SSA.L Regulatory News (SSA)

SISTEMA ANNOUNCES FINANCIAL RESULTS FOR THE FOURTH QUARTER AND FULL YEAR 2018

Moscow, Russia - 3 April 2019 - Sistema PJSFC ("Sistema" or the "Company", together with its subsidiaries, "the Group") (LSE: SSA, MOEX: AFKS), a publicly-traded diversified Russian holding company, today announces its unaudited consolidated financial results in accordance with International Financial Reporting Standards (IFRS) for the fourth quarter 2018 and audited consolidated financial results in accordance with International Financial Reporting Standards (IFRS) for full year ended 31 December 2018.

SUCCESSFUL DELIVERY AGAINST STRATEGIC AND OPERATIONAL GOALS

FY 2018 FINANCIAL RESULTS

4Q 2018 FINANCIAL RESULTS

SISTEMA'S CURRENT STRATEGIC IMPERATIVES  

Andrey Dubovskov, President and Chief Executive Officer of Sistema, said:

"Sistema delivered impressive financial and operating results in 2018. Group's revenue for the year increased by 12% to RUB 777 billion on the back of robust growth of our key assets. Most assets grew at significantly above the average growth rates of the markets in which they operate. Notably, MTS, Detsky Mir, Segezha Group, Agroholding Steppe and Medsi strengthened their leadership positions in their respective industries. MTS is not only increasing revenue from mobile services and smartphone sales, but is also entering new, adjacent high-growth markets including IT outsourcing, Internet of Things, cloud services, e-sports and web-based event ticket sales. Detsky Mir continues to grow its business in Russia and Kazakhstan, and has expanded to Belarus and launched a pet supplies business - all while increasing profitability. Segezha Group continues to expand its product lines, focusing on demand from high-opportunity export markets. Agroholding Steppe is now a top-6 Russian grain exporter and continues to demonstrate strong growth across all its main business segments. Steppe also launched its own retail brand as it aims to grow closer to consumers. Based on FY 2018 performance, Medsi has established itself as the leading private healthcare business in Russia by revenue and one of the fastest-growing healthcare businesses globally.

"Group adjusted OIBDA increased by 34% thanks to double-digit OIBDA growth at all key portfolio companies. The new IFRS accounting standards had a significant impact on the results of MTS and Detsky Mir, though on a like-for-like basis these companies also delivered strong OIBDA growth.

"In late 2018 and early 2019 we completed a number of strategic transactions, demonstrating that we continue to add value to our assets in an environment where we have limited investment resources. As part of a consortium of investors we acquired a leading Russian pharmaceutical company, OBL Pharm, and plan to merge it with our pharmaceutical holding, Binnopharm, significantly increasing the value of that business. In future we plan to bring the combined company to the public markets. As a result of transactions involving Leader Invest and Etalon Group, we have changed the landscape of the Russian residential property market, establishing a company that is a top-3 developer in the Moscow and St Petersburg markets by construction volumes and sales. Additionally, we continued to increase our exposure to Ozon, the leading multi-category online retailer. This transaction represents Sistema's strategic investment in the fast-growing e-commerce industry through a company that is poised to consolidate this highly fragmented market.

"We have somewhat modified the Group strategy adopted last year to reflect current market conditions, though our key objectives remain unchanged: maximise shareholder value and reduce the discount between market capitalisation and net asset value, attract third-party capital to diversify and expand our investment resources, and reduce gross debt to RUB 140-150 billion. In the coming years our focus will be on growing the value of four portfolio companies - Agroholding Steppe, Segezha Group, Medsi and Ozon. We are targeting valuations of USD 1-2 billion for each of these companies. We view these companies - which we will ultimately contemplate to bring to capital markets - as catalysts to enhance Sistema's valuation and the key to reducing the discount.

"Given the need to strike a balance between decreasing debt, continuing to invest and delivering returns to shareholders, the Board of Directors has recommended that the General Meeting of Shareholders approve dividends for the full year 2018 in the amount of RUB 1.1 billion, or RUB 0.11 per share. As we previously stated, after the debt load has been substantially reduced, the Company will return to the question of dividend payments, with the aim of strengthening our investment case."

***

Conference call information

Sistema's management will host a conference call today at 10:00 am (New York time) / 3:00 pm (London time) / 4:00 pm (CET) / 5:00 pm (Moscow time) to present and discuss the FY 2018 results.

To participate in the conference call, please dial:

Russia

+7 495 213 1767

8 800 500 9283 (toll-free)

UK

+44 330 336 9125

0800 358 6377 (toll-free)

US

+1 323 794 2588

888 394-8218 (toll-free)

Conference ID: 2565520

Link to webcast: https://webcasts.eqs.com/sistema20190403

Or quote the conference call title: "Sistema Fourth Quarter and Full Year 2018 Financial Results".

A replay of the conference call will be available on Sistema's website www.sistema.com for at least seven days after the event.

