Annual Report
2018
SISTEMA
Contents
About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
1
ONE OF THE LARGEST
PRIVATE INVESTORS
INTO RUSSIA’S
CONTEMPORARY
ECONOMY
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For more information
about Sistema
visit our website:
https://sistema.com
ABOUT THE COMPANY
Profile of Sistema
Investment Portfolio
CEO’s Statement
Key Events of 2018
Mission and Strategy
FINANCIAL PERFORMANCE
Financial Performance in 2018
Shareholders’ Equity
Report on Dividends
Sistema’s Credit Ratings
KEY ASSET RESULTS
MTS
Detsky Mir
Segezha Group
Medsi
Agroholding “STEPPE”
Real Estate Assets
RTI
BPGC
Hospitality Assets
Binnopharm
Other Portfolio Companies
Funds
Ozon
CORPORATE GOVERNANCE
Sistema’s Corporate Governance Principles
Sistema’s Corporate Governance Structure
General Meeting of Shareholders
Board of Directors
Committees of the Board of Directors
President
Management Board
Committees Reporting to the President
and the Management Board
Specific Characteristics of Risk Management,
Internal Control and Internal Audit Systems
Development of the Corporate Governance System
in 2018
Remuneration Policy
Risks
SOCIAL RESPONSIBILITY
ESG and Corporate Responsibility Principles
Contribution to Socio-Economic Development
Social Investment in Technology and Human Capital
External Assessment of Sustainable Development
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SISTEMA
Annual Report 2018
Annual Report 2018
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About the Company
About the Company
Financial Performance
Financial Performance
Key Asset Results
Key Asset Results
Corporate Governance
Corporate Governance
Social Responsibility
Social Responsibility
3
3
ABOUT
THE COMPANY
PROFILE OF SISTEMA
INVESTMENT PORTFOLIO
CEO’S STATEMENT
KEY EVENTS OF 2018
MISSION AND STRATEGY
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Annual Report 2018
Annual Report 2018
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About the Company
About the Company
Financial Performance
Financial Performance
Key Asset Results
Key Asset Results
Corporate Governance
Corporate Governance
Social Responsibility
Social Responsibility
5
5
Profile
of Sistema
Sistema is one of the largest private investors in the real
sector of the Russian economy. Sistema’s investment
portfolio comprises Russian companies in sectors including
telecommunications, consumer retail, paper and packaging,
agriculture, high-tech, real estate, healthcare and hospitality.
Sistema holds controlling interests in most of its portfolio
companies.
RUSSIA’S BIGGEST PRIVATE NON-RESOURCES CORPORATION
ONE OF RUSSIA’S
20
LARGEST PRIVATE COMPANIES
IN THE FORBES GLOBAL 2000
INVESTS MORE THAN
RUB 100 billion
IN THE RUSSIAN ECONOMY
EVERY YEAR
Top-15
RUSSIA’S LARGEST COMPANIES
BY REVENUE
Sistema’s strategic goal is to create
long-term growth of shareholder
value by boosting returns on
investments in existing assets and
reinvesting available cash in new
investment projects to diversify its
portfolio and increase overall returns
on investment.
Sistema focuses on improving the
operational efficiency of the assets
it acquires by restructuring and
by working with relevant partners
to enhance expertise and mitigate
financial risks.
The Corporation’s shares trade on
Moscow Exchange (ticker: AFKS) and
on the London Stock Exchange in the
form of global depositary receipts
(ticker: SSA). One GDR represents
20 ordinary shares.
GDRS ON LSE
SSA
MOSCOW EXCHANGE
TICKER
AFKS
1 In accordance with IFRS.
2 Here and hereinafter, consolidated results of Sistema and its subsidiaries for 2018 are presented in accordance with new accounting standards IFRS 9, 15 and 16 unless specified otherwise. Results
for 2017 are presented without the impact of the new standards.
3 Sistema acquired a 25% stake in Etalon Group Plc in February 2019.
INVESTMENTS
AND COMPETENCES
KEY HIGHLIGHTS 20181
>150 000 000
CONSUMERS
REVENUE
777.4
RUB billion2
>15
SECTORS
ASSETS
1,465.4
RUB billion
UNIQUE PORTFOLIO OF ASSETS
IN HIGH-POTENTIAL SECTORS
OF THE RUSSIAN ECONOMY
Public
assets:
MTS, DETSKY MIR, ETALON GROUP3
ONE OF RUSSIA’S
50
MOST VALUABLE
BRANDS
CREDIT RATINGS
FROM INTERNATIONAL
AND RUSSIAN RATING
AGENCIES
S&P
B+
FITCH
BB-
RAEX
RuA-
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Annual Report 2018
Annual Report 2018
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About the Company
About the Company
Financial Performance
Financial Performance
Key Asset Results
Key Asset Results
Corporate Governance
Corporate Governance
Social Responsibility
Social Responsibility
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7
Investment
Portfolio1
BY PRODUCTION OF HIGH-QUALITY
UNBLEACHED SACK PAPER
No.1 IN RUSSIA
No.3 IN THE WORLD
BY PAPER SACK
PRODUCTION
No.1 IN RUSSIA
No.2 IN EUROPE
Leading Russian
vertically integrated
forest holding
748 stores
IN RUSSIAN CITIES,
KAZAKHSTAN AND
4
BELARUS
No.1
player in the children’s
goods market in Russia
52.1%
DETSKY
MIR
Leading
Russian
multicategory
online retailer
One of Russia’s
leading developers
and manufacturers of
high-tech products
Cosmos Group
One of Russia’s leading
hotel management
companies
36.0%
96.0%
Binnopharm
One of Russia’s
largest full-cycle
biopharmaceutical
companies
OBL Pharm
One of leading
production companies
in the Russian
pharmaceutical
market
100%
OZON2 3
KRONSTADT
GROUP
HOSPITALITY
ASSETS
99.9%
SEGEZHA
GROUP
74.0%
12.8%
PHARMACEU-
TICALS
50.01%
MTS
Leading
telecommunications
operator and digital
services provider
in Russia
LEADING
RUSSIAN TELECOMS OPERATOR
by subscriber base,
revenue and OIBDA
Over 105 million
MOBILE SUBSCRIBERS
RTI
87.0%
Leading
Russian high-tech
company
RUSSIAN MARKET
482 million chips
MICROCHIPS
1,381 million
AMONG RUSSIA’S
6 largest
LAND OWNERS
AMONG RUSSIA’S
6 largest
GRAIN EXPORTERS
Major agriculture
holding
and one of the Russia’s
largest land owners
AGRO-
HOLDING
STEPPE
92.8%5
BPGC
91.0%
CONCEPT
GROUP
MEDSI
43.0%
INVESTMENT
FUNDS
REAL ESTATE
98.5%
Bashkirian Power Grid
Company —
One of Russia’s biggest
power grid companies
TOTAL LENGTH OF POWER
GRIDS
Over 88,500 sqm
1 As at December 31st 2018, Sistema’s direct stake in MTS bank was 43.24%.
In February 2019, after the sale of MTS Bank shares to Mobile TeleSystems B.V.,
100% subsidiary of MTS, Sistema’s direct stake in MTS bank decreased to 5.0%.
2 Hereinafter Sistema’s stake refers to effective stake for MTS, BPGC and to total
ownership for other assets. The stake in Ozon.Ru includes all shares controlled
by Sistema Group.
3 Sistema acquired 18.7% in Ozon Holdings Limited in March 2019.
4 As of 31 March 2019. As of 31 December 2018 Detsky Mir Group included
743 stores in Russia and Kazakhstan.
5 84.63% as of December 31, 2018.
One of the
largest players
in lingerie wholesale
and childrenswear
monobrand stores
Private equity and asset
management funds
Leader Invest,
Business-Nedvizhimost,
Etalon Group6
No.1
Russian private
healthcare company
by revenue in 2018
6 Sistema acquired 25% of Etalon
Group in February 2019.
PATIENT VISITS
8,5 million per year
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Annual Report 2018
Annual Report 2018
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About the Company
About the Company
Financial Performance
Financial Performance
Key Asset Results
Key Asset Results
Corporate Governance
Corporate Governance
Social Responsibility
Social Responsibility
9
9
CEO’s
Statement
DEAR SHAREHOLDERS,
Sistema delivered impressive growth of both
revenue (up 12%) and OIBDA (up 34%)
in the full year 2018, as our portfolio
companies continued to consolidate their
respective markets and expand into new
business segments.
Our publicly traded assets delivered
sustained growth in revenue and OIBDA
as both MTS and Detsky Mir continue to lead
their respective sectors. In both the retail
and telecoms sectors, the operating
environment presents its own challenges.
However, both management teams have
shown the ability to successfully monetise
their customer bases.
MTS posted full year revenue growth
of 8% year-on-year, despite a 0.4% year-on-
year decrease in subscribers. Detsky Mir,
meanwhile, saw revenue increase by 14%
in the full year on the back of the strong
like-for-like sales. During the year Detsky Mir
also managed to improve profitability
as a result of economies of scale and cost
discipline.
Both companies have successfully ventured
into new markets and developed new
revenue streams. At MTS, the contribution
from IT and systems integration business
is growing steadily. The company is also
scaling up in the data centre/cloud business,
and saw revenue from cloud services triple
in 2018.
REVENUE
GROWTH
12%
OIBDA
GROWTH
34%
Detsky Mir continues to open new stores
in new regions of Russia and Kazakhstan.
It has also launched operations in Belarus
and in the promising pet supplies segment.
And online sales almost doubled during
the year, reaching almost 8% of sales.
Our key non-public assets, both exporters
and domestic players, strengthened their
market positions.
At Segezha Group, where the top line grew
by 32% for the full year, growth was driven
by the paper and packaging segment, which
accounted for 70% of total revenue. Adjusted
OIBDA was up 83% for 2018. Growth was
driven by:
Z increased prices for key Segezha’s
products;
Z greater capacity due to a new
papermaking machine;
Z currency factors.
Our agriculture business, Steppe,
continues to grow both organically
and through the launch of new business
lines. Steppe’s revenue increased by 137%
in the full year as a result of:
Z strong growth of the field crop division;
Z acceleration of the grain trading
business as Steppe become one of
Russia’s top six grain exporters;
Z solid operating results in the dairy
segment;
Z the launch of sales of sugar and produce
under the Steppe brand.
Steppe’s OIBDA was up 22% in 2018 due
to improved efficiency in the grain segment
and the development of agrotrading.
Medsi’s revenue for the year (+52%) affirmed
its position as Russia’s leading private
healthcare provider. Adjusted OIBDA rose 83%
in the full year 2018, primarily driven by higher
utilisation rates and an increase in revenue
per square metre of medical facilities.
Over recent months, Sistema has completed
transactions that crystallise the value of our
assets in real estate and the pharmaceuticals
sector.
In February 2019, we sold a 51% stake in our
Moscow real estate development business,
Leader Invest, to London-listed development
and construction company Etalon Group.
Subsequently, Sistema acquired 25% of Etalon
from the company’s founder and his family.
As a result, Sistema has become the largest
shareholder in a significantly strengthened,
publicly-traded real estate business.
The combined company, a top-three player
in Russia’s largest markets — Moscow
and St. Petersburg — boasts an excellent
portfolio of projects. And it has an opportunity
to take advantage of significant synergies
through optimisation of construction costs
and administrative expenses. Etalon’s in-
house construction capacities and design
bureau will accelerate the development
of Leader Invest’s projects. As the market
undergoes transformation with new regulation
and changing consumer preferences,
we believe consolidation is the key trend.
And we are eager to embrace it and benefit
from it.
In pharma, Sistema partnered with VTB
to acquire a 95% stake in OBL Pharm, which
we plan to merge with our pharmaceutical
business, Binnopharm, in the coming
months. The two companies possess
complementary assets and we have set
a medium-term goal of building out a top-
five Russian player in the fast-growing
commercial segment of the pharma
industry. In April 2019, the Russian Direct
Investment Fund, the Russia-China
Investment Fund and the largest Middle
Eastern funds agreed to join the project,
which is a solid confirmation of the project’s
investment appeal and its importance
for the development of the industry.
Additionally, we have made a strategic bet
on Russian e-commerce, increasing our
holding in market leader Ozon by buying
out MTS’s stake and acquiring stakes
of some minority shareholders. As of April
2019, Sistema directly holds 21.9% of Ozon,
and another 16.3% stake via venture capital
fund Sistema_VC. The potential in Russian
e-commerce is huge. The market is forecast
to grow from RUB 1tn to RUB 3.5tn in 2023
with CAGR of 24%. And Ozon, with its
aggressive strategy to conquer the market
with a focus on technological development,
a strong team, a wide range of products, its
own logistics infrastructure, a recognisable
brand and a developing marketplace,
is well positioned to consolidate this highly
fragmented industry and benefit from its
growth.
Looking ahead, we will continue to deliver
against the strategy adopted in 2018 that
centres on three strategic goals:
Z maximising shareholder returns and
reducing the discount between market
capitalisation and NAV;
Z attracting third-party capital to enhance
our investment resources.
Our strategic focus is on building out four
businesses — Steppe, Segezha Group,
Medsi and Ozon — with a target
enterprise value per business
of USD 1–2bn. Our ambition
is to eventually take them
to the public markets, opening
up whole new sectors
of the Russian economy
to equity investors through
fast-growing companies
that become leaders in their
respective sectors.
ANDREY DUBOVSKOV
President of Sistema
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Key Events
of 2018
CORPORATION
EVENTS AT PORTFOLIO COMPANIES AND SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD
ANDREY
DUBOVSKOV
President
VLADIMIR
TRAVKOV
Vice-President,
Chief of Financial
and Investment
Department (CFO)
NEW PRESIDENT
AND VICE PRESIDENT FOR FINANCE
AND INVESTMENTS APPOINTED
In March 2018, Sistema’s Board of Directors
approved the appointment as President
of Sistema of Andrey Dubovskov, the former
president of MTS. Andrey Dubovskov took
office on 13 March 2018.
In April 2018, Vladimir Travkov was
appointed as Vice-President, Chief
of Financial and Investment Department
(CFO). Since 2003 he has held management
positions in MTS Group, including as director
of the Functional Control Department
since 2016.
STRENGTHENED POSITION
IN THE FTSE4GOOD INDEX
Sistema received a high score
for its environmental activities and social
responsibility practices. FTSE Russell,
an analytical agency of the London Stock
Exchange, upgraded Sistema’s sustainable
development rating and confirmed its status
of a participant of the FTSE4Good1 index
following a revision in June 2018. The high
rating and participation in the index confirm
the Corporation’s commitment to responsible
investment and asset management.
1 The FTSE4Good indices were created by FTSE Russell to assess companies’ effectiveness in environmental, social
and governance practices (ESG).
SETTLEMENT AGREEMENT
WITH ROSNEFT AND BASHNEFT
In 2018 Sistema fulfilled in full all of its
financial obligations under the Settlement
Agreement that settled all litigation involving
Sistema and Sistema-Invest relating
to the ownership and or management
of Bashneft and or its affiliated entities
by Sistema and Sistema-Invest.
