're not going to follow it when you have such a strong financial position, as you do now?

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [3]

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This is Veronika Kryachko. Andrey Eremin will give the answer in Russian, and then I will have to translate in English.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [4]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [5]

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[Interpreted] Firstly, as for the volumes for the second quarter, we would like to decrease the volumes quarter-over-quarter by 15%, 17%. Firstly, the production volumes, firstly, it is connected to the planned reconstruction of Hot-Rolling Mill 2500, which we previously announced, and the repair work started to perform in the beginning of February.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [6]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [7]

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[Interpreted] So hence, again, the volume decline are mostly connected to the stoppage -- to the temporary stoppage for repair works of Hot-Rolling Mill 2500. And the second point, the volume decline is also connected to the change in the structure of our sales in the forthcoming quarter on the actual second quarter which is growing right now as we plan and this is connected to the decline in demand in Russia itself by key sectors, and we plan to sell about 40% of our volumes to the exports in the second quarter.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [8]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [9]

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[Interpreted] We expect the key decline in demand for steel in Russia to start in May and June. And after that, we expect the gradual upturn in the demand and normalization to the usual levels in the Q3 and Q4 of 2020.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [10]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [11]

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[Interpreted] Due to these changes in volume structure and actually in volume itself and given the current prices in place, we expect the EBITDA decline in the second quarter.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [12]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [13]

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[Interpreted] We cannot give the exact guidance for EBITDA decline in the second quarter, but potentially, we expect the EBITDA decline in the Q2 by 30%.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [14]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [15]

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[Interpreted] This is mainly concern of the Q2, and we expect the normalization of the EBITDA level in Q3 and Q4, with the usual level that we're used to.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [16]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [17]

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[Interpreted] This forecast -- our internal forecast will gradually lighten the stress scenario, which we worked out for ourselves. And we're currently try to follow it and look at it.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [18]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [19]

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[Interpreted] Well, as to the dividend question, we remain committed to our dividend policy. But given the current situation of great uncertainty in the steel markets and in the whole economy overall, and taking into the account that we cannot for sure predict how the market will look at the Q2 and Q3 as well, and well, the whole 2020 because of this coronavirus infection, we -- the key shareholder, the Chairman of the Board made the decision to delay the dividend, the decision on the dividend till the autumn of 2020. We are not canceling the dividend. We are just delaying the decision on the dividend and remain still committed to the dividend call.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [20]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [21]

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[Interpreted] Also, given that the current uncertainty and the weak economy influences not only us, the key producers and -- well the steel producers around the world, but also our customers, which are dependent on taking this decision of dividend delay. We will also take into account that we will have to actually, at some point, to finance the working capital of our key customers, which will ultimately lead us to our working capital buildup and some outflow from our cash flow during this period. So taking this in mind and keeping all these things altogether, we made the decision, as we said, to delay the dividend decision to the autumn.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [22]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [23]

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[Interpreted] Speaking about our key suppliers, we speak of the policy of meeting our obligation to them and to pay them in due time.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [24]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [25]

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[Interpreted] I would like to highlight once again the main decision is not connected to the cancellation of the dividend, but rather to the delay of the decision on the whole 2020 dividend to the autumn. And given that the economic situation normalizes quickly, we will be able, for example, if it normalizes in Q2, we will be able to pay the dividend for Q1 and Q2 in -- during the Q2. If it normalizes in Q3, we'll be able to pay it in Q3. And given it is normalizes by the end of the year, we will be able to pay the full chunk of the dividend for the whole year at the end of the year. So we are keeping all obligations to our shareholders in place, and we are not canceling the dividend policy.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [26]

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Okay. Understood. And just to clarify, I didn't hear a forecast in terms of volume decline in the second quarter. I heard what you said a big share of exports would be 40%, but on what sort of volume level? And just as a follow-up to that as well. You mentioned there was -- things were dependent upon reconstruction of Mill 3500 and things like that. So are you saying that you have -- you actually have ample demand for your product, but it's a question of production? Or if that's the case, you will not be pulling a better position than that?

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [27]

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There are 2 sides, I would like to tell once again, which was I've already said. There are 2 sides of the story. The construction of Mill 2500 and we expect kind of natural decline in our volumes by 15% to 17%, largely because of that. But on the other hand, we expect the change in the structure of the demand in the market. So in this way, we will have to redirect the major parts of our production volumes to the export. And because of that, we expect the export volumes in the Q2 to be around 40%.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [28]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [29]

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[Interpreted] Is it clear?