For further information, please visit www.sistema.com or contact:

 FINANCIAL SUMMARY AND GROUP OPERATING REVIEW

In 2018, Sistema's consolidated revenue increased by 12.1% year-on-year as a result of increased revenue from key assets: MTS, as the core telecoms business benefitted substantially from a better pricing environment in Russia, data usage increased, revenue from new business lines accelerated rapidly and smartphone sales were strong; Detsky Mir, on the back of new store openings, growth in like-for-like sales, growth in the e-commerce segment and increased traffic at previously opened stores; Segezha Group, as a result of increased sales volumes of paper and packaging, higher prices for paper and sawn timber, and weakening of the rouble; Agroholding Steppe, due to growth of the field crop segment as wheat prices have increased, strong growth of the agrotrading division and increased milk production; Medsi, due to increased capacity utilisation and as a result in-patient revenue, higher revenue from the CDC at Krasnaya Presnya and expansion of the chain of clinics; and real estate assets, driven by sales growth and earlier revenue recognition due to the adoption of the IFRS 15 standard.

Group adjusted OIBDA increased by 34.3% on the year, reflecting strong results at MTS, primarily due to the new accounting standards, increased revenue and strong performance of the Ukrainian business; Detsky Mir as a result of the new IFRS standards, optimisation of buying prices, efficient management of the product assortment and increased operational efficiency; Segezha Group, as a result of increased prices on most key products as well as the commissioning of a new papermaking machine in late 2017; Agroholding Steppe, due to increased operational efficiency in the field crop segment and increased contributions from the agrotrading segment; Medsi, as capacity utilisation of key assets ramped up and revenue per square metre of medical facilities rose. Excluding the effect of the new accounting standards, Group adjusted OIBDA increased by 11.3% versus 2017 primarily as a result of growth at MTS, Detsky Mir, Segezha, Agroholding Steppe and Medsi. The adjusted OIBDA margin increased by 5.6 p.p. to 34.1%, principally as a result of the new accounting standards. Without taking into account the new standards, the adjusted OIBDA margin was unchanged at 28.5%.

Group selling, general and administrative expenses (SG&A) for the full year 2018 decreased by 7.5% versus 2017 to RUB 141.6 billion, mainly due to the new IFRS standards. Without this effect, Group SG&A increased by 6.8% to RUB 163.5 billion. The SG&A/revenue ratio declined year-on-year from 22.1% to 18.2%; excluding the impact of new IFRS standards the SG&A/revenue ratio declined to 21.2%, reflecting Sistema's continued success in improving operational efficiency. SG&A at the Corporate Centre declined year-on-year by 10.3% to RUB 9.0 billion as a result of cuts in headcount, lower compensation expense and reduced administrative expenses.

Group capital expenditures increased by 18.8% year-on-year to RUB 124.0 billion in 2018, mainly in connection with increased capex at MTS as a consequence of increased investments in network development in Russia and a focus on providing the best LTE coverage in line with the company's strategy; and Detsky Mir, as the company executed on its expansion strategy.

OPERATING REVIEW[6]

MTS

Leading telecommunications operator and digital services provider in Russia

In 4Q 2018 and FY 2018 revenue at MTS rose by 11.3% and 8.4% year-on-year, respectively, driven by robust performance of Russian operations as the core telecoms business benefitted substantially from a better pricing environment in Russia, data usage increased, revenue from new business lines accelerated rapidly, smartphone sales were strong, and as a result of the consolidation of MTS Bank. The new IFRS standards had a non-material negative effect on revenue.

Adjusted OIBDA grew by 24.0% and 22.7% in 4Q and FY 2018, respectively, due to the effect of new accounting standards, revenue growth, the consolidation of MTS Bank and strong performance of the Ukrainian business. The abolition of internal roaming and increased payments for frequency spectrum in Russia had a negative impact on OIBDA. Excluding the effect of the new standards, adjusted OIBDA increased by 6.5% and 5.9% in 4Q and FY 2018, respectively. The adjusted OIBDA margin strengthened by 4.3 p.p. and 5.3 p.p. to 42.3% and 45.6% in 4Q and FY 2018, respectively.

In 3Q 2018 MTS recorded a provision of RUB 55.8 billion  as the potential liability in respect of an investigation by the US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ). On 7 March 2019 MTS announced a settlement with the SEC and DOJ under which MTS has agreed to pay USD 850 million.

Including the provision, MTS's net profit attributable to Sistema for FY 2018 was RUB 3.4 billion. Excluding the effect of this one-time factor, adjusted profit for FY 2018 was RUB 33.0 billion.

During calendar year 2018 MTS paid dividends totalling RUB 52 billion, or RUB 26.0 per ordinary share, in line with the company's dividend policy for 2016-2018.

OUTLOOK FOR 2019

MTS forecasts revenue growth of above 3%.

MTS targets keeping OIBDA flat, but expects Adjusted OIBDA dynamics to be slightly negative.