ACTIVE PRESENCE IN DEBT MARKETS
In February and March 2018, Sistema
successfully placed exchange-traded bonds
of series 001P-07 and 001P-08 with the total
nominal value of RUB 10bn and RUB 15bn,
respectively. The rates for coupons 1-2 were
set at 9.80% p.a. for series 001P-07 bonds
and at 9.25% for series 001P-08 bonds.
The bonds mature in 10 years with put
options exercisable 1 year and 1.5 years after
the dates of placement, respectively.
INCREASED SCALE AND CRYSTALIZED
VALUE OF PHARMACEUTICALS
BUSINESS
In December 2018, Sistema acquired
a stake in a leading pharmaceutical
company, OBL Pharm, for RUB 1.83 billion.
Sistema made the acquisition as a member
of a consortium of investors that also
included VTB Bank and members of the OBL
Pharm management team. The strategic
aim of the transaction is the merger of OBL
Pharm with Sistema’s pharmaceutical holding,
Binnopharm, and utilisation of synergies
in marketing and sales, combining R&D
functions and reducing administrative costs.
The medium-term goal of the combined
company is to become one of Russia’s five
largest pharmaceuticals producer in the non-
state segment, the fastest-growing segment
in the Russian pharma market.
MTS:
UNLOCKING SYNERGIES
WITH THE BANKING BUSINESS
AND DEVELOPING NEW REVENUE
STREAMS
In February 2018, MTS acquired
Ticketland.ru and Ponominalu.ru, two
major Russian e-ticketing operators.
In April 2018, MTS partnered up
with Ericsson to open a research centre
in Tatarstan that will develop innovative
products and solutions based on 5G, IoT
and Big Data.
In May 2018, MTS placed Russia’s first
commercial bonds using smart contracts
based on blockchain. The total nominal
value of the issue was RUB 750m.
In July 2018, MTS increased its equity
holding in MTS Bank to 55.2%, which will
help unlock further synergies between
the telecom and banking businesses,
simplify management and reduce
the time-to-market of new fintech
products. In February 2019, Sistema’s
direct ownership interest in MTS Bank
was reduced to 5.0%, while MTS’s stake
increased from 55.2% to 94.7%.
In August 2018, MTS used the expertise
of its subsidiary, system integrator
NVision Group, and its 5,000+ IT
specialists across the country to enter
the outsourced IT services market.
DETSKY MIR:
CHAIN EXPANSION
AND NEW MARKETS
In 2018, Detsky Mir entered a new
market — pet products — in accordance
with its expansion strategy.
The management estimates the size
of the pet products segment in Russia
at RUB 200bn. In December 2018,
the company opened four pilot pet stores
under the Zoozavr brand.
THE TOTAL SELLING SPACE
OF ALL THE STORES OF THE GROUP IS
11.6%
768 sq m
Detsky Mir intends to enter a new
geography — Belarus — and become a key
player there in the medium term. The first
store in Belarus was opened in Minsk
(Evroopt shopping mall) in February 2019.
Its total area is 1,690 sq m. Detsky Mir
will develop in Belarus under the DetMir
brand.
THE TOTAL AREA OF THE FIRST STORE
IN BELARUS
1,690 sq m
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EVENTS AT PORTFOLIO COMPANIES AND SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD
NEW FUNDS’ INVESTMENTS AND EXITS
STRATEGIC TRANSACTIONS
MEDSI:
TELEMEDICINE
AND PATIENT CARE CENTRE
In April 2018, Medsi and MTS launched
a telemedicine platform, SmartMed,
which will be used for developing digital
healthcare products and services.
In July 2018, the company established
a patient care centre, the main mission
of which is to study customers’
satisfaction and preferences with regard
to healthcare and other services provided
at Medsi, implement best global practices
of patient-centric medicine, and develop
internal processes and culture aimed
at meeting customers’ needs.
STEPPE AGROHOLDING:
CAPACITY INCREASE
Steppe AgroHolding is actively
increasing its capacity in the dairy
farming segment. In March 2018,
the company commissioned its fifth
dairy farm for 1,800 cows. The new
farm is expected to reach its design
capacity of 20,000 t of milk per year
in 2021. At the end of 2018, Agroholding
announced its plans to build another
dairy farm in the Rostov region. Together
with the farm launched in March 2018
in the Krasnodar region and another
new enterprise under construction
there, it will more than triple production,
from 40,000 tonnes in 2017 to over
120,000 tonnes in 2023, making Steppe
Agroholding one of the top three players
in the Russian market.
SEGEZHA GROUP:
INCREASING OUTPUT
AND ENHANCING EFFICIENCY
In March 2018, Mikhail Shamolin, former
president of Sistema, was appointed
president of Segezha Group.
In July 2018, the company launched
the second line at the Vyatka Plywood
Mill, which will enable it to increase its
plywood output to 192,000 cu m and expand
the range of high-margin products,
including large-size long-grain plywood.
In December 2018, a pellet plant
with an annual capacity of 70,000 t
of pellets was opened at the Lesosibirsk
Woodworking Plant. Pellets are produced
from waste (sawdust) generated
at the woodworking facility.
In the fourth quarter of 2018, Segezha Pulp
and Paper Mill commissioned a multi-fuel
boiler that runs on bark waste, which will
increase heat generation at the mill by 25%
and reduce use of expensive fuel oil.
RTI:
CREATION OF A COMBINED
MICROELECTRONICS COMPONENTS
COMPANY
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.
THE PARTIES WILL COMBINE UNDER THE NEW
COMPANY CONTROLLING STAKES IN
19 microelectronics
component development, production and design companies
SISTEMA ASIA FUND
OZON
In May 2018, Sistema’s venture fund Sistema
Asia Fund added HealthifyMe, an Indian
mobile health and fitness application, to their
portfolio.
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.
SISTEMA VENTURE CAPITAL
In May 2018, Sistema’s venture fund Sistema
Venture Capital invested in TraceAir, a start-
up developing a platform for monitoring
construction sites using unmanned aerial
vehicles, in Connecterra, a start-up which
deploys AI solutions for dairy farming,
and in SQream, a company that enables
enterprises to maximize and leverage their
big data analytics by using GPU.
In February 2019, Sistema acquired
18.7% of Russia’s leading multi-category
online retailer, Ozon Holdings, from MTS
for RUB 7.9 billion. The decision to increase
the stake is based on Sistema’s strategic
bet on growth prospects for e-commerce
and market consolidation through
investments in the market leader.
OZON.RU GMV GROWTH IN 2018
73% y-o-y
ETALON
In February 2019, Sistema sold 51%
of JSC Leader Invest to Etalon Group, while
retaining a 49% stake in the company.
Following this transaction, Sistema acquired
25% of Etalon Group for USD 226.6 million.
The transactions create a top-three
player in the Moscow and St Petersburg
markets, bring together complementary
development portfolios, allow Leader
Invest’s projects to leverage Etalon’s
general contracting capacity and regional
sales network to accelerate construction
and sales, and realise significant synergies
in construction as well as reduction
of administrative expenses.
SISTEMA ACQUIRED
25%
of Etalon Group
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15
Mission and Strategy
MISSION
PARTNERSHIP MANAGEMENT
MODEL
ASSET MANAGEMENT PRINCIPLES
BASIC PRINCIPLES OF THE INVESTMENT STRATEGY
The Corporation has adopted a partnership
management model that allows key
executives of the Corporation (Managing
Partners) to share the risks and returns
from investment activities with shareholders:
Investing in the development of existing
portfolio assets to increase their value is one
of the key stages of Sistema’s value creation
model. Value creation includes a number
of mandatory steps, starting from active
management of a newly acquired asset.
CURRENT INVESTMENTS
NEW INVESTMENTS
Focus: INVESTMENTS IN SISTEMA’S HIGH-
POTENTIAL PORTFOLIO COMPANIES that
can develop be grown into businesses worth
over USD 1 billion in the medium term
and require investments from Sistema.
Focus: DIRECT INVESTMENTS BY SISTEMA’S
CORPORATE CENTRE IN UNIQUE
OPPORTUNITIES IN TRADITIONAL SECTORS
IN RUSSIA
Focus: INVESTMENTS IN FUTURE
TECHNOLOGIES
Investments in large technology
companies
1. MANAGING PARTNERS ARE
VALUE CREATION AT ASSETS:
Mature undervalued assets
A Board of Directors is formed at companies
controlled by Sistema, and must have
independent members with recognised
industry and/or functional expertise.
The boards supervise, coordinate
and support the activities of portfolio
companies’ management in decision-making
in key functional areas: strategy and key
transactions, budget planning, HR policy,
internal audit;
Z effective managers are recruited; an
incentive system is established that is
aimed at creating shareholder value;
Z strategic and financial planning
cycles are introduced based on best
international practices of corporate
governance;
Z new technologies are identified, with
testing and adoption to increase
efficiency, streamline processes, develop
innovative products and services for
customers, and expand current markets
of portfolio companies.
Investment strategy:
Investments in portfolio companies
to increase their market share and or enter
adjacent/synergetic business segments
Geography of investments: in accordance
with the approved strategy for portfolio
companies
Industries: companies’ industries
and adjacent/synergetic industries
Discounted payback period (DPBP)
of 3–10 years
Investment strategy:
investments in significant and controlling
stakes of large assets in attractive markets
in Russia. Acquisition at a significant discount
to the market value and with the possibility
of quickly reducing the discount and selling
within 2-3 years
Growing assets
Investment strategy:
buy and consolidate players. Generating
value by ousting competitors, consolidating
the industry, using economies of scale
and market growth. Exit in 4-5 years through
sale to a strategic investor/IPO
Investment strategy:
direct investment by Sistema’s Corporate
Centre in big stakes in technology companies
that do not meet the investment criteria
of Sistema’s funds, with an opportunity
to build businesses worth over USD 1 billion
and monetisation prospects in 5-7 years
Venture projects
Investment strategy:
investments within existing and new venture
funds under Sistema’s management,
monetisation of investments via closing
of funds. Mandatory participation of outside
investors as financial partners (share
of outside partners: at least 20%)
Geography of investments: predominantly
Russia
Geography of investments: no restrictions
Sectors: sectors with large markets (at least
USD 1 billion), high growth rates, import
substitution potential and export prospects
Sectors: Software development, e-commerce,
e-businesses, IoT, virtual assistants, machine
learning and neural networks, cybersecurity,
medtech, AR/VR and others.
Sistema’s mission is to build Russia’s leading
investment company, with diversified
expertise and a strong track record,
which will become an investment platform
for managing both Sistema’s and third-party
capital while providing access to unique
investment opportunities in the most
attractive sectors of the Russian economy
and high-potential technologies, and oriented
towards long-term growth of equity value.
SISTEMA’S STRATEGIC GOALS
RESPONSIBLE FOR IMPLEMENTATION
OF PORTFOLIO COMPANIES’
INVESTMENT STRATEGIES. This means
they:
1. Maximising total shareholder return
Z organise asset management (mostly
via the Board of Directors) and take full
responsibility for the asset’s KPIs and
financial performance;
Z in most cases, the chair of the asset’s
Board of Directors, bear responsibility
for its composition and work, and
recruit and appoint the CEO and senior
management.
2. INCENTIVES OF THE MANAGING
PARTNERS ARE AIMED AT:
Z increasing Sistema’s capitalisation;
Z maximising the value of assets under
management and monetising this value;
Z raising outside capital for management.
Managing Partners co-invest in assets
under their management.
(TSR) and reducing the discount of
market capitalisation to net asset value
(NAV);
2. Raising and managing outside capital to
expand available investment resources;
STRATEGIC FOCUS
(COMPONENTS OF
THE STRATEGY)
Z Growing existing assets in high-
potential segments (private healthcare,
agriculture, pulp & paper) into
businesses with a valuation between h
USD 1–2 billion
Z Taking advantage of unique investment
opportunities in traditional sectors in
Russia;
Z Focusing on investments in the high-
potential technology sector;
Z Ongoing generation of value in existing
assets, including through adoption
of advanced technologies and digital
solutions;
Z Ongoing improvement of management
structures and corporate governance.
16
SISTEMA
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
17
FINANCIAL
PERFORMANCE
FINANCIAL PERFORMANCE IN 2018
SHAREHOLDERS’ EQUITY
REPORT ON DIVIDENDS
SISTEMA’S CREDIT RATINGS
18
22
24
25
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Annual Report 2018
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
19
Financial
Performance in 2018
(RUB million)
Revenue
Adj. OIBDA
Operating income
Loss attributable to Sistema
Adjusted profit/ attributable to Sistema
1
Excluding impact of new IFRS standards
2018
777,405
265,273
128,600
(45,898)
1,114
2017
693,424
197,558
90,290
(94,602)
4,119
Изм.
12.1%
34.3%
42.4%
—
(73.0%)
2018
770,196
219,829
114,003
(46,952)
60
Change
11.1%
11.3%
26.3%
—
(98.5%)
REVENUE,
RUB BN
777.4
ADJUSTED OIBDA,
RUB BN
265.3
GROWTH OF ADJUSTED
OIBDA
11.3%
693.4
693,4
777.4
777,4
693.4
693,4
770.2
770,2
197.6
197,6
265.3
265,3
197.6
197,6
219.8
219,8
12,1%
12.1%
11,1%
11.1%
34,3%
34.3%
11,3%
11.3%
PERCENTAGE OF BPGC’S SMART
GRID PROJECT COMPLETED
MTS’S NEW DIVIDEND POLICY
AT LEAST
78%
28.0 RUB/share
MEDSI BECAME THE LEADER
BY REVENUE AMONG PRIVATE
HEALTHCARE COMPANIES IN RUSSIA
1 st
AGROHOLDING STEPPE BECAME
ONE OF RUSSIA’S TOP-6 GRAIN
EXPORTERS
Top-6
GROWTH IN ETALON’S REVENUE
IN 2018
100.9%
1 Here and hereinafter, new standards refer to IFRS 9, 15 and 16.
GROWTH IN ADJUSTED OIBDA
AT SEGEZHA IN 2018, Y-O-Y
83.4%
ADJUSTED OIBDA MARGIN
AT DETSKY MIR IN 2018
19.0%
AVERAGE OCCUPANCY RATE
AT COSMOS GROUP IN 2018
62.5%
2017
2017
Old
Старые
IFRS
МСФО
2018
2018
New
Новые
IFRS
МСФО
2017
2017
2018
2018
Old
Старые
IFRS
МСФО
2017
2017
Old
Старые
IFRS
МСФО
2018
2018
New
Новые
IFRS
МСФО
2017
2017
2018
2018
Old
Старые
IFRS
МСФО
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
5.6 p.p.
ADJUSTED
OIBDA MARGIN
34.1%
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%.
20
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21
GROUP SG&A EXPENSES,
IFRS, RUB BILLION
141.6
153.2
141.6
163.5
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.
GROUP CAPEX,
IFRS, RUB BN
124.0
104.4
124.0
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.
