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Edited Transcript of TATN.MZ earnings conference call or presentation 4-Sep-19 1:00pm GMT

Half Year 2019 Tatneft' PAO Earnings Call (IFRS)

Tatarstan Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Tatneft' PAO earnings conference call or presentation Wednesday, September 4, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Vasiliy Aleksandrovich Mozgovoy

PJSC Tatneft - Assistant To General Director of Corporate Finances

* Vladlen Aleksandrovich Voskoboynikov

PJSC Tatneft - Head of Consolidated Financial statement Department & Member of Management Board

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Conference Call Participants

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* Alexander Burgansky

Renaissance Capital, Research Division - MD and Head of Oil & Gas Research

* Alexey Ilin

* Andrey Gromadin

Sberbank CIB Investment Research - Analyst

* Igor Kuzmin

Morgan Stanley, Research Division - Equity Analyst

* Ildar Davletshin

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tatneft Second Quarter 2019 IFRS Results Conference Call. (Operator Instructions) Please note that this call is for investors and analysts only. If representatives of the media wish to ask any questions, they should contact the company directly. (Operator Instructions) Please also note this call is being recorded.

I would now like to turn the conference over to Mr. Vasiliy Mozgovoy. Please go ahead, sir.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [2]

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Thank you, Chris. Hello, everybody. Thank you for joining today's conference call and special thanks to Renaissance Capital for hosting us. I'm Vasiliy Mozgovoy, Assistant to the General Director of Corporate Finance. I'm joined on this call by Vladlen Voskoboynikov, head of Consolidated Financial Reporting and a member of the company's management council.

First of all, I would like to draw your attention to our standard legal disclaimer about forward-looking statements, which is contained in our press release published on 28th of August 2019 in connection with the release of our financial statements.

Before turning the floor to Vlad, who will present the highlights from our IFRS financial statements for the second quarter of 2019, I would like to say a few words about our operational results and investments. In the second quarter of 2019, we produced 7.5 million tonnes or 53.4 million barrels of crude oils, including 674,000 tonnes of highly viscous oil. Our crude oil production averaged 587,000 barrels per day. Gas production was 253 million cubic meters. Our refinery, TANECO, produced 1,329,000 tonnes of petroleum products in the second quarter of this year, including 922,000 tonnes of diesel fuel; 205,000 tonnes of middle distillates; 267,000 tonnes of automobile gasoline; 117,000 tonnes of naphtha as well as other products.

In the second quarter of 2019, we sold 4.4 million tonnes of crude oil to customers, of which 2.3 million tonnes in export markets, both CIS and non-CIS. Throughout the second quarter, we were affected by the temporary suspension of shipments of crude oil via our Transneft’s Druzhba pipeline, resulting on lower volumes of crude oil delivered to our customers and respective inventory buildup but no impact on the production. Information on the effect of this incident on our results can be found in the MD&A.

In the second quarter of 2019, we sold 3 million tonnes of refined products, of which 1,025,000 tonnes in non-CIS export markets, 1.9 million tonnes in the Russian domestic market and 69,000 tonnes in the CIS. In the same period, we purchased 95,000 tonnes of crude oil and 375,000 tonnes of refined products for trading.

In the second quarter of this year, we started fracking the second initial processing unit, CDU/VDU-6, at TANECO. It has now been commissioned. Total additions to property, plant and equipment for the second quarter of 2019 under IFRS were RUB 20.1 billion, out of which 45% and 38% were invested in upstream and downstream, respectively. Total CapEx in the first half of this year was about RUB 39.4 billion. We maintain our guidance for the full year at around RUB 127 billion in total. However, this amount includes certain projected investments that would be done if the OPEC+ restrictions are eased. If the existing limitations remain in place without modification by the year-end, our CapEx would be at least RUB 10 billion lower.

We recently announced 2 M&A transactions. Both are expected to be completed by the end of this year. First is the planned acquisition from Neste Corporation of fuel retail business, consisting of 75 fuel stations and a terminal in St. Petersburg region. The transaction is subject to the approval of the Russian competition authorities. Pursuant to a separate agreement between Tatneft and Neste following the acquisition, the retail network will continue to operate under the Neste brand for up to 5 years.