Excluding costs for compliance with the Yarovaya law, MTS maintains its capex forecast at around RUB 160 billion in 2018-2019. MTS lowers its estimate of additional investment required to comply with the Yarovaya law from RUB 60 billion to RUB 50 billion over five years. Taking into account expenditures due to the Yarovaya law, MTS expects capital expenditures to be approximately RUB 90 billion in 2019.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

On 21 March 2019, MTS announced a new dividend policy for 2019-2021. Under the new dividend policy, the company will seek to pay at least RUB 28.0 per ordinary MTS share per calendar year, distributed in two semi-annual payments.

In February 2019, MTS acquired a 39.48% stake in MTS Bank from Sistema for RUB 11.4 billion, bringing its share in MTS Bank to 95%.

In March 2019, a class action lawsuit was filed in the US District Court for the Eastern District of New York against MTS and certain of its managers alleging certain securities-law violations relating to the MTS's recently announced resolution of US government investigations. MTS is reviewing the allegations and intends to defend its interests.

Detsky Mir[7]

The largest children's goods retailer in Russia

In FY 2018 and 4Q 2018 Detsky Mir's revenue grew by 14.3% and 13.0% year-on-year, respectively. Growth was driven by new store openings, an increase in like-for-like (LFL) sales and online sales, as well as the continued ramp-up of stores opened in 2017. LFL sales in Russia increased by 3.0% in 4Q year-on-year and by 4.3% for FY 2018. Growth of LFL sales in Kazakhstan increased by 30% year-on-year in KZT terms. The online segment[8] remained the fastest-growing channel, with revenue growing by 82% to RUB 3.6 billion in 4Q 2018 and almost doubling for FY 2018 to RUB 8.8 billion. The online store accounted for 7.9% of total sales in FY 2018, compared to 4.8% in 2017.

Adjusted OIBDA increased by 48.5% year-on-year in 4Q 2018 to RUB 6.4 billion. Excluding the impact of new accounting standards, adjusted OIBDA rose by 8.0% to RUB 4.6 billion, due in large part to optimisation of purchasing costs, effective management of the assortment and increased operational efficiency. The adjusted OIBDA margin increased by 8.1 p.p. for FY 2018 to 19.0%, and by 4.4 p.p. year-on-year for 4Q 2018 to 18.6%. Excluding the effect of new accounting standards, the adjusted OIBDA margin for 4Q 2018 was 13.5%. With the new accounting standards, the adjusted SG&A to revenue ratio decreased from 21.4% to 15.8% year-on-year in 4Q and decreased from 22.8% to 14.1% in 2018. Excluding this effect, the ratio decreased by 0.6 p.p. year-on-year in 4Q and by 1.0 p.p. in FY 2018.

Adjusted profit attributable to Sistema increased substantially in 4Q and FY 2018 due to increased operational efficiency and a reduction in SG&A to RUB 5.4 billion and RUB 15.7 billion, respectively. Excluding the effect of the new accounting standards, profit increased by 31.1% in 2018.

100 new Detsky Mir stores were opened in 2018. As of 31 December 2018, the total number of stores[9] stood at 743. In the medium term the company intends to open at least 300 Detsky Mir stores with a target IRR of approximately 40% in the next four years.

In December 2018, Detsky Mir opened the first Zoozavr branded store selling pet supplies. Zoozavr offers pet products including pet food (including medical), veterinary medicines, bath products, hygiene and grooming products and more. Developing the new chain will allow the company to diversify its business and apply its many years of experience and expertise in the retail sector.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In February 2019, Detsky Mir opened its first store in Belarus, with total area of 1,690 sq m. In Belarus, Detsky Mir operates under the Detmir brand.

In March 2019, Detsky Mir acquired a building in central Moscow that will house the company's flagship store. The former Valday shopping complex building, with 3,624.5 sq m of space, is located at 11 New Arbat, building 1. The opening of the flagship store is planned for the second half of 2019.

In March 2019, Detsky Mir announced that management would recommend allocating 100% of net profit for 4Q 2018 under Russian Accounting Standards (RAS) as dividends, a total of RUB 3.3 billion. In March 2019, the Expert RA (RAEX) rating agency assigned Detsky Mir a long-term credit rating of ruA+ with a Stable outlook.

Segezha Group

Leading Russian vertically integrated forestry holding

Segezha Group's revenue grew by 39.6% and 32.4%, respectively, in 4Q and FY 2018. The main growth driver was revenue from the Paper and Packaging division, which accounted for 70% of total revenue. Revenue growth was driven by increased sales volumes and higher prices for paper. Revenue for the year was also positively affected by growth of prices for sawn timber through the first nine months of the year and the depreciation of the rouble by 13.8% against the US dollar and 10.4% against the euro in 4Q. In 2018 the average rouble rate decreased by 7.5% against the dollar and by 12.2% against the euro.

Adjusted OIBDA increased year-on-year by 90.4% and 83.4% for 4Q and FY 2018, respectively. Growth was driven by increased prices for most of Segezha's key products, as well as the commissioning of a new paper-making machine at the end of 2017, which added RUB 2.6 billion at the OIBDA level. The adjusted OIBDA margin increased by 6.6 p.p. year-on-year in 4Q and rose by 1.7 p.p. for FY 2018 to 24.7% and 19.8%, respectively, due to price increases. The introduction of the new IFRS 16 standard had a positive effect on adjusted OIBDA of RUB 242 million in 4Q 2018 and RUB 894 million in FY 2018.