CORPORATE CENTRE SG&A EXPENSES,
RUB BILLION
9.0
1.8%
12.6
1.4%
10.0
1.2%
9.0
GROUP SG&A EXPENSES
IN 2018
7.5% y-o-y
GROUP SG&A/GROUP REVENUE
18.2% y-o-y
2017
Old IFRS
2018
New IFRS
2018
Old IFRS
2016
2017
2018
2017
GROUP SG&A EXPENSES,
RUB BILLION
2017
Old IFRS
2018
New IFRS
2018
Old IFRS
MTS
Detsky mir
Segezha Group
Corporate centre
STEPPE Agroholding
Other
Total
Group SG&A/Group revenue
91.3
22.1
6.7
10.0
2.2
20.9
153.2
22.1%
83.9
15.7
11.4
9.0
3.5
18.1
141.6
18.2%
96.7
24.1
11.6
9.0
3.5
18.6
163.5
21.2%
Corporate centre SG&A
Corporate centre SG&A/Group revenue
GROUP CAPEX,
IFRS, RUB BN
MTS
Detsky mir
Other
Total
2018
2017
76.4
2.5
25.5
2018
92.0
3.8
28.2
104.4
124.0
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Social Responsibility
23
Shareholders’
Equity
SHAREHOLDERS’
EQUITY
Sistema has 9,650,000,000 ordinary
shares outstanding with a nominal value
of RUB 0.09 each. Its authorised capital
is RUB 868,500,000.
Sistema held an initial public offering
in 2005. Its shares trade on the London Stock
Exchange in the form of global depositary
receipts (GDRs) under the ticker SSA.
One GDR represents 20 ordinary shares.
The Corporation’s ordinary shares are also
listed on Moscow Exchange in the first listing
level under the ticker AFKS. The GDRs
traded on the London Stock Exchange
represent about 15.9% of Sistema’s equity,
while the shares traded on Moscow
Exchange represent 16.5%1.
Sistema’s shares are included in Moscow
Exchange’s two key indices, the MOEX Russia
Index (formerly MICEX) and RTS, as well
as its Broad Market Indices2.
Shares of MTS, a Sistema subsidiary, trade
on Moscow Exchange under the ticker MTSS
and on the New York Stock Exchange (NYSE)
in the form of ADRs under the ticker MBT.
Shares of Detsky Mir, a Sistema subsidiary,
began trading on Moscow Exchange
in February 2017 under the ticker DSKY
in the first listing level.
In February 2019, Sistema acquired 25%
of Etalon Group. Etalon’s GDRs listed
on London Stock Exchange under the ticker
ETLN since 2011.
Sistema’s principal shareholder is its
Chairman Vladimir Evtushenkov, who owns
59.2% of the Corporation’s equity.
SISTEMA’S SHAREHOLDING
STRUCTURE3
15.9%
8.4%
100%
16.5%
59.2%
ORDINARY SHARES
OUTSTANDING
9,650 million
Vladimir Evtushenkov
Free-float (shares)
Free-float (GDRs)
Other4
SISTEMA TICKER
ON MOSCOW EXCHANGE
SISTEMA GDRS TICKER
ON LSE
AFKS
SSA
MTS TICKER
ON MOSCOW EXCHANGE
DETSKY MIR TICKER
ON MOSCOW EXCHANGE
MTSS
DSKY
1 As of December 31, 2018.
2 Broad Market Indices of the Moscow Exchange include top 100 securities selected based on the criteria of liquidity, capitalisation and the number of shares in free float and form the bases
for calculation of the Moscow Exchange’s other indices. The calculation bases include the shares whose free float coefficient is at least 5%.
3 As of December 31, 2018.
4 Ordinary shares and GDRs owned by Sistema Group companies, members of the Board of Directors and the management of Sistema.
5 Source: Bloomberg.
CHANGES IN SISTEMA’S GDR
AND ORDINARY SHARE PRICES5
In 2018, Sistema’s share price fell by 35.2%
and the price of its GDRs by 47.8%. Despite
the strong operational and financial
performance of Sistema’s portfolio
companies, its share price was under
pressure due to the absence of substantial
monetisations.
On the first trading day of 2018, the closing
price of one GDR on the London Stock
Exchange was USD 4.4, for a total market
capitalisation of USD 2,145.2 mn. On the last
trading day of the year, the closing price
was USD 2.3, with Sistema’s total market
capitalisation standing at USD 1,119.4 mn.
On the first trading day of 2018, the closing
price of one ordinary share on the Moscow
Exchange was RUB 12.4, for a total market
capitalisation of RUB 119.2 bn. On the last
trading day of the year, the closing price
was RUB 8.0, with Sistema’s total market
capitalisation standing at RUB 77.2 bn.
The closing price of GDRs reached a record
high of USD 4.5 on 26 February 2018,
and the ordinary shares peaked at RUB 12.8
on 15 January 2018. The lowest closing GDR
and ordinary share prices were recorded
on 27 December 2018 at USD 2.2 and on 26
October 2018 at RUB 7.7, respectively.
Average daily trading volume on the London
Stock Exchange in 2018 was 327,489 GDRs,
and on Moscow Exchange 15,646,315
ordinary shares.
30%
20%
10%
0%
–10%
–20%
–30%
–40%
–50%
01.01.2018
01.03.18
01.05.18
01.07.18
01.09.18
01.11.18
Акции АФК «Система»
Sistema’s ordinary shares
ГДР АФК «Система»
Sistema’s GDR’s
Индекс РТС
RTSI$ Index
Индекс МосБиржи
IMOEX Index
24
SISTEMA
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25
Report
on dividends declared (accrued)
on Sistema shares1
DIVIDEND POLICY
In April 2017, Sistema’s Board of Directors
approved a revised dividend policy.
In accordance with the new policy,
the amount of dividends recommended
by the Board for each reporting year
will be the higher of either an amount
equivalent to a dividend yield of at least
6% or RUB 1.19 per ordinary share.
The Corporation determines the final amount
of dividends payable with due regard
to its financial results, current cash flow
and investment needs.
When determining dividends for 2017,
the Board of Directors took into account
the priority of the strategic goal to reduce
the Corporation’s debt and recommended
paying dividends for 2017 in the amount
of RUB 0.11 per share, supporting
the Corporation’s deviation from the current
dividend policy.
To maintain a balance between
the rights and interests of all shareholders
and the Corporation’s ability to pay
dividends, the Board of Directors, when
determining the amount of dividends,
will take into account the acceptable
rate of Sistema’s debt reduction
and the proportionality of dividends
to the current cash flow of the Corporation.
Sistema plans to continue to pay dividends
in accordance with the current dividend
policy after achieving the goal of debt
reduction.
As of 31 December 2017, dividends payable
to persons included in the shareholders
register, with the exception of nominee
shareholders and custodians who are
professional participants of the securities
market, were not due for payment. These
dividends were paid in 2018.
As of 31 December 2018, the total amount
of dividends distributed for 9 months of 2017
equalled RUB 2,348,863,483.40. Withholding
tax on dividends distributed to foreign
shareholders totalled RUB 2,798,048.00.
DIVIDENDS DISTRIBUTED
FOR THE FIRST NINE MONTHS
OF 2017
DIVIDENDS DISTRIBUTED
FOR THE FULL YEAR 2017
On 03 November 2017, an Extraordinary
General Meeting of shareholders (Minutes
No 2-17) approved the distribution
of RUB 6,562,000,000.00, or RUB 0.68 per
ordinary share in Sistema, as dividends.
As of 31 December 2017, the total
amount of dividends distributed equalled
RUB 2,121,721,383.40 (the total amount
of dividends to nominee shareholders
and custodians who are professional
participants of the securities market and who
are included in the shareholders register).
On 30 June 2018, the Extraordinary
General Meeting of Sistema’s shareholders
(Minutes No 1-18) approved the distribution
of RUB 1,061,500,000.00, or RUB 0.11 per
ordinary share in Sistema, as dividends.
As of 31 December 2018, the total
amount of dividends distributed equalled
RUB 1,061,461,415.52. Withholding
tax on dividends distributed to foreign
shareholders totalled RUB 429,305.00.
UNPAID DIVIDENDS
As of 31 December 2018, the total
amount of unpaid dividends equalled
RUB 4,213,722,383.52, including:
¡ RUB 4,213,003,658.88 not paid in
accordance with a written request from
a shareholder;
¡ RUB 718,724.64 not paid due to absence
of information about dividend recipients
necessary to transfer the due amounts.
TOTAL AMOUNT OF DECLARED
DIVIDENDS IN 2018
1,061.5 RUB mn
2013 (for the full year 2012)
2014 (for the full year 2013)
2015 (for the full year 2014)
2016 (for the full year 2015)
2016 (for H1 2016)
2017 (for the full year 2016)
2017 (for 9M 2017)
2018 (for the full year 2017)
Total amount of declared
dividends, RUB
Dividend per share, RUB
Declaration date
Payment date
9,264,000,000
19,879,000,000
4,535,500,000
6,465,500,000
3,667,000,000
7,816,500,000
6,562,000,000
1,061,500,000
0.96
2.06
0.47
0.67
0.38
0.81
0.68
0.11
29/06/2013
28/06/2014
27/06/2015
25/06/2016
23/09/2016
24/06/2017
28/11/2017
30/06/2018
26/08/2013
31/07/2014
29/07/2015
27/07/2016
20/10/2016
28/11/2017
22/12/20172 — 19/01/20183
31.07.2018
Sistema’s Credit Ratings
Rating agency
Date of most recent rating update
Long-term credit rating
Outlook
Standard & Poor’s
Fitch
Expert RA
30 July 2018
19 January 2018
08 October 2018
B+
BB-
ruA-
Positive
Negative
Stable
1 As of December 31, 2018.
2 Date of payment of dividends to nominee shareholders and custodians who are professional participants of the securities market and who are included in the shareholders register.
3 Date of payment of dividends to other persons included in the shareholders register.
26
SISTEMA
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27
KEY
ASSET
RESULTS
MTS
DETSKY MIR
SEGEZHA GROUP
MEDSI
AGROHOLDING “STEPPE”
REAL ESTATE ASSETS
RTI
BPGC
HOSPITALITY ASSETS
BINNOPHARM
OTHER PORTFOLIO COMPANIES
FUNDS
OZON
28
32
36
42
49
54
60
63
66
69
72
74
80
28
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29
PJSC Mobile TeleSystems
PJSC Mobile TeleSystems (“MTS”)
is a leading Russian company
offering mobile and fixed-line services, Internet access, cable and satellite TV, digital
services and mobile apps, financial and e-commerce services, and convergent IT
solutions in system integration, Internet of things, monitoring, data processing
and cloud computing.
MTS is a leader in the Russian telecom
market in terms of key mobile business
indicators: subscriber base, revenue
and OIBDA.
MTS GROUP HAS
~105 million
mobile subscribers in Russia, Armenia,
Ukraine and Belarus
ALEXEY KORNYA
President,
Chairman of the Management Board
LTE-ADVANCED
AND LTE ADVANCED PRO
NETWORKS WITH PEAK DATA
SPEEDS UP TO
1 Gbit/s
NUMBER OF GPON USERS
1.95 mn
RON SOMMER
Chairman of the Board of Directors
SUBSCRIBERS OF CABLE,
SATELLITE AND IP TV
3 mn
FIBER-OPTIC LINES
LENGTH
>220 thsd km
PENETRATION OF SMARTPHONES
IN MTS NETWORK
>70%
ONLINE SALES
VOLUME
~7 RUB bn
SISTEMA’S EFFECTIVE STAKE1:
MTS RETAIL OUTLETS
EMPLOYEES
50.01%
8
https://mts.ru
5.88 thsd
>65 thsd
INDUSTRY OVERVIEW FOR 20182
In 2018, the telecommunications market was
worth RUB 1.7 trillion. Revenue growth rate
reached a five-year high of 3.4%. Growth
was mostly driven by revenue from fixed
telephony, with broadband and pay TV
networks also enjoying stable growth.
The fixed telephony and inter-operator
services segments continued to shrink,
though at a slower pace.
The mobile telecommunications market
benefited from an initiative launched by mobile
operators in 2017 to «stabilise the market».
The initiative provided for scrapping price
competition and unlimited tariff plans,
and expanding the offer of core and extra
services. Revision of tariff plans was caused
by changes in legislation, in particular,
amendments to the Law on Communications
that provided for abolition of roaming charges
within Russia and required mobile operators
to introduce a single tariff for all domestic
calls. The federal law will come into force
on 1 June 2019.
On 1 October 2018, a new law on storage
of the information transmitted via communica-
tion networks took effect. According to the law,
Russian mobile operators have to store
user Internet traffic for 30 days and increase
storage capacity by 15% annually for the next
five years.
The 5G standard is expected to be
introduced in Russia in 2022 and is currently
being actively discussed by the Ministry
of Communications, the Federal Anti-Monopoly
Service and mobile operators. The Union
of LTE Operators, which comprises MTS,
Megafon, Vimpelcom and Tele2, is against
market monopolisation and the creation
of a single infrastructure operator. However,
the Union supports setting up a consortium
for joint use of 5G frequencies in the 3.4–
3.8GHz spectrum.
In 2019, operators will face a number
of challenges related to the saturation
of some market segments. However, 2017-
2018 showed that, despite the unfavourable
environment, the market may be expected
to grow at 2-3% p.a. in the medium term.
BUSINESS DEVELOPMENT IN 2018
In 2018, MTS achieved strong operating
and financial results on the back of healthy
market growth in Russia and increasing
penetration of digital services in all
the regions where the company operates.
Growth of revenue in the mobile business
enabled the company to post record OIBDA
in 2018. The main events of 2018 are related
to entering new markets and business
segments. For example, MTS acquired
Russia’s two leading ticket distributors,
Ticketland.ru and Ponominalu.ru; bought
a stake in YouDo, Russia’s biggest online
service connecting customers with service
providers for household and business
RUSSIA TELECOM MARKET DYNAMICS2,
RUB TRILLION
1.7%
1.57
0.8%
1.59
0.6%
1.60
2.8%
1.64
3.4%
1.70
1 MTS’s stake in MTS Bank was increased to 94.72% in February 2019.
2 According to TMT Consulting report “Russian telecommunications market in 2018-2023”.
Income, RUB trillion
Rates of growth, %
2014
2015
2016
2017
2018E
tasks; and launched the Smart University
educational platform and the MTS Marketing
Expert digital platform.
MTS and Medsi Group started strategic
cooperation in the area of digital healthcare
with the launch of the SmartMed
telemedicine platform. On the basis of this
platform the companies will develop a range
of digital healthcare products and services.
At the end of 2018, MTS started selling
SmartMed services to retail customers
in Moscow and the Moscow region.
In Q3 2018, MTS acquired LLC Avantage,
one of the largest data processing centres
in Russia, which will significantly bolster
the operator’s position in the fast-growing
market for cloud services. This is the tenth
data centre in MTS’s federal network.
In July 2018, MTS acquired a 28.63% stake
in PJSC MTS Bank for RUB 8.27 billion
from Sistema. As a result of the transaction,
MTS’s shareholding in the bank increased
from 26.61% to 55.24% . The acquisition
enabled MTS to consolidate its fintech
business in Russia and to simplify
operational management, making it possible
to launch new products faster and to utilise
MTS’s retail network more effectively
in order to expand the bank’s footprint. In Q3
2018, MTS started consolidating the results
of MTS Bank, which had a positive impact
on revenue.