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [30]

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Yes, it is a 15% to 17% decline in total sales volumes.

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [31]

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Production volume, production volumes.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [32]

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Production volumes. Okay. But in terms of sales volume, what do you expect quarter-on-quarter?

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [33]

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We expect it to be the same as the decline in production largely. So the sales volume also will be declined by 15% to 17% quarter-over-quarter.

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Operator [34]

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There are no further questions in the telephone queue. We now have a question in the telephone queue. We'll take our next question.

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Yuriy A. Vlasov, Sova Capital Limited, Research Division - Research Analyst [35]

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Yuriy Vlasov, Sova Capital. (foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [36]

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[Interpreted] Yuriy, I will translate your question to the other people in our conference call. So Yuriy asked first question about what we are seeing in the Turkish market and how will we evaluate the situation in Turkish market? And the second question, how we are evaluating and forecasting the prices for iron ore and coking coal in Russia in the coming quarters?

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [37]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [38]

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[Interpreted] Okay. As for the overall demand situation in the Turkey, it remains quite the same. But we see some positive signs of recovery in the Turkish economy. We see that the government became less strict under current regime in the country. We see that some industries and companies which are producing, for example, home appliances and auto producers are starting to rebound to their production volumes. So overall, the economy starts to revive and we see some positive signs overall. As for our assets, MMK Metallurgy is still ongoing. And this quarter, we saw a $3 million growth in EBITDA. The free cash flow is also positive on the back of some working capital relief and overall positive EBITDA trend. In the coming quarters, we expect the flow of our assets to be above 0. We also see that the government starts to introduce some stimulus measures to the economy by reducing the key rate in the country and actually making some help to the key producers and industries in the country. So overall, the long-term trend is positive despite some current uncertainties connected to -- largely to coronavirus and all this uncertainty.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [39]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [40]

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[Interpreted] So as for the iron ore trend, with the largely forecast the dip -- actually gradual decline in coming quarters. For example, in Q1, iron ore index Platts printed $90 per tonne. But as for the Q2, we expect it to be around $80 to $83 per tonne. This radial decline is largely connected to the China, which continued to consume iron ore in other commodities during the coronavirus pandemic, which started from January and lasted gradually to February and beginning of March. And the operating capacities of key Chinese producers were actually at the average high level of about 85%, 88%, 90%. And the blast furnace operating capacity was also quite high. And this largely supported the iron ore prices and other commodity prices during the Q1. Moreover, the supply side also supported this case because the Brazilian, for example, suppliers of iron ore, saw a decline of supply during the Q1 because of cyclones and rainfalls, heavy rainfalls during the quarter. But when we speak about our outlook for Q3 and Q4, we believe that the supply situation will recover and Brazil will largely support this overall iron ore supply going forward as well as Australia. And our forecast for the prices for this quarter will be even about $75 per tonne. So to sum up, we actually expect the prices to go down from $90 per tonne in Q1 to $75 by the end of the year for iron ore.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [41]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [42]

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[Interpreted] As our contract price is largely tied to the index Platts, we expect our iron ore prices to decline by 7% to 8% in the Q2.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [43]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [44]

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[Interpreted] As for the forecast for the coal prices and the coal situation, actually, the coal market largely in the processes (inaudible) of the world and especially in Russia. And during the Q1, for example, we saw the price decline for the coal by $6 per tonne -- 6% per tonne. And in the Q2, we actually forecasted to be even down by 10% because largely, the economic situation and supply-demand balance in this particular sector won't change gradually and will stay quite at the current level.

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Operator [45]

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We can take our next question.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [46]

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A follow-up for me. Just in terms of your profitability on exports. And with Black Sea prices somewhere around like $360, $370 or something, I would assume that your rail cost about $70 or something to the site. So ex works, you're probably getting a $300 or something. I mean, with a slab cash cost of close to $270 with the rolling cost of HRC, it sounds on those prices you're not really turning to profit on those volumes, maybe a little bit of a decline in iron ore and coal, you might have some margin. Could you give us an idea as to how much EBITDA per tonne you would make on those export volumes?