The second one is our planned acquisition of SIBUR's Togliatti-based petrochemical business, focusing on the production of synthetic rubber used in tire manufacturing, which was announced earlier this week. This transaction is subject to definitive agreements to be signed by the parties at necessary approvals. Both transactions are aimed at achieving on our strategic goals in refining, in marketing and tire businesses, respectively.

Thank you. Now I turn the floor to Vlad.

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Vladlen Aleksandrovich Voskoboynikov, PJSC Tatneft - Head of Consolidated Financial statement Department & Member of Management Board [3]

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Thank you, Vasiliy. I'd like to highlight the following key points regarding our financial results in the second quarter of 2019 compared to the previous one. Our revenue on nonbanking activities, net of export duties and excise tax, decreased by 2.2% to RUB 222.3 billion from RUB 227.3 billion in the first quarter of 2019. Export duties and excise taxes decreased by 33% in the second quarter of 2019 compared to the first quarter of 2019. The net profit in the second quarter of 2019 decreased by 10% compared to the first quarter of 2019. The profit margin calculated based on net profit for the period-end second quarter of 2019 was 24% compared to the first quarter of 26%. EBITDA margin was 35% based on the second quarter of 2019 results compared to 38% in the first quarter of 2019.

Total cost and other deductions on nonbanking activities increased by 3.7% compared to the second quarter of 2019 -- in the first quarter of 2019, mostly due to the increased purchase of crude oil and refined products. Compared to second quarter 2019 versus second quarter 2018, we saw the following results: Decrease in total cost of 3.4%; increase of operating expense by 2.8% and decrease of lifting costs by 5.8%; a decrease in SG&A by 8.5%; increase in taxes other than income tax by 3.9% due to the increase in mineral tax costs.

On a personal note, this may -- could -- this will be my last such call after 13 years with Tatneft. I decided to leave the company. I would like to thank everyone for their patience and support over the years. In the future, your questions could be addressed to our Chief Accountant, Oleg Matveyev.

Thank you, and back to Vasiliy.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [4]

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Thank you, Vlad. And before starting the Q&A session, I would like to remind you about the upcoming Extraordinary General Shareholders' Meeting of Tatneft on September 13, with the agenda to approve the proposed 6-month interim dividend of RUB 40.11 per share. We encourage all shareholders to participate in the meeting by casting their votes or their proxy. Please note that the ADR voting is closing on September 6. Your participation is extremely important to us.

And now we will be happy to answer your questions. Thank you.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, again, please note that the call is for investors and analysts only. And if representatives of the media wish to ask any questions, they can contact the company directly. (Operator Instructions) Our first question is from Ildar Davletshin of Wood & Company.

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Ildar Davletshin, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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I have 3 questions. One is just to confirm, if you could, your CapEx guidance, which you just provided. Could you clarify exactly how much lower can it be if the OPEC+ deal is until the year-end? And then 2 more questions. One on the Druzhba pipeline. Can you update us on the latest status? Like are operations fully resolved? Like do you experience any issues right now? And whether -- and sort of what else -- what impact could you see in the third quarter from normalization of the pipeline? So like what sort of extra inventories do you plan to really sell on top of your regular sales? And the main reason for this question is that second quarter was clearly affected. But will we see the reverse? And to what degree in the third quarter? Will it be more like next few quarters, not just 1 quarter of improvement? And then lastly, on free cash flow, like you also used to provide some guidance on free cash flow in your presentation, with potentially lower CapEx. How does your free cash flow look now relative to 6 months ago? Do you see it more or less at the same level as you with the consolidation, maybe lower, maybe higher? That's all my questions.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [3]

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Thank you, Ildar. I will address the first and the last, and I will ask Vlad to talk about the Druzhba pipeline issue and the effect. On CapEx, just to give you -- it was mentioned in the introduction, if the OPEC+ restrictions remain in place until the end of the year, our CapEx could be approximately RUB 10 billion lower than what we guided for the full year of around RUB 127 billion. And related to that, obviously, our free cash flow projection that was announced -- since the announced CapEx, therefore, if CapEx is lower, then free cash flow is expected to increase approximately about the same amount. And with respect to the Druzhba pipeline, Vlad could elaborate on that?