MTS continued active development of digital
products in the retail and corporate markets
and launched a number of strategic
initiatives in the area of digital businesses.
In March 2018, MTS launched an in-house
accelerator, StartUp Hub, that enables
technology startups to integrate their
solutions and products with the company’s
business.
30
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31
PJSC
MTS
MTS’s strategy also envisages the development of new
business segments such as fintech, entertainment and B2B/
IoT, both organically and through M&A.
DIGITAL BUSINESS
In order to increase the profitability
and efficiency of its core business, MTS —
in addition to operations in the mobile
and fixed telephony markets — is developing
convergent products, promoting its own
mobile apps, and improving and expanding
its portfolio of projects in the Big Data
segment. It is also implementing a project
for internal digitalisation of business
processes.
STARTUP HUB
Held
2 accelerator enrollment
programs in 2018
RUB 30 mn invested
MTS
DIGITAL
BUSINESSES
Entertainment
Ticketland.ru and
Ponominalu.ru
2 leading ticketing
operators
Cybersport
Gambin Esports
Home
operator
Approximately
13.7%
share in Youdo.com
BIG DATA
>300 specialists
Total economic effect from
big data analysis in 3 years
since Big Data department
launch
> RUB 3.5 billion
#CloudМТS
Cloud services based
on MTS’s
10 data processing
centres
Apps
E-HEALTH
14.1 million
monthly users
of My MTS app
SmartMed
telemedicine
jointly with Medsi
IоT/М2М
Segment leader
with market share of
42%
SMART
EDUCATION
Smart
University
for distance learning
FINTECH
5.4 million users
of MTS Money
Total debt portfolio
RUB 21.6 billion
MTS was granted permission to use 900 MHz
frequencies and announced that it was ready
for commercial operation of the Narrowband Internet
of Things (NB-IoT) network.
IN 2018, MTS COMMISSIONED NB-IOT
NETWORKS IN
50 cities of Russia
Adjusted OIBDA grew by 22.7% in 2018, 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 roaming charges
within Russia 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 5.9% in 2018. The adjusted OIBDA
margin strengthened by 5.3 p.p. to 45.6%.
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 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.
MTS continued implementing its
strategy of ensuring attractive returns
to shareholders. In April 2018, the Board
of Directors of MTS approved dividends
payable for 2017 in the total amount
of RUB 46.762 billion, or RUB 23.4 per share.
In October 2018, the Board of Directors
of MTS approved dividends for the first half
of 2018 in the total amount of RUB 5.196
billion, or RUB 2.6 per share. The total
amount of MTS’s dividends in 2018 reached
RUB 51.958 billion, which is in line
with the payments made in the previous
year.
BUSINESS DEVELOPMENT
STRATEGY
Since 2016 MTS has been implementing its
3D strategy (Data, Digital and Dividends).
In 2018, the board of directors of MTS
approved an updated strategy for 2019-2021,
according to which the company will offer
its subscribers services united into one
ecosystem. The new 3D strategy is focused
on digital transformation and development
of new business segments:
1. Data
Z Retention of core mobile revenue via
increased penetration of services, data
transfer and V&D tariffs, competitive
development of 4G networks, optimal use
of the spectrum and a competitive 5G
spectrum;
Z Growth of revenue from fixed telephony
through expansion of the BB and TV
subscriber base in Moscow and Russia’s
regions, increasing ARPU by selling
additional services and developing B2B
products and IT as a service;
2. Digital
Z New digital businesses: IoT, system
integration, е-commerce, fintech,
applications, Big Data, e-ticketing, etc.;
Z Internal transformations: emphasis on
interaction with customers, innovations in
corporate culture, atomisation of product
and business management;
3. Dividends
Z High shareholder returns;
Z Investment and operational efficiency;
Z Maintaning optimal amount of debt .
MTS’s investment programme includes
nationwide projects aimed at improving
the quality of communications, expanding
coverage and rolling out the LTE network,
increasing the capacity of intra-areal
and trunk networks to enable data traffic
growth, developing new priority business
segments (Big Data, Cloud, IoT, OTT, financial
technologies) and B2B projects for customers,
and preparing communication networks
for the commercial operation of 5G in Russia.
2018 FINANCIAL PERFORMANCE
In 2018 revenue at MTS rose by 8.4% year-on-
year, driven by robust performance of Russian
operations as the core telecoms business
benefitted substantially from a better pricing
environment in Russia, and as 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.
FINANCIAL
INDICATORS
(RUB million)
Revenue
Operating income
Adj. OIBDA
Profit attributable to Sistema
Adj. profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
480,292
114,245
218,833
3,424
32,951
FY 2017
442,910
94,671
178,358
28,038
29,926
Change
8.4%
20.7%
22.7%
(87.8%)
FY 2018
482,469
106,817
188,795
4,591
Change
8.9%
12.8%
5.9%
(83,6%)
10.1%
34,118
14.0%
1 V&D — Voice and Data.
32
SISTEMA
Annual Report 2018
sistema.com
About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
33
Detsky Mir
Detsky Mir Group1 is a multi-format retail operator
and a leader in the children’s goods segment in Russia
and Kazakhstan. It comprises the nation-wide retail chain
Detsky Mir, the ELC and ABC stores, and the Zoozavr chain
of pet stores.
AT THE END OF 2018,
DETSKY MIR GROUP HAD
DETSKY MIR
STORES
743 stores
673 stores
in 252 cities and towns
across Russia and Kazakhstan
ELC AND ABC
STORES
66 stores
DETSKY MIR’S BUSINESS MODEL
Detsky Mir’s retail concept combines five key components:
VLADIMIR CHIRAKHOV
CEO
ALEXEY KATKOV
Chairman of the Board of Directors
5.
Smart visual
merchandising
designed to appeal
specifically
to children
and parents
4.
Building long-
term customer
relationships
through the loyalty
programme
1.
A multi-category
children’s goods
store with
the broadest
and most unique
product mix
2.
Affordable prices
with a focus
on the medium/
and below medium-
price segments
3.
Convenient
stores in modern
shopping malls and
densely populated
residential areas
SISTEMA’S EFFECTIVE STAKE:
ОINDUSTRY OVERVIEW FOR 20182
52.1%
8
https://detmir.ru
Detsky Mir Group operates mainly in Russia
and Kazakhstan, and since February
2019 also in Belarus. At the end of 2018,
the Company had a 23% share of the Russian
market of children’s goods by revenue
and a 15% share of the e-commerce segment.
The Russian children’s goods market grew
by 0.1% YoY in 2018 to RUB 522.1 billion.
The market’s CAGR over the last actual four
years was 0.4%.
1 As of 31 December 2018, the Group included PJSC
Detsky Mir, LLC Kub-Market (ELC and ABC), LLP Detsky Mir
Kazakhstan, JSC Detsky Mir Orel, LLC DM NORTH-WEST,
LLC Detmir BEL and LLC DM Capital.
2 According to the research agency Ipsos Comcon.
THE TOTAL SELLING SPACE IS
768,000 sq m
Analysts project that it will grow
by an average of about 2% per year and will
reach RUB 570 billion by 2023.
Clothing and footwear traditionally account
for a substantial part of the children’s
goods market, and in 2018 accounted
for 38.5% of the total (29.6% and 9.0%,
respectively). Baby products and toys
account for 31.0% and 17.9%, respectively.
The highest growth rate was registered
in the baby products category, which reached
RUB 162 billion in money terms in 2018,
up from RUB 158 billion in 2017. The CAGR
of this category over the last 4 years was
9.5%.
In 2018, some specialised retailers
left the market or shut down most
of their stores, and the remaining national
and regional chains lost traffic and closed
stores following a significant decrease
in like-for-like sales. Nevertheless,
specialised retailers remain the main
sales channel for children’s goods, along
with hypermarkets and supermarkets
(39.1% and 38.9% market share, respectively,
in 2018).
The share of e-commerce in the children’s
goods market is growing steadily, reaching
12.6% in 2018 compared to 10.1% in 2017.
The CAGR of e-commerce channels
in 2010–2018 was 27%. In money terms,
sales of children’s goods through specialised
stores increased from RUB 119 billion
in 2010 to RUB 204 billion in 2018. Online
sales of children’s goods in 2018 amounted
to RUB 66 billion.
The Company’s share of the children’s
goods market among specialised retailers
increased from 14% in 2011 to 59%
in 2018, driven by the opening of a large
number of stores during this period
and the attraction of consumer traffic
from competing retail chains. Toys and baby
goods were the key drivers of the Company’s
market share growth in 2018; Detsky Mir’s
market share in these categories increased
from 38.9% to 45.6% and from 24.3%
to 26.8%, respectively. The Company’s
market share increased in all categories
of children’s goods in 2018.
ANNUAL VOLUME OF CHILDREN’S GOODS MARKET IN RUSSIA BY CATEGORY3,
RUB BILLION
1%
0.1%
0.1%
0.5%
1.5%
515.7
521.1
521.5
522.1
524.6
532.2
2015
2016
2017
2018
2019E
2020E
Baby Products
Clothing
Toys
Stationery
Footwear
2015
123
165
110
65
52
2016
153
147
104
66
51
2017
157
151
96
66
51
2018
162
154
93
66
47
2019E
2020E
163
157
93
66
45
165
163
94
66
45
CHILDREN’S GOODS MARKET STRUCTURE BY SALES CHANNEL3, %
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
Specialised stores
Grocery retail chains
Online channel
Other
3 Source: Ipsos Comcon.
2010
34.3
30.7
2.9
2011
45.2
26.9
3.6
2012
45.6
27.8
4.3
2013
46.0
29.0
5.0
2014
41.3
36.3
7.6
2015
40.8
40.0
8.1
2016
38.6
39.1
8.9
32.2
24.3
22.4
20.0
14.8
11.1
13.5
2017
39.8
39.7
10.1
10.4
2018
39.1
38.9
12.6
9.4
34
SISTEMA
Annual Report 2018
sistema.com
About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
35
DETSKY MIR
Group
DETSKY MIR AWARDS
AND RANKINGS
DETSKY MIR’S BUSINESS
DEVELOPMENT IN 2018
In 2018, Detsky Mir achieved impressive
results in terms of business growth.
Group revenue increased 14.3% in 2018
to RUB 110.9 billion, from RUB 97.0 billion
in 2017. One hundred new stores were
opened. In addition, Detsky Mir continued
active regional and international expansion.
In 2018, 33 debut stores opened in cities
of Russia and Kazakhstan that are new
for the Company. Detsky Mir entered
a new region — the Far East — with stores
opened in Blagoveshchensk, Vladivostok
and Khabarovsk.
Kazakhstan remains a promising market
for the international expansion of the Detsky
Mir retail chain. In 2018, the Company
expanded its retail chain in Kazakhstan
by eight supermarkets and almost doubled
revenue, while growth of like-for-like
sales in tenge was 30%. Detsky Mir has
a total of 30 stores in 15 biggest cities
of the Republic of Kazakhstan.
In addition to retail stores, Detsky Mir
Group offers the full range of its products
for purchase online. The e-commerce
business segment was launched in 2011
and still remains the fastest growing
sales channel. The online store had more
than 178m visits and fulfilled over 5.1m
online orders in 2018. The online channel’s
revenue doubled in 2018 and amounted
to RUB 8.8 billion.
FORBES’ RANKING OF RUSSIA’S
TOP 200 LARGEST PRIVATE
SECTOR COMPANIES
12
88th place
INFOLINE RETAIL RUSSIA
TOP-100 RANKING
OF LARGEST RETAIL CHAINS
3
13th place
RANKING OF RUSSIA’S TOP 100
MOST VALUABLE PUBLICLY TRADED
COMPANIES (BY RIA RATING)
61st place
RBC’S LIST OF RUSSIA’S 50
FASTEST GROWING COMPANIES
37th place
LIST OF RUSSIA’S TOP 100 LARGEST
COMPANIES BY MARKET CAP
59th place
ONLINE BUSINESS AS A SHARE OF
DETSKY MIR’S TOTAL REVENUE
7.9%
ONLINE
ORDERS
5.1m+
ONLINE STORE
VISITS
178m+
One of the key drivers of revenue growth
in 2018 was the promotion and expansion
of the In-Store Pickup service. Now
customers can pick up orders at a Detsky Mir
store within 60 minutes of placing the order.
The development of logistics infrastructure
is a key element of the Company’s strategy.
In 2018, the Company launched a second
distribution centre (DC) in the class A+
industrial park PNK Bekasovo in the Naro-
Fominsk district of the Moscow region.
The Company now owns the Bekasovo-1
and Bekasovo-2 DCs, with a total area
of 132,500 sq m, and leases the Krekshino
DC with an area of 20,000 sq m.
The Company seeks to optimise purchase
prices, maintain an efficient product mix
and improve quality assurance by signing
direct contracts with major specialist
manufacturers or their representatives
in Russia, and by reducing the share
of distributors. This helps Detsky Mir get
attractive prices and minimise currency
risks, and also provides direct access
to goods.
At the end of 2018, the Company opened
four pilot stores of the Zoozavr chain —
a new business line for Detsky Mir.
The market of pet products is promising
because of its volumes, expected growth
rates and high level of fragmentation,
as well as the opportunities it offers
for the management to leverage their
experience gained in the children’s goods
market. The Company expects to open six
more stores by the end of 2019. The decision
regarding further development of this chain
will be based on the results of the pilot
stores.
OPERATING AND INVESTMENT
BUSINESS DEVELOPMENT
STRATEGIES
The key strategic goal of Detsky Mir
is consolidation of the children’s goods
market in Russia and Kazakhstan. This
will be achieved by expanding the chain,
developing omni-channel sales and offering
affordable and diverse products, including
private labels.
STRATEGIC DEVELOPMENT AREAS
OF DETSKY MIR GROUP
1. Expansion across Russia
and internationally
2. Development of omni-channel sales
3. Development of private labels
4. Enhancement of operational efficiency
There are opportunities in the markets
of Russia and Kazakhstan to open at least 265
new stores in the next 3-4 years, including
at least 80 stores in 2019.
As part of its geographical expansion
strategy, Detsky Mir made a decision to enter
the Belarusian market. The Company’s goal
in the medium term is to open at least 35
stores in Belarus, including at least 10 stores
in 2019.
Detsky Mir’s growth potential, including
regional and international expansion, is thus
300 stores over the next 3-4 years.
KEY INITIATIVES IN 2019:
2018 FINANCIAL PERFORMANCE
1. Become a number one player in the
Kazakh market by the end of 2019, with
35 stores of the Detsky Mir chain.
2. Enter Belarus — a market of more than
RUB 40 billion — and open at least
10 stores in 2019.
3. Enter the pet products market — worth
approximately RUB 212 billion —
and open up to 10 pilot Zoozavr stores
by the end of 2019.
4. Retain the number one position
in the online children’s goods market,
and increase the share of Group revenue
from the online segment to double
digits in 2019 by improving service
quality (“Ideal In-Store” and “Last Mile”
projects).
5. Increase the share of private labels
and direct imports in toys to 25%
and in diapers to 15% in 2019.