Paper output increased by 18% year-on-year to 375.4[10] thousand tonnes due to the commissioning and ramp-up of the new paper-making machine at the Segezha Pulp & Paper Mill. Segezha Group's sales of sack paper increased by 19.6% to 244.0 thousand tonnes, driven by increased shipment volumes under current contracts and expansion of the client portfolio.

In 2018 Segezha sold 1,284 million paper sacks, an increase of 7.8% versus the year prior. Growth in production volumes was driven by the launch of the second Triumph 5 QT SK paper-bag production line at Salsk, with total capacity of 25 million bags per year. Higher production volumes year-on-year were also supported by improved order planning and as a result increased productivity at existing facilities.

Birch plywood sales volumes increased by 26.0% to 119.8 thousand cu m in 2018. Output growth was driven by the launch of the new plywood production facility in the Kirov region in July 2018. Higher production volumes drove an expansion of the client portfolio in the transport and formwork segments.

Sawn timber output increased by 3.1% to 924 thousand cu m in 2018 compared to 2017 due to increased production efficiency at Lesosibirsk. Sales volumes grew by 4.1% on the back of higher production volumes, and also due to optimisation of rail transport and new shipment channels.

In December 2018, a pelleting plant with capacity of 70 thousand tonnes of pellets per year was commissioned at Lesosibirsk. The facility is used to process sawdust and wood chippings generated as waste during timber production processes.

In 4Q 2018 a multi-fuel boiler running on bark and wood waste was launched at Segezha facility. The boiler will increase heat production at the facility by 25% and reduce the use of expensive fuel oil.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In January 2019 an energy efficiency project was launched at the Vyatsk Plywood Plant to utilise wood waste instead of natural gas. The project will reduce the plant's costs by RUB 43.5 million.

 Agroholding Steppe

Major agriculture holding and one of Russia's largest land owners

Agroholding Steppe delivered significant revenue growth of 136.6% year-on-year in 2018, to RUB 24.2 billion. The revenue increase was driven by growth in the field crop segment, the intensive development of agrotrading and entry into sugar and groceries trading segments, as well as increased production volumes in the Dairy segment.

OIBDA grew by 22.2% year-on-year to RUB 4.9 billion for FY 2018 as a result of higher operational efficiency in the field crop segment and the impact of growth in the Agrotrading segment.

Capex increased by 18.8% to RUB 1.9 billion for 2018 due to the beginning of new projects implementation in the Dairy segment and logistics which provide for production increase and vertical integration of the business.

The increase in net debt was due to purchases of grain from third parties as part of Steppe's agrotrading activities, as well as the start of financing of new investment projects in line with the capex programme.

The results of the field crop segment came under pressure from dry conditions in grain producing Russia's regions, which led to a slight decrease in the gross wheat crop during the 2018 season. The average export price for Steppe's wheat increased by more than 15% year-on-year; combined with the high proportion of high-quality wheat and growth of export volumes offset the decrease in harvesting volumes.

Steppe's land bank increased to 401 thousand hectares as of the end of 2018 following acquisitions of new agricultural assets in the Rostov region.

Grain export volumes in 2018 exceeded 1.1 million tonnes, a fourfold increase year-on-year, putting Steppe among Russia's six largest exporters of grain for the first half of the 2018 grain season.

The Dairy segment delivered stable growth of operational results. Gross milk yield for 2018 increased by 18.3% to more than 46.5 thousand tonnes, while productivity per cow increased by 5.4% year-on-year. As of the end of the year the herd numbered approximately 4,800 cows.

The gross vegetable harvest in 2018 increased by 2.7% to 46.3 thousand tonnes, which is a record for this segment of Steppe's business.

In December 2018 Steppe launched its own retail brand for the company's produce in the fresh segment across the whole of Russia. Vegetables and fruit will be sold under a single brand, along with dozens of grains and sugar from the Investprom-opt trading house, which Steppe acquired in November 2018.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In February 2019, Steppe and the Government of the Rostov region signed an Agreement on Cooperation with the aim of building a grain terminal in the town of Azov. Steppe plans to build a grain terminal with trans-shipment capacity of more than 2 million tonnes. Total investment in the project will amount to roughly RUB 1.1 billion.

 Medsi

 Leading private healthcare operator in Russia

Medsi's revenue increased by 60.3% year-on-year in 4Q 2018 to RUB 5.6 billion due to a fourfold increase in in-patient treatments under the Mandatory Health Insurance programme (MHI), revenue growth of 26% to RUB 1.9 billion in the Voluntary Health Insurance segment (VHI), and an increase in revenue from individual patients of 15% to RUB 1.5 billion. Revenue for 2018 increased by 52.1% to RUB 17.7 billion due to increased capacity utilisation and, as a result, revenue from in-patient services increased 27.7% to RUB 5.4 billion, higher revenue from the CDC at Krasnaya Presnya in Moscow as well as the expansion of the clinic network following acquisitions of clinics in St Petersburg and Perm and the opening of three new clinics in Moscow. The average cheque increased by 43.4% to RUB 2,100, primarily due to the increased proportion of complex procedures in the in-patient segment and the diagnostic segment, and also due to the effect of higher prices in line with market trends.