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Vladlen Aleksandrovich Voskoboynikov, PJSC Tatneft - Head of Consolidated Financial statement Department & Member of Management Board [4]

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Basically, our operations are normalized. From an inventory perspective, our inventory is a little over double what it usually is, so there should be an incremental cash flow that we did not have in the second quarter. We should see a substantial pickup in the third quarter.

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Operator [5]

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The next question is from Alexander Burgansky of Renaissance Capital.

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Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [6]

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I have 2 questions. So firstly, there was a Board meeting on the 26th of August, which among other things, discussed the plans of increasing capacity at the TANECO Refining. And so I was just wondering whether these are -- any new plans and how do they compare to the plans that you have outlined in your strategy presentation until 2030 and whether we need to make any adjustments to that presentation. That's the first question. And secondly, I also noticed some news over the last few days about your -- the plans for the petrochemical capacity in Tatarstan. And I was wondering if you could provide a little bit more detail on exactly the structure of your petrochemical investments? How it's going to look like, what will be the exact capacity and maybe the breakdown on a quarter-by-quarter basis. I understand if I go beyond this -- trying to know the contract size. But perhaps if you could sort of maybe update in the last presentation on contract size will be much appreciated.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [7]

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Thank you, Alexander, for your questions. The short and simple answer, if there was something that we have to announce of being material, we will do so already. More specifically, on the first question related to the discussion in the Board level, it was focusing on the marketing plan for the refined products produced at TANECO going forward. So it was not a consideration or discussion of any specific changes in our plans with respect to commissioning of various units at TANECO compared to what was outlined in our strategy presentation in September of last year, but more focusing on various sales channels and ways of marketing product that is produced by TANECO. So no significant changes on that front and, hence, there is no separate announcement.

With respect to OPEC compliance and Tatarstan, to be honest, I'm not sure. It seems to be following the block as to what specifically you referred to. And if you could provide that information off-line for us to talk about it. But we obviously have projects that, again, was specifically defined and disclosed in our strategy presentation in September of last year, the first stage of developing at petchem business outside of our tire manufacturing business. And that's focusing on relatively small project at the first stage. However, we're still debating and considering potential further expansion on that front and perhaps some of the news were related to those considerations. But again, until the final investment decision that we have to announce, obviously, we're not communicating them because it's under consideration.

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Operator [8]

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(Operator Instructions) Next question is from Igor Kuzmin of Morgan Stanley.

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [9]

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I have just a question on CapEx. So compared to the range that we have in mind right now, RUB 117 billion to RUB 127 billion, depending on the outcome of decisions by OPEC+, how that change might evolve in 2020? And if you've got -- and here right now already, perhaps even directionally, what it could be, that will be very helpful.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [10]

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Thank you for your question. At this point, we are still considering our CapEx plan for next year. But at this point, initially, we're looking at approximately the same level as this year. So the range that we've been disclosing -- we've been communicating between approximately RUB 110 billion, RUB 130 billion.

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Operator [11]

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The next question is from Andrey Gromadin of Sberbank CIB.

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Andrey Gromadin, Sberbank CIB Investment Research - Analyst [12]

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One quick question. A few days ago, there was a report in the Fox saying that the production in late August was reduced by about 19%. Could you please explain a bit why there was such a dramatic decline? And what are the main reasons? And what production at the moment, how should we look at it for fourth quarter level?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [13]

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Thank you for your question. I mean as everyone knows us and observe obviously, including with respect to -- in depreciation rather with the Druzhba pipeline and so then there was quite a bit of a volatility in production by various producers in Russia. And as to ourselves, obviously, you observed that the last couple of months, at least, our production was a little bit higher than we initially guided because of the existence of OPEC+ restrictions. But as we announced, the normalized kind of production level that we expected for the full year was at around 576,000 barrels per day for the group. And obviously, the last couple of months, we've seen higher. So we're kind of coming down to more normalized level associated with our share of commitment under the OPEC+ operation.

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Operator [14]

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(Operator Instructions) We have a question from Alexey Ilin of Franklin Templeton.

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Alexey Ilin, [15]

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I have a small question related to TANECO outputs. Can you provide like some breakdown of other products and what price you're getting on them because depending on the markets, you didn't quite -- there was quite significant difference between the prices on these products?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [16]

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I think for the year, it would be -- if you first look at our presentation that we posted in April, on Slide 5, we have a quite detailed breakdown of TANECO output by product. That includes pretty much the description of -- most of the other that we usually announce, number before our result. And with respect to pricing, we're not announcing forward pricing but we expect on refined products to use, but on the MD&A, of course, we disclosed the realized price for those products, and that could in fact identify the sort of pricing parameters for various products produced and sold.