In FY 2018 Detsky Mir’s revenue grew
by 14.3% year-on-year. Growth was driven
by new store openings, an increase in like-
for-like1 (LFL) sales and online sales, as well
as the continued ramp-up of stores opened
in 2017. LFL sales in Russia increased
by 4.3% for FY 2018. Growth of LFL sales
in Kazakhstan increased by 30% year-on-
year in KZT terms. The online segment2
remained the fastest-growing channel,
with revenue 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 98.0% year-
on-year to RUB 21.1 billion. Excluding
the impact of new accounting standards,
Adjusted OIBDA increased by 18.8%
to RUB 12.7 billion, due in large part
to optimisation of purchasing costs,
effective management of the assortment
and increased operational efficiency.
Adjusted profit attributable to Sistema
increased substantially in FY 2018
due to increased operational efficiency
and a reduction in SG&A to RUB 15.7 billion.
Excluding the effect of the new accounting
standards, profit increased by 31.1% in 2018.
FINANCIAL
INDICATORS
(RUB million)
Revenue
Operating income
Adj. OIBDA
Adj. profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
110,874
11,232
21,115
3,292
FY 2017
97,003
8,024
10,664
2,871
Change
14.3%
40.0%
98.0%
14.6%
FY 2018
110,874
9,770
12,666
3,765
Change
14.3%
21.8%
18.8%
31.1%
1 Like-for-life sales (LFL) growth was calculated based on the results of the Detsky Mir retail chain in Russia, which were in operation for
at least 12 full calendar months preceding the reporting date.
2 The segment includes online orders on the site www.detmir.ru including orders for collection at Detsky Mir stores.
36
SISTEMA
Annual Report 2018
sistema.com
About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
37
Segezha Group is a leading vertically
integrated Russian forest products holding
with a full cycle of logging and advanced
wood processing.
Segezha Group comprises forest, wood
processing and pulp and paper assets in
Russia and Europe. The main production
facilities are located in the European part of
Russia and EU nations.
REPRESENTATIVE
OFFICES IN
12 countries
SEGEZHA GROUP’S
ENTERPRISES EMPLOY OVER
13,000 people
MIKHAIL SHAMOLIN
President
ALI UZDENOV
Chairman of the Board of Directors
OUTPUT OF BROWN
SACK PAPER
No 1 in Russia
No 3 globally
OUTPUT OF
PAPER SACKS
No 1 in Russia
No 2 in Europe
OUTPUT OF HIGH-
QUALITY LARGE-SIZE
BIRCH PLYWOOD
No 5 globally
OUTPUT OF
SAWN TIMBER
No 1 in Russia
BY OUTPUT OF
PREFAB GLULAM HOUSES
No 1 in Russia
SISTEMA’S EFFECTIVE STAKE:
SEGEZHA GROUP’S
BUSINESS MODEL
SEGEZHA GROUP’S BUSINESS
DEVELOPMENT IN 2018
New products of Segezha Group
Ironbirch plywood
Ironbirch plywood has unique anti-slip properties. The product was
designed for flooring in high-capacity trailer trucks. Special particles
in the coating ensure high wear resistance and anti-slip properties.
Honeycomb coating
Plywood with Honeycomb coating is used for flooring in light
commercial vehicles, warehouses, children’s and sports grounds,
boats and yachts. This type of plywood has an attractive appearance,
high wear resistance and anti-slip properties.
Coloured plywood
Laminated plywood of various colours (white, yellow, green, blue
and red) is used for indoor and outdoor works, including creation
of decorative elements for furniture, interior design, interior
decoration of commercial vehicles, and construction of children’s
and sports grounds.
paper are Southeast Asia, Africa, and Central
and South America. The anti-dumping duties
introduced by China for most producers
from Europe, North America and Japan have
created advantages for sack paper producers
from Russia and Canada.
The key event in 2018 was the completion
of a three-year programme of upgrades
at Segezha PPM. At the end of the year,
a new multi-fuel boiler was installed
with a capacity of 120 t of steam per hour.
To reduce the environmental footprint, it was
equipped with an electrostatic precipitator
with purification efficiency of 99.7%.
In 2018, Segezha Group increased paper
output by 18% to 375,400 t. The growth was
mainly due to the launch and full ramp-
up of the new paper-making machine.
Sack paper sales increased by 20%,
to 244,000 t, mainly due to increased
shipment volumes under current contracts
and expansion of the client portfolio.
99.9%
8
https://segezha-group.com
Segezha Group’s business model
is based on maximum vertical integration,
with the aim of creating added value
and ensuring business sustainability
by diversifying risks amid a changing macro
environment.
High levels of operational efficiency
and a presence in all key stages of value
creation — from in-house logging at leased
forest plots to selling high-margin products
to consumers — allow Segezha Group
to maintain market leadership in terms
of cost of finished products in all business
segments.
BIRCH PLYWOOD
SACK PAPER
In 2018, Segezha Group was the world’s fifth
biggest producer of large-size birch plywood.
Segezha Group’s key strategic markets are
Germany, the UK, US, Benelux and South
Asia.
In 2018, plywood output increased by 36%
year-on-year to 135,700 cu m. Production
growth was driven by the launch of a new
plywood production line in the Kirov region
in July 2018, which doubled the capacity
of Vyatka Plywood Mill to 192,000 cu m
and allowed the company to enter new
markets with a new product — long-grained
plywood. The share of plywood exports rose
from 78% to 80% in 2018.
PLYWOOD SALES,
THOUSAND CU M
36%
120
95
120
In 2018, Segezha Group retained its position
as the number one producer of unbleached
sack paper in Russia and climbed to number
three globally (from number four in 2017).
Segezha Group’s main sack paper plant —
Segezha Pulp and Paper Mill (PPM) —
reached its design capacity in 2018 after
the launch of the new paper-making machine
at the end of 2017 and produced 355,000 t
of high-quality paper.
Segezha Group exports 95% of marketable
sack paper (37% of produced paper goes
to the company’s converting facilities
to produce paper packaging). The key
export markets for Segezha Group’s sack
SACK PAPER SALES,
THOUSAND T
20%
244
204
244
2017
2018
2017
2018
38
SISTEMA
Annual Report 2018
sistema.com
About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
39
SEGEZHA GROUP
PAPER SACKS
In 2018, Segezha Group’s paper packaging
output increased by 6% to 1,286m
bags. Growth was driven by the launch
of the second bag-making line (Triumph 5 QT
SK) in Salsk, Rostov region, with a capacity
of 25 million bags per year. The year-on-year
increase was also driven by improvements
to the order planning system
and a consequent increase in productivity.
In 2018, Segezha Packaging accounted
for 64% of sales in the Russian market.
Products for the construction industry
account for more than 82% of this. During
the year, the company continued to work
on increasing the share of high-margin
products in its sales portfolio.
In 2018, Segezha Packaging implemented
priority plans to retain market share
in the key European countries such as Italy,
France, Germany and Spain.
In 2018 the group planned to increase
the output of its Russian enterprises
to 560 million sacks.
The company exceeded this target
and produced a record number of sacks
(590 million), mainly due to increased
planning efficiency regarding utilisation
of converting capacities, as well as expansion
of the client portfolio.
Launch of the second production
line for consumer paper packaging
at LLC Segezha Packaging’s plant
in Salsk
One of the key events in 2018 was
the launch of the new Triumph 5 QT SK
bag-making line supplied by Germany’s
GARANT Maschinenhandel. The new high-
tech equipment can produce single-layer
paper bags and bags with twisted handles
with a capacity of 25 million items per
year. Products are certified in accordance
with FSC®C-100540, EAC, ISO 9001, ISO
14001 and OHSAS 18001.
Segezha Packaging’s plants in the Republic
of Karelia and the Rostov Region have
a capacity of 800 million sacks per year,
while the total capacity including Western
converting assets is 1.6 billion bags per year.
8%
PAPER SACK SALES,
MILLION ITEMS
1,284
1,191
1,284
THE GROUP EXPORTS
99%
of its sawn timber
to more than 30 countries
SAWN TIMBER
Segezha Group exports 99% of its
sawn timber to more than 30 countries,
with more than 95% exported to China, Egypt
and the EU. The Group’s products are mainly
consumed by construction and furniture
manufacturing industries.
In 2018, Segezha Group’s enterprises
increased output of sawn timber by 3% year-
on-year, to 924,000 cu m, due to increased
production efficiency at Lesosibirsk
Woodworking Plant (WP). Sales increased
by 4% following the increase in output,
as well as due to debottlenecking
in shipment of products by rail and launching
of new shipment channels.
In 2018, Segezha Group took a number
of steps to ensure that its specifications
and internal requirements for sawn
timber quality meet market requirements.
The company worked closely with customers
and expanded its product range during
the year.
In October 2018, Lesosibirsk WP launched
a pellet production line with a capacity
of 70,000 t of finished products, which will
provide additional income from waste
processing.
SAWN TIMBER SALES,
THOUSAND CU M
4%
931
894
931
2017
2018
2017
2018
In 2018, Segezha Group, in cooperation with the Ministry of Industry and Trade, actively
participated in the development of the Russian Forest Sector Development Strategy Until 2030,
which was approved in September 2018. The strategy of Russia’s timber industry is aimed at
improving the long-term competitiveness of the sector and increasing its contribution to the
country’s socio-economic development, as well as at effective use, protection and reproduction
of forests through sustainable forest management.
LAMINATED BEAMS AND PREFAB
HOUSES
OUTPUT AND SALES OF PREFAB HOUSES AND LAMINATED BEAMS
IN 2016-2018, THOUSAND CU M
In 2018, Segezha Group increased sales
of prefab houses by 45% through working
closely with construction dealers, product
promotion, the launch of a new premium
product (prefab glulam houses with a height
of 280 mm or more) and improved product
quality. Sokol WP, the leader in its segment,
supplies prefab houses mainly to the Russian
market.
Sales of laminated beams in 2018 grew
26% year-on-year. Growth was driven
by increased productivity due to optimisation
of the production process. A significant
contribution to the increase in sales
was Sokol WP’s entry to new markets
such as Spain, Turkey and Israel. Most
of laminated beams are exported.
BUSINESS DEVELOPMENT
STRATEGY
Segezha Group’s development
strategy was updated in 2018, taking
into account the Russian Forest
Sector Development Strategy Until
2030, and is aimed at creating
an industry leader in terms
of operational efficiency using
a vertically integrated and diversified
business model.
PREFAB HOUSES
LAMINATED BEAMS
44%
45%
14%
19%
18.3
26.3
19.2
27.9
44.4
50.6
43.1
51.1
Output
Sales
Output
Sales
2017
2018
SEGEZHA GROUP’S STRATEGIC PRIORITIES
Wood
resources
Manufacturing
assets
Z Increasing the share of own wood supply
at all of the Group’s enterprises by
expanding allowable cut and increasing
utilisation of existing allowable cut
Z High-quality reproduction of forests
Z Modernisation of existing production
facilities
Z Construction of new energy efficient
facilities to meet growing demand for
forest products in global markets
Sustainable
development
Innovation
Z Employee safety and health
Z Reduction of environmental impact
Z Striving for zero waste production
Z Development of the regions of operations
Z R&D within the Company
Z Creation of new products, manufacturing
processes and future solutions
40
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SEGEZHA GROUP
REVENUE
32.4%
57,889 RUB million
OPERATING
INCOME
161.1%
8,178 RUB million
INDUSTRY OVERVIEW FOR 20181
Russian market
SAWN TIMBER
PAPER SACKS
Products made by Segezha Packaging’s
seven enterprises located in Europe are sold
mainly in the European market, while its
enterprises in the Karelia and Rostov regions
sell to Russia and other CIS markets.
European market
The European paper sacks market is highly
consolidated. About 50% of demand comes
from Germany, Italy, France and Spain.
The European paper packaging market
in 2018 remained at the same volume
as 2017 – about 5.4 billion items. Prices
for paper packaging grew about 5% year-
on-year, following a sharp increase in paper
prices during the year. Experts expect that
the main drivers of market growth until 2021
will be the food industry and the animal
feed and chemicals segments. In 2018,
the construction industry remained the main
consumer of paper sacks with a share
of about 60%.
Consumption of paper sacks
in the Russian market in 2018 remained
at the same level as 2017 – 766 million
units – amid a slowdown in construction,
which as in the previous year accounted
for the bulk of demand (88% in 2018).
Prices for paper packaging grew about
4% year-on-year, which was driven mainly
by an increase in global kraft paper prices.
Russia maintains a balance of production
and consumption of industrial paper sacks,
and this is expected to continue until 2023.
SACK PAPER
Segezha Group produces more than 60%
of all sack paper in Russia. The Company
uses 37% of produced paper to make sacks
at its own enterprises in Russia and Europe.
The remaining 63% of products are sold
in international markets (approximately
60 countries in 2018). Key export markets
are the Middle East and Southeast Asia.
Significant volumes are also exported
to the EU, Africa, and Central and South
America.
In 2018, the global market for sack paper
was estimated at 7.2 million t (vs 6.9 million t
in 2017). In 2018, there was a huge shortage
of paper in the global market, caused by high
demand and limited supply. The demand
was driven mostly by a construction boom
in Asia, the Middle East and Africa.
IN 2018, SEGEZHA GROUP’S
SHARE IN OUTPUT OF PAPER
SACKS IN EUROPE WAS
12%
The global market of sawn softwood
timber reached 350 million cu m
in 2018. Over the past five years, global
sawn timber consumption has grown
by an average of 2.5% per year due to growth
in the construction and furniture markets
in the US and China, which are the largest
consumers of sawn timber in the world.
Russia is the fourth largest producer of sawn
softwood timber in the world after Europe,
the US and Canada, with a market share
of 11%.
Russia’s output of sawn softwood
timber in 2018 grew 3.6% year-on-year
to 39 million cu m, while exports increased
7% to 30 million cu m, mainly due to high
demand in China, which is the largest
consumer of Russian sawn softwood timber.
PLYWOOD
Exports accounted for 88% of Segezha
Group’s plywood sales in 2018. The main
importers are European countries, primarily
Germany, the Netherlands, Belgium, France,
Italy, Norway, Finland and Czechia.
Global consumption of birch plywood has
been steadily growing in recent years
at an average rate of 2.0%-2.7% per
year. In 2018, the global market for birch
plywood was estimated at 4.9 million cu
m, with Russian birch plywood accounting
for 75%-80% of the total. In 2018, Russia’s
plywood exports grew by 8.7% to 2.68
million cu m, or 67% of total output. The bulk
of demand comes from the construction,
furniture manufacturing, transport,
shipbuilding and packaging industries.
Consumption growth in 2019 is projected
at 3% in Russia and 2%-4% globally.
1 Sources: Eurosac, Rosstat, Federal Customs Service, Trade Map, RISI, Poyry, ChinaBulletin, Random Lengths, WoodMarkets, EUWID, GWMI, FAOstat, Indufor.
LAMINATED BEAMS
AND PREFAB HOUSES
Laminated beams
Prefab houses
Segezha Group’s production of laminated
beams at Sokol WP is export-oriented,
primarily for the European market.
In 2018, Italy, Germany, Austria and Spain
accounted for 92% of the Group’s sales.