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [47]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [48]

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[Interpreted] Well, taking into the account, our current prices, the first quarter, we reported for the Q1 of about $283. And taking into the account current prices in the market, our EBITDA margin on export volumes is about $30 per tonne. And given that the -- in the coming quarters, we expect the marginal decline in commodity prices in iron ore, in coal, well that will logically drive the decline in HRC as well. And well, obviously, our margins won't be very big. That still, given our current structure and level of dominant costs, which we have, was still a marginal under the current situation, and we can cover our dominant costs and earn some margin in the end.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [49]

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I mean if you're selling 40% of your volumes at very, very low margins, that looks a bit, I mean, maybe 30%, maybe a bit more if you have some decline in your slab cash cost, I would have assumed the decline in EBITDA would be much more than 30% in the second quarter, especially with a 15% to 17% decrease in volumes. Am I being too pessimistic? Or I mean, how confident are you in that idea of approximately a 30% decline? And what sort of range could we see?

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [50]

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[Interpreted] Given the current price environment, we can make our estimations roughly based on the current prices, as you can imagine, because everything is changing very quickly. Given the current prices are in place or more or less on this level, we expect the EBITDA declined by 30%, as we said. But obviously, we cannot guide for sure how the change will evolve. And well, everything can happen. But we, ourselves, expect that the decline will be more than 30% or around this figure.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [51]

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Comparison, what sort of margin are you making per tonne on domestic sales on average at the moment at current prices?

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [52]

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[Interpreted] Indeed so, we said that we had margin we have the current about $30 per tonne. And as you know, the internal market premium is about $60 to $70 per tonne. So well, the margin between internal markets in the end is $30 plus $60 or $70, is about $100 per tonne.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [53]

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(foreign language)

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Operator [54]

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We will take our next question.

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Unidentified Analyst, [55]

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Hello. (foreign language)

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Operator [56]

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Ladies and gentlemen, there's just been a momentary interruption in today's conference. Please stand by.

And ladies and gentlemen, today's call is continuing. (Operator Instructions) We'll now take our next question.

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Unidentified Analyst, [57]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [58]

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[Interpreted] [Katrina], I will translate your question in English and then we'll provide the answer. So Katrina asked about our export volume. Where we are going to deliver them and how the goals look like in the proxy term? And the second question was about the demand from the key industries in Russia. How we estimate it in Q1 and how we estimate this over the 2Q?

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [59]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [60]

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[Interpreted] Well, the large parts of exports is obviously the HRC that given the changes in the current environment and in the market overall is free to supply to the exit market. Also our galvanized steel and thick plate from Hot-Rolling Mill 5000.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [61]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [62]

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[Interpreted] As for the key markets, we are supplying our product to export destinations, is Middle East, Northern Africa and Southeast Asia. We're not selling any volumes to China.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [63]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [64]

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Galvanized steel, we're selling to Europe.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [65]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [66]

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[Interpreted] So as for the auto production in it, we actually see the potential just to downgrading demand by 40% in total volume. We see some demand coming from KAMAZ, VAZ and GAZ, especially stimulated by the government orders because the government just moved up orders, which were planned initially to be for coming months and quarters. We see that AvtoVAZ currently put in force their orders during the Q2 and as for example Volkswagen, we see that they are starting to move up the production in the coming period.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [67]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [68]

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[Interpreted] As for the building and construction sector, we actually estimate that the decline could be for the year of about 15% to 30% in conjunction with the previous year because the overall construction sector is kind of on a standby right now from (inaudible) from region to region.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [69]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [70]

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[Interpreted] So as for the tube and pipe industry, we see the potential decline of about 14% to 25% for the year in comparison with the previous year.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [71]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [72]

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[Interpreted] But again, I believe that it largely depends on the length of the period of the quarantine and self-isolation measures, which are currently being installed by the government. And given that they will end in the mid-May as we are currently expecting, the situation would normalize even quickly -- but even quicker, but well, if they are to last even more, probably this period will also last for another several months.

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Andrey A. Eremin, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Director for Economics, Member of Management Board & Director [73]

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(foreign language)

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [74]

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[Interpreted] Well, but actually, we believe that these measures taken currently by the governments is actually in terms of decreasing the key rate supporting the mortgages and it's making all the levers they can take right now in order to support the overall industries in the country, which generally the quicker upfront in the economic activity once the self-isolation and quarantine measures are finished. So we believe that overall demand, which is currently declining, it's just delayed demand and will see quite a great uptrend in the Q3 and Q4.

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Operator [75]

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There are no further questions in the telephone queue.

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Veronika Kryachko, Public Joint Stock Company Magnitogorsk Iron & Steel Works - Head of IR [76]

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Okay, ladies and gentlemen, thank you very much for participation in today's conference call. If you still have any questions, please feel free to call our IR department any time and send us e-mail. Thank you very much, once again. Have a great rest of the day. Goodbye.

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Operator [77]

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Ladies and gentlemen, this concludes today's conference call. Thank you 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.]