Adjusted OIBDA increased by 440.3% and 82.9% in 4Q and FY 2018, respectively, due to the continued ramp-up of facilities and increase in revenue per sq m of medical space. The new IFRS standards had an impact of RUB 200 million and RUB 449 million in the fourth quarter and full year 2018, respectively. The adjusted OIBDA margin grew by 20.7 p.p. and 3.4 p.p. to 29.4% and 20.3% in 4Q and FY 2018, respectively thanks to growth in capacity utilisation and an increase in efficiency per sq m.

Adjusted net profit increased by 220.6% in 4Q 2018 and 26.7% in FY 2018. Excluding the effect of new accounting standards, adjusted net profit increased by 227.6% and 42.1% in 4Q and FY 2018, respectively.

Revenue at the CDC at Belorusskaya in 4Q 2018 increased by 17% year-on-year, to RUB 622 million. OIBDA increased by 20% to RUB 264 million and the OIBDA margin grew by 1.2 p.p. to 42.4%.

In 4Q 2018 capacity utilisation at the Krasnaya Presnya CDC increased by 9 p.p. to 39%, which helped drive a twofold increase in revenue to RUB 500 million and a 4.8 p.p. increase in the OIBDA margin to 28.3%.

Real Estate (Leader Invest, Business-Nedvizhimost)

Full-cycle moscow development company and rental assets with a unique pool of properties

Leader Invest

Rental assets: Business Nedvizhimost

Leader Invest

In 4Q 2018 Leader Invest's sales of real estate in Moscow grew 5.5x year-on-year to 55 thousand sq m. Cash collections from sales reached RUB 10.1 billion thanks to increased sales at a number of sites, primarily the business-class developments at 120 Lobachevskogo and 4 Bulvar Yana Rainisa, the premium class developments at 5 Pokrovsky Bulvar and the comfort class site at 14 Mishina as well as sale of the Decart Business Centre.

As of the end of 2018 the sales portfolio including commercial real-estate and parking spaces totalled 209.3 thousand sq m.

Leader Invest's revenue grew by 152.5% and 100.9% year-on-year to RUB 6.4 billion and RUB 12.7 billion in 4Q and FY 2018, respectively. The main sources of revenue recognition in 4Q were the Vsevolozhsky, Pokrovsky, Chertanovskaya and Michurinsky developments. Other developments that made a substantial contribution to revenue in 2018 were Daev, Demyana Bednogo, Kavkazky Plyus, Yana Rainisa and Fabritsiusa.

Revenue in 4Q and FY 2018 was driven primarily by an increased level of completion of projects under construction and higher volumes of NSA available for sale, primarily due to 120 Lobachevsky, as well as previously recognised revenue due to the introduction of the IFRS 15 standard.

Excluding the effect of new accounting standards, revenue decreased in 2018 due to the decrease in deliveries of new developments - in 2017 the premium class Daev and Serpukhovsky projects were delivered, while in 2018 one business class project was delivered, the Schastye v Mnevnikakh residential complex at 15 Ul. Demyana Bednogo.

Positive trends in OIBDA and the OIBDA margin in 4Q and FY 2018 were due to higher sales volumes and supply dynamics, as well as the impact of new IFRS standards.

Factors driving the net loss for FY 2018 excluding the effect of new standards were the decrease in revenue due to a lower number of project deliveries, and also increased advertising spend.

Rental assets: Business Nedvizhimost

In 4Q 2018 revenue from Sistema's rental assets (Business Nedvizhimost and its Mosdachtrest subsidiary) increased by 88.4% year-on-year to RUB 4.6 billion, primarily due to sales of real estate. In 4Q 32 thousand sq m of commercial real estate was sold, and in FY 2018 69.3 thousand sq m was sold. Revenue in 4Q 2018 year-on-year was also positively impacted by growth of average rental rates.

OIBDA increased by 86.4% year-on-year in 4Q to RUB 3.3 billion, in line with revenue and due to optimisation of a number of costs. The slight decrease in the OIBDA margin to 72.5% in 4Q 2018 was due to the increased share of revenue attributable to real-estate sales. Net profit increased in line with OIBDA to RUB 2.6 billion and RUB 3.1 billion in 4Q and FY 2018, respectively.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In early 2019 Leader Invest delivered four projects: 59 Chertanovsakaya, 18 Fabritsiusa, 20 Sofya Kovalevskaya, and 18 Veshnyakovskaya.