Europe and Japan remain the main global
consumers of laminated beams, which are
mainly used in the construction industry.
Segezha Group supplies prefab houses
mainly (~98%) to the Russian market
and is the market leader with a share of 18%
in 2018. The Russian market for prefab
glulam houses in 2018 was estimated
at 155,000 cu m. Key regions for prefab
houses in Russia are the Central, North-West
and Volga federal districts.
2018 FINANCIAL PERFORMANCE
Segezha Group’s revenue grew by 32.4%
in 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. 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 83.4% for 2018. 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 6.2 p.p. for 2018 to 22.4%, due to price
increases. The introduction of the new IFRS
16 standard had a positive effect on adjusted
OIBDA of RUB 894 million in FY 2018.
In 2018, global consumption of laminated
beams did not change significantly
and remained at about 4.1 million cu m.
In 2019, demand for laminated beams
is expected at the same level amid increasing
competition.
SEGEZHA GROUP SHARE
IN PREFAB GLULAM HOUSES
MARKET IN RUSSIA
18%
TOTAL VOLUME OF 2018
PREFAB GLULAM HOUSES
MARKET IN RUSSIA
155 thsd cu m
GLOBAL CONSUMPTION
OF PREFAB GLULAM HOUSES
4.1 mn cu m
FINANCIAL
INDICATORS
(RUB million)
Revenue
Operating income
Adj. OIBDA
(Loss)/Profit attributable to Sistema
Adj. profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
57,889
8,178
12,984
(77)
54
FY 2017
43,725
3,132
7,081
(591)
81
Change
32.4%
161.1%
83.4%
-
(33.9%)
FY 2018
57,889
7,703
12,090
193
323
Change
32.4%
145.9%
70.8%
132.6%
297.2%
42
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Key Asset Results
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Social Responsibility
43
MEDSI
Medsi Group is Russia’s largest national healthcare chain,
offering a full range of preventive, diagnostic, treatment, and
rehabilitation services for children and adults.
NUMBER OF FACILITIES1
NUMBER OF DOCTORS
42
3.3 thsd
NUMBER OF FACILITIES
BUSINESS MODEL
CLINICAL DIAGNOSTIC
CENTRES (CDCS)
REGIONAL
CLINICS
4
Moscow
CDC Krasnaya Presnya
CDC Belorusskaya
CDC Grokholsky
St. Petersburg
11
3
1
Perm
Barnaul
Bryansk
Volgograd
Nizhnevartovsk
Nyagan
6
1
1
1
1
1
PRIMARY CARE CLINICS
19
WELLNESS CENTRES
AND SANATORIUMS
4
CHILDREN’S CLINICS
HOSPITALS
2
REVENUE 2018
2
29%
5%
2%
27%
6%
38%
BY CLIENTS
BY ASSETS
ELENA BRUSILOVA
President
ARTYOM SIRAZUTDINOV
Chairman of the Board of Directors
SISTEMA’S
EFFECTIVE STAKE:
99%
8
https://medsi.ru
A VERTICALLY INTEGRATED
HUB-BASED BUSINESS MODEL
An innovative medical platform with a vertically integrated system of patient
service built on the principles of P4 medicine with exceptional scalability
potential and unique market position with no direct competition.
1.
Z Comprehensive range of patient-centric healthcare services with
cutting-edge medical equipment and care:
¡ Diagnostics
¡ Diagnosis
¡ Prescription
¡ Rehabilitation
¡ Health support & monitoring
2.
…based on P4 medicine
principles and western
treatment protocols…
2.
Z Developing a patient-centric model based on a personalized approach
to each patient:
¡ Predictive: targeted screenings, vaccination, etc.
¡ Preventive: extended diagnostics and centers of excellence
¡ Personalized: targeted treatment and high-tech medicine
¡ Participatory: active participation of the patient at every stage
Z Adoption and use of the international treatment protocols for strategic
therapeutic areas
1.
360° full cycle of services
for the patients…
3.
… delivered via a system
of vertically integrated
regional hubs
3.
Z Centers of excellence in Moscow for priority specialties
Z Full cycle of care in regional hubs based on clinical diagnostic
centers
Z Routing of patients within and between hubs: from primary
screening to high-tech treatment
Z Single HR pool allowing personnel rotation and dissemination of
the best practices
Z Integrated IT system supporting medical and business processes
Insurance
Individuals
Corporate
Other
64%
30%
Clinics
Hospitals
CDC
Other
1 As of 31 December 2018.
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45
MEDSI
Group
PATIENT VISITS1
8.5 mn
SERVICES PROVIDED1
17.9 mn
In January 2018, Medsi first launched its telemedicine platform developed
in conjunction with MTS. In 2019, the company plans to further evolve
the solution through new services and a special mobile app. In addition
to telemedicine, Medsi is looking to start a «third opinion» project that would
rely on neural decision support systems.
MEDSI’S BUSINESS DEVELOPMENT IN 2018
FLOOR SPACE, THSD SQ M 1.7%
AVERAGE CHEQUE, RUB THSD 43.4%
235.7
231.8
235.7
2.1
1.5
2.1
THE AVERAGE CHEQUE increased
by 43.4% to RUB 2.1 thsd, 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.
2017
2018
2017
2018
UTILISATION,
HOSPITALS, %
28 p.p.
UTILISATION,
CLINICS, %
3 p.p.
71
48
42%
71%
51%
48%
CLINIC UTILISATION is presented
on a LFL basis. Including new clinic
openings and M&A, clinic utilisation was
48% in 2018, and 51% in 2017. The decrease
was the result of refurbishment of part
of the CDC at Belorusskaya.
2017
2018
2017
2018
SERVICES
PROVIDED, MN
14.5
17.6%
PATIENT
VISITS, MN
8.5
12.4
14.5
7.7
8.5
6.0%
2017
2018
2017
2018
1 Metrics are for 2018, where capacity is calculated
as the number of possible out-patient visits by patients
at Medsi facilities, and visits as the actual number
of patient visits for the period, all including new clinic
openings and M&A. LFL out-patient capacity in 2018 was
14.7 mn. Visits were 7.4 mn, Utilisation was 50%.
EXISTING ASSETS
New high-precision diagnostic equipment
and modern surgical technology brought
about a significant increase in the quantity,
quality and volumes of medical services,
with a 6% rise in visits and an almost
18% increase in the volume of services.
Continuing the trend started in 2017,
the company drove up MMI revenues (+269%
from 2017) and became a stronger player
in the market of specialised and hi-tech
hospital care, notably in cardiovascular
surgery, oncology, injury treatment
and rehabilitation of patients after surgical
operations, injuries and strokes.
In 2018 Medsi became the absolute
leader among private clinics across
the Moscow region in terms of volume
of services provided to patients with cancer,
servicing more than 11 thousand people.
The Botkinsky Proezd clinical hospital
in Moscow became the seat of a specialised
cancer centre, attracting a vast flow
of patients and driving up the hospital’s
occupancy rates, with more than 8,000
patients treated in 2018 alone.
With a view to building strong partnerships
with leading global vendors of diagnostic
and surgical equipment, in 2018 Medsi
signed new memorandums of cooperation
with Siemens and Olympus.
In 2018 Medsi started preparing
for international JCI accreditation
as attestation of the high standards of quality
and safety of healthcare services provided
across the chain.
Moreover, Medsi became Russia’s first
private medical company to launch patient
experience centres, family support centres
and a fundraising centre. The centres are
expected to boost patient participation
and loyalty, and serve as an important
component of the new «P4 medicine»
strategy.
Flagship assets
Medsi’s largest clinical & diagnostic
centre – CDC Krasnaya Presnya,
with a floorspace of over 20,000 square
metres and a successful track record since
its opening in late 2015 — is steadily evolving
in terms of both occupancy rates (9%
increase on 2017) and financials (revenue
more than doubled from 2017). New centres
of excellence launched here in 2018 use
state-of-the-art equipment and best-in-class
experts. Starting from Q1 2018, CDC Krasnaya
Presnya has been using the trail-blazing
hi-tech robotic da Vinci surgical system
to operate on patients with gynaecological,
urological and endocrine pathologies.
NEW ASSETS
Organic growth
In 2018 Medsi embarked on the construction
of a flagship CDC for children and adults
on Michurinsky Prospekt in Moscow.
The new multi-specialty medical centre
(MSMC) with a floor area of over 28,000 sq m
is scheduled to open in 2020.
Inorganic growth
The large medical centre in St. Petersburg
acquired in 2017 (formerly Medem) combines
28 departments, a first-rate diagnostic centre,
and a hi-tech surgery block, occupying a total
area of 6,800 sq m. The asset is by now fully
integrated in Medsi’s business processes.
In Q3 2018 Medsi became the sole owner
of LLC Medlife Health Clinics (the initial 60%
stake was acquired in 2017), the largest
multi-specialty medical chain in the city
of Perm (comprising seven specialised clinics
and a customer service centre).
In the next few years, Medsi is planning
to further strengthen its role in the private
healthcare markets of both St. Petersburg
and Perm by actively developing its local
assets.
PLANS FOR 2019
Medsi’s priorities in 2019 are expanding
the capacity and spectrum of services offered
at CDC Krasnaya Presnya and launching
the final construction stage at MSMC
Michurinsky. In parallel, the company
is renovating two family clinics in residential
neighbourhoods of Moscow and the Moscow
region (to be opened by the end of the year)
and planning to launch new facilities
in another two regions of Russia (also
by the end of 2019).
Another priority item on the company’s
agenda is inclusion in the Ministry of Health’s
Hi-Tech Healthcare Providers List, which
would open up access to federal financing
and so bring hi-tech care to Medsi’s hospitals
from 2020 onwards. At the moment, Medsi
only provides hi-tech services to residents
of the Moscow region, financed by OMI funds
in Moscow and the Moscow region.
In January 2018, Medsi first launched
its telemedicine platform developed
in conjunction with MTS. In 2019, the company
plans to further evolve the solution through
new services and a special mobile app.
In addition to telemedicine, Medsi is looking
to start a «third opinion» project that would
rely on neural decision support systems.
46
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47
MEDSI
Group
BUSINESS DEVELOPMENT STRATEGY: OPERATIONS AND INVESTMENT
Medsi’s strategy aims to build Russia’s first multi-functional national-scale
medical operator, providing a full spectrum of services.
THIS LONG-TERM GOAL REQUIRES SPECIFIC STEPS:
1.
Expansion of the company’s geographical
footprint across the country.
2.
Evolving existing large local facilities into
regional vertically integrated hubs (to cover
the full spectrum of services, from outpatient
to hospital care) while referring the most
challenging medical cases to the flagship
assets in Moscow.
3.
Increasing market shares in Moscow
and the Moscow region through new
outpatient and diagnostic clinics in
residential neighbourhoods.
4.
Launching a third flagship hospital on
Michurinsky Prospekt in Moscow to widen
the range of services (including a children’s
hospital).
5.
As a matter of medical strategy, establishing
a Chief Specialists Department charged with
implementation of unified quality & safety
standards across all specialties and of the
new patient routing strategy, preparation
and introduction of innovative treatment
methods, and education of medical staff.
6.
Developing and implementing unified quality
and safety standards to guarantee high
quality of treatment in compliance with JCI
standards.
7.
Enhancing on-the-job education and training
programmes provided by the Medical
Academy, and launching international
education programmes.
8.
Transferring auxiliary back functions from
the management company to a single service
centre, while automating and/or partly
outsourcing routine day-to-day functions
in order to optimise the management
company’s costs.
9.
To progress the IT strategy, enhancing
existing online solutions for patients (e.g.,
by introducing new options in personal
accounts and upgrading the telemedicine
app) and for staff (e.g., by providing reliable
decision support systems, case conferences,
etc.) and upgrading the ERP system to
ensure effective management and prompt
decision-making.
RUSSIAN PRIVATE 7.6%
HEALTHCARE MARKET
594 RUB bn
MEDSI’S 2018 REVENUE GROWTH
IN PRIVATE SECTOR, MOSCOW REGION
20.6%
INDUSTRY OVERVIEW FOR 20181
In 2018, the Russian private healthcare
market reached RUB 5942 billion
(+7.6% from 2017). The market growth
of recent years is fuelled by rising demand
from individuals for quality healthcare, which
benefits private operators.
The trend is expected to grow even stronger
in the next few years, as the general socio-
economic situation in Russia stabilizes
and household earnings go up and more
foreigners seek medical care in Russia.
Medsi has also made visible progress
in the voluntary medical insurance market
(VMI), with revenue growth in the segment
that is 4-5 times greater than the average
market rate, both in Moscow and in Russia
more broadly.
The company’s 2018 revenue growth
in the private sector of the market (self-pay
patients) in Moscow and the Moscow region
outpaced the market by almost 4 times (7.7%
in Moscow and 20.6% in the Moscow region).
This strong growth enabled Medsi to boost
its share of the Moscow region market
to 2.92% (from 2.6% in 2017).
Medsi has also become a stronger player
in the mandatory medical insurance space
(MMI), with market share in Moscow
and the Moscow region increasing by over
2.6 times (to 1.8% from 0.5% in 2017).
This dynamic growth is in large part a result
of Medsi becoming a provider of some
of the most sought-after and attractively
priced hospital services. MMI has become
one of the main sources of customers
for Medsi’s in-patient assets.
RUSSIAN PRIVATE HEALTHCARE MARKET3, RUB BILLION
ACTUAL PERFORMANCE CAGR6%
PROJECTED
CAGR8%
272
202
295
219
317
235
344
250
376
268
414
291
460
318
515
352
2015
2016
2017
2018
2019
2020
2021
2022
Regions
Moscow and Moscow region
MEDSI’S MARKET SHARE DYNAMICS (VMI SEGMENT)
RUSSIA
MOSCOW AND MOSCOW REGION
4.35%
4.96%
7.56%
7.83%
5.79%
6.76%
18.56%
19.95%
Revenue
Patient visits
Revenue
Patient visits
2017
2018
MEDSI’S AND MARKET’S GROWTH RATES (VMI SEGMENT)
2018
2017
20.26%
5.49%
2.55%
– 0.98%
21.58%
4.08%
4.98%
– 2.32%
1 Source: BusinesStat.
2 Total revenue received from both insured and self-pay
patients.
3 Voluntary medical insurance (VMI) market and paid
services at the expense of individuals.
Medsi
Market
Revenue
Patient visits
Revenue
Patient visits
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MEDSI
Group
Medsi remains the private market’s largest player in terms of geographical
footprint and an undisputed leader in the VMI segment, which benefits both
occupancy figures and revenue at specific assets. In the first half of 2018,
Medsi had already outperformed the 2017 national leader by revenue,
Mother and Child, by more than 7%.
Steppe AgroHolding
JSC Steppe AgroHolding (“Steppe”) is one of the biggest
agricultural companies in southern Russia with a diversified asset
portfolio including crop farming (TOP-6 of land owners in Russia),
dairy farming, grain trading and logistics, sugar and cereals
trading, and fruit and vegetable growing.