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Alexey Ilin, [17]

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Okay. And I'm just curious because there was like -- I mean quite significant difference between like domestic sales, CIS exports and non-CIS exports, that's why I'm asking what kind of...

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [18]

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I mean basically, the set should help into that, it's just focusing on maximizing margins. And also there are some, of course, limitations as to capacity for utilizing various markets. So it also depends on the set of parameters and how they play out, depending on transportation costs, et cetera. But if there are any specific questions that you have on this front, if you could contact us separately and we'd be very happy to discuss those.

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Alexey Ilin, [19]

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All right. And one more additional question on the sales business. As soon as you purchased 75 sales stations, what are your future plans for this segment going forward? So how do you see it go...

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [20]

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I understand you're referring to the Neste network, right? That's 75 units, kind of terminal in St. Petersburg region. I mean that's pretty much the agreement that we signed, and again it's expected to be closed, subject to the antitrust approval. When that happens, that's pretty much -- the plan for us is to operate that network overall, and as was mentioned under a separate agreement. For a number of years, at least, it will remain to be handled over at Neste. And at this moment, we are still obviously considering further initiatives because after developing and refining the marketing business, there's nothing on the pipeline yet. But we have (inaudible) as a matter of potential acquisition or something like that.

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Alexey Ilin, [21]

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But can you remind what is the long-term target in terms of the number of retail outlets, if there was?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [22]

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As a matter of retail operations, I mean the target that we have under the 2030 strategy was at around 560 retail units. But you should also bear in mind that apart from acquiring new, there was projects related to optimization of the network, so -- and those projects are also subject to changes depending on outlook and the ability to capture higher margins in certain regions, the reason behind -- perhaps, a year ago, (inaudible) that we would have continuation of something like developing Greenfield retail operations in St. Petersburg, the answer would be no. But since it was a good and profitable asset available for acquisition in the market, we decided to pursue this opportunity. So it really depends on what happens in the market and the monetization at those times.

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Operator [23]

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The next question is a follow-up from Ildar from Wood & Company.

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Ildar Davletshin, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [24]

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Just wanted to ask you for the latest update on TANECO overall in terms of the current status. So you launched gasoline production finally. And in terms of the next 6, 12, 18 months, like what are another major milestone in terms of overall capacity and maybe any other units that you plan to install? Should we expect any major change in overall volumes or production mix?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [25]

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Thanks for the follow-up question. And everything that we plan is pretty much in line with what we announced. So the next big step next year is the final launch of TAIF-NK fracking unit, followed then in 2021 by -- one major step is middle distillates, hydrotreating for additional middle distillates that will be produced more in the launch of the second CDU/VDU which, as I mentioned, is now fully operational. And the rest will be the, obviously, the improving the quality of product mix coming out of TANECO. But these are the main milestones in the next 12 months and forward. So the TAIF-NK and TANECO is the major milestone.

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Ildar Davletshin, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [26]

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And the second distillation unit, since it's operational, so should we be expecting like -- something like 14 million tonnes, 15 million tonnes of crude processing next year at TANECO? Or is it...

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [27]

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No. I mean what we announced is basically, we would be targeting maximization of profitability of operation. And because of not just being able to process all, having record EBIT is going to be produced if we have the second CDU/VDU operational at full capacity, we would be locking it at a lower utilization rate. And that's what we pretty much announced under the range of between 11 million tonnes and 12 million metric tonnes until we're able to fully process for heavy record year that is produced or could be produced. Thank you.

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Operator [28]

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(Operator Instructions) Sir, it would appear that we have no further questions in the queue. Kindly provide closing comments.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [29]

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Okay. Thank you very much for participating on the call and your questions. As always, if you have anything that you would like to discuss off-line, feel free to contact us. And once again, thank you for hosting the call to our colleagues at Renaissance Capital. Appreciate it. Good night.

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Operator [30]

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Thank you very much, sir. Ladies and gentlemen, that will conclude this conference call. And you may now disconnect your lines.