In February 2019, Sistema divested a 51% stake in Leader Invest to ETALON GROUP PLC (Etalon) for RUB 15.2 billion. In a separate transaction, Sistema acquired 25% in Etalon for USD 226.6 million from Viacheslav Zarenkov, Etalon Group's founder, and his family. The transactions created a top-3 residential real estate player in Moscow and St Petersburg.

The unified company has a unique opportunity to consolidate the markets in Moscow and St Petersburg and add value through synergies. Etalon and Leader Invest have complementary portfolios that focus on business-, comfort- and premium-class segments in Moscow and St Petersburg. Both companies have attractive profitability across project portfolio and generate significant return on investments.

Utilisation of Etalon's general contracting and subcontractor capacities should accelerate Leader Invest projects, while Etalon's design bureau should help increase efficiency of new Leader Invest projects in Moscow. Etalon's sales network, covering 58 cities across Russia, will support sales of Leader's Moscow projects. In addition, economies of scale will optimise construction costs and administrative expenses.

Two Sistema representatives joined Etalon's Board. Sistema signed a relationship agreement confirming commitment to the highest standards of disclosure and transparency and ensuring that transactions, if any, between Sistema and Etalon will be conducted on an arm's length basis and representatives of Sistema at the Company's Board will abstain from voting on any such transactions.

 RTI

Leading Russian high-tech company[11]

In 4Q and FY 2018 RTI's revenue decreased year-on-year due to the high-base effect: I 2017 a large volume of work was done as part of long-term contracts under the government contracts.

The 302.7% year-on-year increase in adjusted OIBDA in 4Q 2018 was a result of strict control administrative expenses. For the full year adjusted OIBDA increased by 168.1% as SG&A expenses declined by 31.5% year-on-year to RUB 3.7 billion.

In 4Q and FY 2018 the OIBDA margin rose by 33.1 p.p. and 15.5 p.p. to 40.2% and 21.5%, respectively due to the decrease in SG&A expenses and the increased share of work done in-house in the cost of sales structure.

As of 31 December 2018 net debt was RUB 29.0 billion[12]. RTI also has on its accounts additional funds earmarked for government contracts amounting to RUB 8.6 billion that are not included in the net debt calculation.

SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In February 2019, RTI Microelectronics, an RTI Group company, signed a legally binding agreement with State Corporation Rostec and JSC Roselectronica to create a combined microelectronics components company. The parties will combine under the new company controlling stakes in 19 microelectronics component development, production and design companies.

 Bashkirian Power Grid Company (BPGC)

One of Russia's biggest power grid companies

In 4Q 2018 and FY 2018 BPGC's revenue grew by 5.2% and 8.3% to RUB 5.3 billion and RUB 19.1 billion, respectively. Revenue growth in 4Q 2018 year-on-year resulted from indexation of tariffs for electricity transmission services that came into effect from 1 July 2018 and an increase in lease payments for deployment of fibre-optic cables on electricity pylons. Revenue growth in 2018 was also driven by tariff indexation and an increase in electricity consumption and capacity as consumers switched to two-part tariffs.

OIBDA growth of 95.5% in 4Q 2018 was driven by the impact of new IFRS standards, the rise in revenue, lease payments from PJSC Bashinformsvyaz for 2018, and also one-off settlements to resolve disputes. OIBDA growth of 21.1% for 2018 followed revenue and was also due to reduced expenses on network losses and the introduction of new accounting standards.

The OIBDA margin increased by 19.2 p.p. to 41.0% in 4Q 2018 as revenue increased and costs fell and due to the effect of operations to resolve differences. Excluding the effect of the new accounting standards, the OIBDA margin grew by 2.8 p.p. to 24.6%. The OIBDA margin for 2018 increased by 3.5 p.p. versus 2017 to 33.3% as a result of the new IFRS standards. Excluding the effect of the new accounting standards, the OIBDA margin for 2018 decreased by 0.3 wp.p. as a result of an increase in costs for services provided by PJSC Federal Grid Company of Unified Energy System due to an increase in paid-for capacity. The net profit increased following OIBDA.

In 2018 BPGC paid RUB 2 billion in dividends.

As of the end of 2018, BPGC had completed 78% of its project to introduce Smart grid technologies. The project aims to reduce electricity losses and power outages to consumers in emergency situations, to reduce costs for servicing and repair of network equipment, and increase capacity for technological connections to the grid. In 2018 101 distribution and transformer sub-stations and seven power substations were reconstructed, 14.6 km of cable was laid, and 21.8 thousand smart meters installed as part of an organized metering system.

Since installation of the automated commercial electricity metering system began in 2011, 251 thousand meters have been installed. In 2018, including the Smart Grid project, 56.5 thousand meters were installed - the highest in the eight year history of the project. Smart meters thus accounted for 31% of the total at LLC Bashkirenergo. Automated meter reading is being introduced to reduce commercial losses of electricity and support reliable metering in order to ensure that electricity transmission and capacity volumes meet those required.