MEDSI’S MARKET SHARE DYNAMICS (MMI SEGMENT)
RUSSIA
MOSCOW AND MOSCOW REGION
0.11%
0.39%
0.01%
0.01%
0.51%
1.77%
0.05%
0.10%
Revenue
Patient visits
Revenue
Patient visits
STEPPE’S BUSINESS MODEL
The company’s business model is designed
to build a vertically integrated diversified
agricultural player with a focus on crop
farming, grain trading and logistics, sugar
and cereals trading and dairy farming,
and having leading positions in each
segment of operations.
Global grain consumption grew faster than
production, which combined with an expected
decrease in carry-over grain supported
a recovery in global grain prices. The average
export price of Steppe AgroHolding’s
wheat in 2018 grew by 15% year-on-year;
together with the high share of quality grain
and increased export amounts, this made up
for a slight decrease in the gross harvest.
BUSINESS DEVELOPMENT IN 2018
GRAIN TRADING & LOGISTICS
ANDREY NEDUZHKO
CEO
2017
2018
2018 FINANCIAL PERFORMANCE
Medsi’s revenue for 2018 increased
by 52.1% to RUB 17.7 billion due
to increased capacity utilisation and,
as a result, an increase in revenue from in-
patient services of 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.
Adjusted OIBDA increased by 82.9%
in 2018, 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 449 million in 2018.
REVENUE
52.1%
17,747 RUB mn
The adjusted OIBDA margin grew
by 3.4 p.p. to 20.3% thanks to growth
in capacity utilisation and an increase
in efficiency per sq m.
Adjusted profit attributable to Sistema
increased by 26.7% in 2018. Excluding
the effect of new accounting standards,
adjusted profit increased by 42.1%.
ADJUSTED
OIBDA
82.9%
3,600 RUB mn
ADJUSTED
NET PROFIT
26.7%
1,061 RUB mn
SISTEMA’S EFFECTIVE STAKE1:
92.8%
8
https://ahstep.ru
FINANCIAL
INDICATORS
(RUB million)
Revenue
Operating income
Adj. OIBDA
Adj. profit attributable
to Sistema
Excluding impact of
new IFRS standards
FY 2018
17,747
693
3,600
FY 2017
11,670
1,142
1,968
Change
52.1%
(39.3%)
82.9%
FY 2018
17,747
557
3,151
Change
52.1%
(51.2%)
60.1%
1,061
837
26.7%
1,189
42.1%
The main focus areas for Steppe
AgroHolding’s development in 2018 were
crop farming, dairy farming, and grain
trading and logistics. In 2018, the company
improved its operating and financial
performance through both its organic growth
strategy and M&A deals.
ALI UZDENOV
Chairman of the Board of Directors
CROP FARMING
Steppe AgroHolding’s land assets
as of the end of 2018 totalled 401,000
hectares (after an acquisition of land
in the Rostov region in the second half
of the year).
Yields of the main crops remained high
in 2018, exceeding average regional yields
despite a drought in Russia’s grain-
producing regions.
In 2018, Steppe AgroHolding began actively
developing the grain trading segment
and established a full-fledged trading
structure. Grain exports by the trading
business exceeded 1.1 million tonnes in 2018
(up more than four-fold year-on-year), making
Steppe AgroHolding one of Russia’s top six
grain exporters in the first half of the crop
year 2018.
GRAIN EXPORTS, 314%
THOUSAND TONNES
269
1,115
STEPPE AGROHOLDING’S GROSS HARVEST (INCL. RZ AGRO),
THOUSAND TONNES
2017
2018
Beetroot
Wheat
Corn
Winter barley
Sunflower
Other
Total
1 84.63% as of December 31,2018.
2018
251,811
685,943
40,113
24,982
49,362
102,374
1,154,585
2017
347,900
723,600
68,900
19,200
42,700
153,000
1,355,300
Change, %
-28%
-5%
-42%
30%
16%
-33%
-15%
50
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STEPPE
AgroHolding
Steppe’s assets are located in the most favourable
regions of Southern Russia in terms of climate, crop
yields and logistics. Steppe also owns 50% of RZ Agro,
a major producer of grain and oil crops jointly controlled
by Sistema and the Louis-Dreyfus family.
IN 2018, STEPPE COMMISSIONED
A NEW DAIRY FARM
FOR 1,800 cows
DAIRY FARMING
In 2018, Steppe AgroHolding commissioned
a new dairy farm for 1,800 cows.
The total number of milk cows as of the end
of 2018 was 4,800. In the second half
of 2018, the company started construction
of two dairy farms: one for 3,000 cows
in the Krasnodar region and one
for 3,100 cows in the Rostov region.
Steppe AgroHolding is the leading dairy
farmer in Russia in terms of milk yield per
cow. High milk yields are achieved through
having highly productive cattle and using
state-of-the-art agricultural technologies.
The operating performance of the dairy
farming segment demonstrated a steady
growth: gross milk yield in 2018 exceeded
46,500 tonnes, and milk yield per cow was
over 10,500 litres per year.
BUSINESS DEVELOPMENT
STRATEGY
INDUSTRY OVERVIEW FOR 2018
Today, Steppe AgroHolding is a big player
in the Russian agricultural industry
with substantial land assets (401,000 hectares,
,making it the sixth-largest in Russia). The key
goal of further development is to create
a major agricultural company in Russia,
a leader in all its key segments in terms
of both business size and operating efficiency,
with favourable conditions for an IPO
or attracting a strategic investor.
Steppe AgroHolding’s development strategy
envisages further increase of its land assets,
intensive development of grain trading
and logistics, achieving a leading position
in sugar and cereals trading, construction
of new dairy farms, and organic growth
in the fruit and vegetable growing segments.
CROP FARMING
The output of grain and leguminous crops
in Russia in 2018 totalled 113.3 million
tonnes (vs 135.5 million tonnes in 2017,
down 16% year-on-year), with wheat
output equalling 72.1 million tonnes
(vs 86.0 million tonnes in 2017, down 16%
year-on-year).
The 16% decrease in gross grain harvest
compared to the unprecedented harvest
of 2017 was due to a reduction in the crop
area and lower crop yields in some regions
of Russia caused by unfavourable weather
conditions.
FRUIT AND VEGETABLE GROWING
GROSS GRAIN AND GRAIN LEGUME HARVEST IN RUSSIA, M T
Vegetable output in 2018 amounted
to 46,300 tonnes (up 3% year-on-year), which
is an all-time high for Steppe AgroHolding.
113.3
The expected reduction in global carry-
over grain crops in the 2018/2019 season
and grain consumption outpacing production
had a positive effect on global grain
prices, which enabled Russian agricultural
producers to make up for the slight decrease
in the gross harvest.
Today, Russia remains one of the world’s
leading grain exporters, having exported
some 29.0 million tonnes of grain
in July-December 2018, an increase of 4%
from the same period of 2017 (27.8 million
tonnes).
In the medium term, prices for land assets
in Russia are expected to continue rising,
since land is a limited natural resource
and global grain consumption is on the rise.
DAIRY FARMING
Russia’s milk output demonstrated positive
trends in 2018: total milk yield grew by 1.5%
vs 2017 to 30.6 million tonnes, while milk
yield per cow in the private sector exceeded
6,000 l (+4% vs 2017), which compensated
for a gradual decrease in livestock numbers.
In Russia, raw milk competes with dairy
products made of milk fat substitutes,
but the government is taking steps
to reduce the share of counterfeit products
in the market, including the introduction
of the Mercury programme, which makes
it possible to control movement of dairy
products and their history from the field
to the store counter.
In the region where Steppe operates,
raw milk processing capacity is gradually
growing, which has a positive effect
on producers of high-quality raw milk able
to supply it in large batches.
The milk output of Steppe’s dairy farms
has grown due to the increase both
in the number of milk cows and milk yield
per cow.
MILK YIELD PER COW,1
KG
6,094
TOTAL MILK YIELD,
M T
30.6
94.2
70.9
92.4
105.3
104.8
120.7
135.3
113.3
5,542
5,871
6,094
30,5
30,8
30,8
30,8
30,2
30,6
14.0
16.5
14.4
16.4
14.7
16.1
15.1
15.7
15.7
14.5
16.2
14.4
In 2018, the company optimised its vegetable
and fruit sales, developing a single brand,
Steppe AgroHolding, for all produce sold
to retail chains. Sales of produce under
a single brand increases brand recognition,
enables the company to get a price
premium due to a broader product range,
and strengthens its investment case as its
products are carried by retail chains.
2011
2012
2013
2014
2015
2016
2017
2018
2016
2017
2018
2013
2014
2015
2016
2017
2018
1 Milk yield per cow at agro enterprises.
Agro enterprises
Farmsteads of all categories
52
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
53
STEPPE
AgroHolding
FRUIT GROWING
VEGETABLE GROWING
The fruit growing segment in Russia has
been demonstrating a gradual increase
of the output: gross pomaceous fruit harvest
in 2018 amounted to 1.9 million tonnes,
according to preliminary estimates
(up 31% vs 2017). Growth drivers included
the planting of new orchards: the area under
pomaceous fruit crops reached 229,000 ha
in 2018 (+3,800 ha vs 2017).
Despite the increase of domestic production,
imports of pomaceous fruits remained high,
totalling 843,000 tonnes in 2018 (+18.7%
vs 2017).
In 2018, production of protected-ground
vegetables continued to rise due
to commissioning of new greenhouses.
The total area of greenhouses now stands
at 2,500 ha, an increase of 8% from 2017.
Total output of protected-ground vegetables
in 2018 exceeded 1 million tonnes
(+17% vs 2017), while imports of tomatoes
and cucumbers reached 701,000 tonnes
(+7% vs 2017).
OUTPUT 31%
POMACEOUS FRUIT CROPS
1.9 m t
AREA UNDER POMACEOUS
FRUIT CROPS
229 thsd ha
POMACEOUS FRUIT 18.7%
CROPS IMPORTS
GROSS HARVEST OF POMACEOUS FRUIT CROPS AND APPLES
IMPORT IN RUSSIA, M T
2.84
1.53
1.35
1.60
1.05
1.50
0.89
1.73
0.68
1.52
0.71
2.00
0.84
843 thsd t
TOTAL
GREENHOUSE AREA
2.5 thsd ha
OPERATIONAL RESULTS
STEPPE AGROHOLDING
(thsd tonnes)
Gross harvest, total (crop farming)
Milk production
Vegetable harvest
Tomatoes
Cucumbers
Gross apple harvest
2018
814.1
46.7
46.3
25.1
21.2
18.5
2017
973.2
39.4
44.9
23.2
21.8
21.8
OUTPUT OF STEPPE AGROHOLDING (WITH RZ AGRO)
(thsd tonnes)
Beetroot
Wheat
Corn
Winter barley
Sunflower
Other
Total
2018
251.8
685.9
40.1
25.0
49.4
102.4
1,154.6
2017
347.9
723.6
68.9
19.2
42.7
153.0
1,355.3
2018 FINANCIAL PERFORMANCE
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 entering the 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 launch of new projects
in the Dairy segment and logistics to support
increased production and vertical integration
of the business.
Change, %
–16%
18%
3%
8%
–3%
–15%
Change, %
−28%
−5%
−42%
30%
16%
−33%
−15%
STEPPE AGROHOLDING: CROP YIELDS
8%
(t/hа)
Beetroot
Wheat
Corn
Barley
Sunflower
2018
45.1
4.2
3.7
6.4
1.5
2017
54.2
4.9
5.3
6.1
2.6
Change, %
–17%
–14%
–30%
5%
–43%
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.
2013
2014
2015
2016
2017
2018
Production of seed crops
Import of apples
OUTPUT OF PROTECTED- 17%
GROUND VEGETABLES
>1 m t
IMPORTS OF TOMATOES 7%
AND CUCUMBERS
701 thsd t
FINANCIAL
INDICATORS
(RUB million)
Revenue
OIBDA
Operating profit
Net profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
24,161
4,909
3,261
1,095
FY 2017
10,210
4,019
2,647
1,130
Change
136.6%
22.1%
23.2%
(3.1%)
FY 2018
24,161
4,617
3,147
1,243
Change
136.6%
14.9%
18.9%
10.0%
54
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
55
Real estate assets:
JSC Leader Invest ( “Leader Invest”)
is a development company carrying
out housing and commercial real
estate projects in Moscow.
The company both builds
residential complexes in a range
of classes from Comfort+
to Premium and carries out large-
scale housing estate projects.
PORTFOLIO COMPRISES
PORTFOLIO VOLUME
>40 projects
in developed areas
with good ecological conditions
~3.0 million sq m
1
MAXIM BERLOVICH
President
CONSTRUCTION IN PROGRESS
19 projects
NOW SELLING
23 projects
BUSINESS MODEL
MARKET SEGMENTS WHERE
LEADER INVEST OPERATES
42%
2%
100%
56%
2
GENNADY SHCHERBINA
Chairman of the Board of Directors
Leader Invest is growing in the segments
of the Moscow real estate market that
are most stable and attractive in terms
of investment. The company’s development
model is based on the following pillars:
Comfort
Business
Premium
the company acts in the interests of the city
all properties are in the Comfort,
SISTEMA’S EFFECTIVE STAKE3:
49%
and its residents, supports new initiatives in
Moscow’s construction industry, creates
new points of growth (residential, social
and infrastructure facilities) and jobs,
and looks at construction projects
as a chance to enrich urban areas
through comprehensive and
sustainable development
Business or Premium class and are
located in residential areas of “old”
Moscow with excellent public
transport accessibility and
developed social infrastructure
Strong
marketability and
quality of assets
Social
responsibility
A unique
niche product
competitive
prices, fast
construction,
focus on modern
architectural
trends
latest technologies
and solutions in design
and construction
Innovations
8
http://l-invest.ru
A strong
professional team
1 As of 31 December 2018 – Oleg Mamayev.
2 As of 31 December 2018 – Oleg Mubarakshin.
3 По состоянию на 31 декабря 2018 года: 100%.
LEADER INVEST’S BUSINESS
DEVELOPMENT IN 2018
In 2018, Leader Invest focused primarily
on streamlining of business processes
and improving efficiency, specifically
optimising project solutions, introducing
new cost-effective procurement procedures,
strengthening project management
and increasing salesforce efficiency.
Leader Invest’s portfolio comprises over
40 projects at various stages, the most
on the “old Moscow” market. In 2018, it
launched the Happiness brand to sell
small-footprint infill properties in residential
neighbourhoods while heavily developing
its landmark Wings project at 120
Lobachevskogo Street and the large-scale
Central Park housing estate in Moscow’s
gentrified Nagatino district. The company
also made progress on the development
of its other housing estate, ZIL-Yug,
and commissioned a residential building
at 15 Demyana Bednogo St.
The team worked hard throughout 2018
to finalise ZIL-Yug’s marketing concept,
phasing and cash inflow calendar; to speed
up the launch of sales for the Wings after
an expansive redesigning (with an upgraded
master plan and optimised apartment
layouts and façade solutions); and to start
active construction of Central Park, a unique
business-class housing estate occupying over
450,000 square metres and using a concept
prepared by British architecture firm AHR.
The Phase 1 construction permit for Wings
was granted in 2018.