Binnopharm

One of Russia's largest full-cycle biopharmaceutical enterprises

 Revenue in 4Q 2018 and for the full year 2018 declined by 7.8% and 10.2% year-on-year to RUB 0.9 billion and RUB 2.1 billion, respectively, after Binnopharm ceased commercial distribution of some low-margin third-party products. Sales of Binnopharm's own products grew by 18.5% in 2018. Revenue from sales of Binnopharm's own products rose to 97% of the total in 4Q 2018 from 92% in 3Q 2018 due to the gradual sell-down of remaining inventory of third-party products. Binnopharm is continuing to pursue its strategy to reduce the share of the hospital segment in revenue; the share of the commercial segment in revenue increased by 4 p.p. year-on-year to 54% in 4Q 2018.

OIBDA decreased year-on-year in 4Q, following revenue. OIBDA growth in 2018 of 5.3% was driven by the launch of sales of new products, as well as savings on commercial expenses. This was reflected in OIBDA margin growth of 3.5 p.p. to 23.9%.

In 2018 Binnopham completed the registration of a record number of new products - 14, including Hydroxyethyl starch, Maxifloxacin, Levofloxacin, two forms of Inspirax, and a Lidocain-Tolperison combination. More than 30 products are currently being developed, and are expected to come to market in 2019-2021.

In December 2019, Sistema, as part of a consortium of investors, acquired a leading pharmaceutical company, OBL Pharm. The strategic goal of the transaction is to merge OBL Pharm with Binnopharm, which will allow for efficient use of Binnopharm's production capacity to produce OBL Pharm medicines, generate significant synergies in marketing, sales and R&D and reduce administrative costs. The combined company is expected to be created in the first half of 2019. The medium term goal of the combined company is to become a top-5 pharmaceuticals manufacturer in the commercial segment, the fastest-growing segment in the high-growth Russian pharma market.

Hospitality assets

Cosmos Group - one of russia's leading hotel management companies

Revenue growth from hospital assets of 22.8% year-on-year was driven by higher occupancy rates and an increase in the average daily rate (ADR), as well as by the World Cup. Revenue in 4Q 2018 grew by 10.2% year-on-year due to higher occupancy rates and the opening of Holiday Inn Express at Paveletskaya in November 2017.

Revenue from hotels outside Russia accounted for 20.7% of the total in 2018, down by 2.1 p.p., due to the faster pace of revenue growth at Russian assets. In 4Q 2018 revenue from hotels outside Russia grew by 1.6% to 18.4% of the total, primarily due to the depreciation of the rouble.

The OIBDA in the hospitality segment in 2018 increased by 54.7% compared to 2017 on the back of revenue growth and due to effective cost control. The OIBDA margin for the year increased by 5.1 p.p. to 24.8%. The hospitality assets achieved profitability at the OIBDA level in 2018 compared with a loss in the year-ago period.

The average occupancy rate in 2018 was 62.5%, an increase of 6.3 p.p. on the previous year. The leader in terms of growth was the Cosmos hotel, where the rate increased by 11.1 p.p to 69.8%. Average occupancy in 4Q 2018 increased by 9.3 p.p. year-on-year, with the fastest growth seen at the Cosmos Petozavodsk hotel, rising 18.1 p.p. to 55.5%.

CORPORATE

The Corporate segment comprises companies that control and manage Sistema's interests in its subsidiaries.

In 4Q 2018 SG&A at the Corporate Centre declined by 10.3% year-on-year to RUB 9.0 billion, due to headcount optimisation, reduction in compensation and a decrease in administrative costs. The SG&A/revenue ratio at the Corporate Centre declined from 1.4% to 1.2%.

The Corporate Centre's financial liabilities stood at RUB 223.2 billion as of 31 December 2018.

KEY GROUP HIGHLIGHTS IN 4Q AND AFTER THE END OF THE REPORTING PERIOD

In March 2019, Sistema's Board of Directors resolved to recommend that the General Meeting of Shareholders approve payment of dividends for 2018 totalling RUB 1,061.5 million (RUB 0.11 per share or RUB 2.2 per GDR).

In March 2019, Sistema Asia Fund, a Sistema venture capital fund, sold its holding of Qwikcilver, an Indian technology company specialising in gift cards and stored-value solutions. The transaction is the first exit for the Sistema Asia Fund. Sistema Asia Fund invested in Qwikcilver in 2016 and after three years exited having achieved a high return on invested capital.

In March 2019, Sistema acquired 18.7% of Ozon Holdings Limited, the leading Russian multi-category online retailer, from MTS for RUB 7.9 billion. Payment will be made in three tranches with the final tranche in July 2021. As a result of the transaction, Sistema's direct ownership stake in Ozon amounted to 19.3%. Additionally, Sistema venture capital fund Sistema_VC holds a 16.3% stake in Ozon. Sistema has an 80% equity interest in Sistema_VC.

In March 2019, Sistema successfully closed the order book on its RUB 10 billion series 001P-10 bond. The coupon was set at 9.90%, representing a yield to the put option of 10.14%. Term to maturity is 3,640 days. The term of the issue is 3.5 years. The coupon period is 182 days.

In February 2019, Sistema successfully placed its series 001P-09 RUB 10 billion exchange-traded bond. The coupon was set at 9.90%, representing a yield to the put option of 10.14%. Term to maturity is 3,640 days. The term of the issue is 3 years. The coupon period is 182 days.

In February 2019, Sistema sold 51% of Leader Invest to Etalon Group (LSE: ETLN), one of the Russia's largest property developers and construction companies, for RUB 15.2 billion. Following the transaction Sistema retained 49% of Leader Invest. Sistema additionally acquired a 25% stake in Etalon Group from its founder and largest shareholder Viacheslav Zarenkov and his family for USD 226.6 million.

In February 2019, Sistema and its 100% subsidiary OOO Sistema Telecom Aktivy sold 39.5% of PJSC MTS Bank to Mobile TeleSystems B.V., a 100% subsidiary of PJSC MTS, for RUB 11.4 billion. As a result of the transaction Sistema's direct stake in MTS Bank's equity capital declined to 5% and MTS's stake increased from 55.2% to 94.7%.

In February 2019, construction was completed on OBL Pharm's new solid dosage form production facility. Total invested capital in the new facility was RUB 3 billion. The production complex occupies six hectares. Production capacity is 120 million packages: 1.6 billion pills, 120 million capsules and 15 million sachets per year.

In February 2019, Sistema successfully completed a secondary placement of its exchange-traded series 001P-07 bond. During the tender offer on February 06, 2019, the Corporation repurchased bonds in the amount of RUB 482.4 million out of the total of RUB 10 billion in the issue. Bonds repurchased during the tender offer were sold in the open market through secondary placement at the price of 100.5% of the nominal value. The nominal value of one bond is RUB 1,000. The bonds have a put option exercisable in 2 years. The maturity date is January 21, 2028. The coupon period is 182 days. The rate for coupons 3-6 is set at 10%. 

In December 2018, Sistema acquired a stake in PSJ Pharmaceutical Enterprise Obolonskoe (OBL Pharm), a leading Russian pharmaceutical company. The acquisition was made jointly with VTB Bank and members of the management team of OBL Pharm from Alvansa Ltd, whose main shareholders are Gazprombank and UFG Private Equity. Sistema invested RUB 1.83 billion in OBL Pharm. The consortium of investors - Sistema, VTB and OBL Pharm managers - together acquired 95.14% of OBL Pharm for a total of RUB 15.5 billion. The partners invested via a joint holding company, Ristango Holding Limited. Sistema and VTB have signed an agreement whereby Sistema will buy out VTB's stake in Ristango Holding Limited in no less than three years from the day the transaction closed.

In October 2018, rating agency Expert RA (RAEX) upgraded Sistema's credit rating from ruBBB+ to ruA- and removed the 'Under Review' status. The outlook of the rating is Positive.

Between the beginning of October 2018 and the end of March 2019, Sistema subsidiary Sistema Finance S.A. sold a total of 35,054,752 ordinary shares of PJSC MTS to MTS subsidiary LLC Bastion for a total consideration of RUB 9.18 billion. The transactions took place as part of MTS's share repurchase programme.

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For further information, please visit www.sistema.com or contact:

Sistema PJSFC is a publicly-traded diversified Russian holding company serving over 150 million customers in the sectors of telecommunications, high technology, financial services, retail, paper and packaging, agriculture, real estate, tourism and medical services. The company was founded in 1993. Revenue in 2018 was RUB 777.4 bn; total assets equalled RUB 1.1 trn as of 31 December 2018. Sistema's global depositary receipts are listed under the "SSA" ticker on the London Stock Exchange. Sistema's ordinary shares are listed under the "AFKS" ticker on the Moscow Exchange. Website: www.sistema.com.

The Company is not an investment company, and is not and will not be registered as such, under the U.S. Investment Company Act of 1940.

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Sistema. You can identify forward looking statements by terms such as "expect," "believe," "anticipate," "estimate," "intend," "will," "could," "may" or "might" the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. In addition, there is no assurance that the new contracts entered into by our subsidiaries referenced above will be completed on the terms contained therein or at all. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid technological and market change in our industries, as well as many other risks specifically related to Sistema and its operations.

SISTEMA PJSFC AND SUBSIDIARIES: AUDITED CONSOLIDATED STATEMENT OF PROFIT OR LOSSFOR THE YEARS AND THREE MONTHS ENDED DECEMBER 31, 2018 AND 2017

 (Amounts in millions of Russian roubles, except for per share amounts)

SISTEMA PJSFC AND SUBSIDIARIES

AUDITED CONSOLIDATED statement of financial position

as of DECEMBER 31, 2018 AND DECEMBER 31, 2017

 (Amounts in millions of Russian roubles)

SISTEMA PJSFC AND SUBSIDIARIES

AUDITED CONSOLIDATED statement of financial position

as of DECEMBER 31, 2018 AND DECEMBER 31, 2017 (CONTINUED)

(Amounts in millions of Russian roubles)