Leader Invest welcomes digitalisation as yet
another avenue to leadership and uses it in its
day-to-day operations. The recently adopted
BIM system significantly enhances the quality
of designing and makes cost control much
easier.
In November 2018, S&P Global Ratings
affirmed Leader Invest’s long-term
and short-term user credit ratings
at B/B and revised its outlook to Stable.
Today, Leader Invest is among Moscow’s
three highest-rated developers, and it shares
the top position with a major mass-segment
operator. The high international expert
rating is primarily due to an exceptional
new management team, a broad
portfolio of projects, and healthy liquidity
and leverage ratios. In April 2019, S&P
upgraded the outlook to Positive, reflecting
expert consensus that the ongoing
integration with Etalon Group will improve
the company’s operating and financial
performance, strengthen its market standing
and fuel revenue growth in 2019-2020.
MOSCOW DEVELOPERS
BASED ON RATING
Тop-3
LARGEST PROJECTS
COMMISSIONED IN 2018
Schastye Mnevniki
13 Demyana Bednogo St.
AREA
13.5 thsd sq m
56
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
57
Real estate assets:
LEADER INVEST
THE NUMBER OF OFF-PLAN SALES CONTRACTS 47%
SIGNED IN MOSCOW IN 2018
80,000
The combined assets and
expertise of Etalon Group
and Leader Invest will create
a leader on the residential
market.
COMBINED PORTFOLIO
WITH A TOTAL AREA OF
4 million sq m
INDUSTRY OVERVIEW FOR 2018
SUPPLY OF NEW HOUSING IN MOSCOW IN 2015-20181,
THSD APARTMENTS
8.5
6.3
8.2
6.5
10.8
9.7
12.0
14.0
12.1
15.1
11.0
15.1
11.9
17.2
12.1
17.8
12.5
19.1
15.2
21.6
16.5
20.7
15.8
19.1
17.1
17.8
15.2
14.8
14.9
14.6
14.6
15.0
2015
2016
2017
2018
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
AVERAGE PRICES IN BUSINESS- AND COMFORT-CLASS RESIDENTIAL
SEGMENTS1, RUB
252
158
242
161
234
153
230
148
229
145
235
142
238
147
242
147
232
148
227
148
223
150
223
151
226
152
226
155
225
158
229
162
BUSINESS DEVELOPMENT
STRATEGY
In February 2019, Sistema sold a 51%
stake in Leader Invest to Etalon Group
for RUB 15.2 billion, and in a separate
transaction purchased 25% in Etalon Group
from its founder and largest shareholder
Viacheslav Zarenkov (and his family)
for USD 226.6 million.
Two Sistema representatives received seats
on Etalon’s board of directors. Sistema
signed an agreement supporting its
commitment to high standards of information
disclosure and transparency and confirming
that any and all transactions (if any) between
Sistema and Leader Invest in the future
should be carried out on an arm’s length
basis, including a guarantee that Sistema’s
representatives will abstain from voting
on any such matters.
Etalon Group is among Russia’s largest
and oldest residential developers, a solid
leader in St Petersburg and a growing
presence in the Moscow metropolitan area.
Etalon Group’s shares have been listed
on the London Stock Exchange since 2011,
under the ticker “ETLN”.
The company’s portfolio is represented
by 39 projects at various stages, mostly
in the high-margin Comfort and Business
class segments. The total net sellable area
is 2.73 million square metres, with a total
portfolio value (according to Knight Frank)
exceeding RUB 132 billion as of 30 June
2018. In 2018 alone, Etalon Group sold
628,000 square metres of floorspace
for RUB 68.7 billion. In 2017, the company’s
revenue was RUB 70.6 billion, with EBITDA
of RUB 13.2 billion.
BUILDING VALUE THROUGH SYNERGIES
2015
2016
2017
2018
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Comfort
Business
NUMBER OF HOUSING TRANSACTIONS IN MOSCOW, 2015-2018,
THSD
Q1
4.3
Q2
5.1
Q3
4.5
Q4
5.8
Q1
6.6
Q2
7.7
Q3
9.2
Q4
11.0
Q1
10.5
Q2
13.4
Q3
12.8
Q4
17.6
Q1
15.9
Q2
18.0
Q3
20.0
Q4
25.8
Focus
on the same
regions (Moscow
& St. Petersburg)
and segments
(predominantly
business, comfort,
and premium
class)
Complementary project
portfolios: no overlap
in projects in Moscow
Attractive profits
and impressive returns
on investment
2018 was a year of unprecedented buoyancy
in the Moscow market for business-class
residential properties. As in the mass
segment, the spending spike here was
primarily driven by a reduction in mortgage
rates. 40% of all of sales in the segment
in 2018 involved mortgage contracts, which
is quite untypical for the business class space
(cf. 50+% in the mass segment) . To put it
in perspective, in 2017 mortgage penetration
in the segment was 30%, and in 2016 just
27%. The recent trend, in turn, is driven
by two factors: all-time low mortgage
rates and an abundance of new, highly
attractively priced properties. By the end
of the year, the average Moscow home price
in the primary mass-segment residential
market peaked at RUB 162,090 per square
metre.
By the end of the year, the primary business-
class market was represented by 94
residential complexes with some 14,550
apartments (or 1.07 million square metres
in total), with six projects entering the sales
phase in Q4. The average price in the segment
at the year-end was RUB 228,525 per square
metre, 2.3% up from 2017.
Like the mass market, the residential
business class segment in 2019 will be
affected by a number of factors, primarily
recent legislative changes (amendments
to Federal Law 214-FZ governing off-plan
property development projects) that come
into effect on 11 July 2019 and require that
buyers’ money be held in escrow accounts
until commissioning, which means that
project financing will become the only source
of funding available to developers. According
to experts, the move will toughen competition
and put smaller developers out of business,
while larger professional players with broad
expertise will consolidate their market
shares.
2018 FINANCIAL PERFORMANCE
Leader Invest’s revenue grew by 100.9%
year-on-year to RUB 12.7 billion in 2018.
The main sources of revenue recognition were
the Vsevolozhsky, Pokrovsky, Chertanovskaya
and Michurinsky developments, as well
as Daev, Demyana Bednogo, Kavkazky Plyus,
Yana Rainisa and Fabritsiusa.
As of the end of 2018 the sales portfolio
including commercial real-estate and parking
spaces totalled 209.3 thousand square metres.
Revenue in 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, Schastye v Mnevnikakh
residential complex at 15 Ul. Demyana
Bednogo.
Positive trends in OIBDA and the OIBDA
margin in 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.
2015
2016
2017
2018
1 All statistics provided in this market review are according to Metrium.
2 Source: Federal Service for State Registration.
REVENUE
100.9%
12,676 RUB million
FINANCIAL
INDICATORS
(RUB million)
Revenue
OIBDA
Operating income
Profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
12,676
3,129
2,990
772
FY 2017
6,308
415
221
164
Change
100.9%
654.6%
1,253.3%
372.2%
FY 2018
2,978
(1,038)
(1,178)
(2,104)
Change
(52.8%)
—
—
—
58
SISTEMA
Annual Report 2018
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
59
Real estate assets:
Business Nedvizhimost Group is one of the largest property
owners in Moscow. The company’s main assets are
JSC Business Nedvizhimost (lease and sale of commercial
real estate) and JSC Mosdachtrest (lease of cottages/sale
of land plots).
Business Nedvizhimost’s
operating results in 2018
PROPERTIES GENERATING
RENTAL INCOME
TOTAL
PROPERTY PORTFOLIO
50 units
246.7 thsd sq m
INDUSTRY OVERVIEW FOR 2018
BUSINESS DEVELOPMENT IN 2018
A total of 114,000 sq m of new office space
was commissioned in Moscow in 2018.
The Moscow quality office space market
reached 20.5m sq m, with class A offices
accounting for 4.94m sq m, class B+ offices
7.43m sq m, and class B- offices 8.43m sq m.
Companies operating in the consumer sector
accounted for about 17% of real estate
market demand. Demand from the IT sector
also increased, reaching 15% of the total.
Trading companies continue to generate
steady demand and account for 14%
of the total number of bids.
At the end of 2018, average rental rates
grew across all property classes. Class
A properties saw the highest growth. Overall,
the average rental rate for class A space
rose by 9%, reaching 26,160 RUB/sq m per
annum (excluding VAT) by the end of 2018.
The average weighted rental rate in class
B+/B properties also increased and reached
15,180 RUB/sq m per annum (excluding
VAT). In class C the rental rate amounted
to 11,160 RUB/sq m per annum, having
increased by 1.1% year-on-year.
Business Nedvizhimost has a unique pool
of properties: mansions in the centre
of Moscow, office and commercial buildings,
manufacturing and storage facilities,
high-end cottages and land plots. In 2018,
the company continued to implement its
strategy in two core areas:
1. effective management of property
portfolio under ownership,
2. providing professional and effective
management services and operation of
commercial real estate, including third-
party properties.
In terms of designated use Business
Nedvizhimost’s assets are divided into
three key groups: leasing, development
monetisation as part of the M&A programme.
The objectives of the company
for 2019 include creation of an IT platform
for commercial real estate management,
renovation of own properties jointly
with partners and launching a programme
for replacing existing assets, redevelopment
of own high-potential properties
and acquisition of investment-grade assets
from the market.
OFFICE PROPERTY MARKET1
AS OF THE END OF Q4 2018,
THOUSAND SQ M
CHANGES IN VACANT SPACE1
AS OF THE END OF Q4 2018, %
4,963
7,433
8,430
1,227
14.5%
11.9%
6.6%
10.3%
VYACHESLAV KHVAN
CEO
SERGEY SHISHKIN
Chairman of the Board of Directors
SISTEMA’S STAKE:
100%
8
http://sistema-bn.ru
MOSDACHTREST is a subsidiary of Business
Nedvizhimost whose operations are mostly
related to the lease of cottages and office
buildings in Moscow. Mosdachtrest’s
key assets are land plots in Serebryany
Bor and the Moscow region. In 2018,
Mosdachtrest completed the renovation
of 50 properties in Serebryany Bor.
COMMERCIAL REAL ESTATE SALES
THSD SQ M
ASSETS OF BUSINESS NEDVIZHIMOST
AS OF 31 DECEMBER 2018, SQ M
69.3
22.3
69.3
54,667
36,626
246,670
MOSDACHTREST
TOTAL PROPERTY PORTFOLIO
52.3 thsd sq m
BUSINESS DEVELOPMENT
STRATEGY
The development strategy of Business
Nedvizhimost includes three key areas:
1. Maximising the value of assets through
renovation;
2. Rotation of tenants to maintain rental
income at a minimum of 10% per annum;
3. Replacement of assets at their peak
value by assets from the market with
potential for improvements and value
growth of at least 30%.
According to its strategy for 2019–22,
Business Nedvizhimost will conduct rotation
of its commercial property portfolio in order
to replace assets that have reached their
peak value by investment-grade assets
with growth potential, and expand the area
of residential rental real estate in ownership
by building new residential properties.
155,377
For rent
For sale outside Sistema Group
For renovation
UoM
thsd m2
thsd m2
ha
ha
2018
248.7
54.7
19.3
82.7
2017
302.9
84.3
19.3
87.2
%
– 18%
– 35%
х
– 5%
thsd m2
46.7
48.3
– 3%
OIBDA increased by 59.3% year-on-year
to RUB 4.6 billion, in line with revenue
and due to optimisation of a number of costs.
2017
2018
2018 OPERATING RESULTS2
Indicator
Area of commercial real estate in Moscow,
of which for sale
Land area (Serebryany Bor)
Land area (Moscow region)
Cottages for rent, (Serebryany Bor, Barvikha
and Trudovaya)
2018 FINANCIAL PERFORMANCE
In 2018 revenue from Sistema’s rental
assets (Business Nedvizhimost and its
Mosdachtrest subsidiary) increased by 31.0%
year-on-year to RUB 7.9 billion, primarily
due to sales of real estate. In FY 2018
69.3 thousand sq m was sold.
FINANCIAL
INDICATORS
(RUB million)
Revenue
Operating income
OIBDA
Profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
7,887
4,184
4,598
3,147
FY 2017
6,019
2,629
2,887
1,655
Change
31.0%
60.9%
59.3%
90.1%
FY 2018
7,887
4,229
4,553
3,163
Change
31.0%
59.1%
57.7%
91.1%
Class А
Class B +
Class B -
Class C
Class А
Class B +
Class B -
Average
1 Source: ILM, Becar.
2 As of 31 December 18.
60
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
61
JSC RTI
JSC RTI (“RTI”) is a major research and production company
that develops, produces and supplies radars, comprehensive
automated control systems, command centres, communications
equipment, electronic devices and microelectronics.
RTI’s products ensure border
protection, security of air
and maritime traffic, and safety
in all areas of life.
BUSINESS DEVELOPMENT IN 2018
RTI is a major research and production
holding company for more than 10
enterprises spanning segments
from microelectronics to radars
and communications. JSC Mintz Radio
Technology Institute, one of RTI Group’s
leading research and production enterprises,
was commissioned by Roscosmos
to develop prototypes of on-board radars
and fulfilled export orders for on-board
broadband communication systems in 2018.
The company has developed a new method
of real-time functional control of complex
radio systems, including early warning radar
systems. Its algorithms can reduce the time
required to identify and resolve problems
and prevent the risk of incorrect operations
of radar systems.
PJSC Yaroslavl Radio Factory, a leading
Russian manufacturer of professional radio
communications equipment, conducted
technical upgrades and launched
an advanced assembly shop for spacecraft
payload and drastically increased the volume
of work on space programmes (including
GLONASS). Following the commissioning
of this production facility Yaroslavl Radio
Factory became one of the key links
in the production chain for new spacecraft.
The enterprise will increase its competitive
advantages by obtaining a certificate
of compliance from its foreign partner,
Thales Alenia Space, which will allow it
to export products for foreign satellites.
The company actively worked on its
quality management system in 2018
to increase the level of process stability
and the traceability of order execution.
Yaroslavl Radio Factory and JSC Russian
Space Systems also signed an agreement
on cooperation in the development
and production of on-board space equipment.
Yaroslavl Radio Factory will become a centre
of excellence in navigation and space
communications.
ADVANCES IN MICROELECTRONICS
For more than 30 years, Mikron has been
the undisputed leader of the Russian
microelectronics market. In 2018,
the company continued to capitalise
on growth opportunities in new markets,
consistently updating its product portfolio
and developing its customer base. Projects
implemented include expansion of the client
and distribution network, with 54 new clients
and 38 distributors, dealers and integrators.
Automotive electronics and IoT components
are among new segments that the company
plans to enter in the future. In 2018, Mikron
produced chip samples for automotive
electronics and received a letter
of conformance with the international IATF
standard for its quality management system,
which is necessary to enter the exports
market.
MAXIM KUZYUK
CEO
OLEG MUBARAKSHIN
Chairman of the Board of Directors
SISTEMA’S EFFECTIVE STAKE:
87%
8
http://aorti.ru
In 2018, Mikron began supplies
of microcontrollers protecting transmitted
data of IoT devices for municipal services.
It is expected that after pilot applications
in 2018, supplies will grow 5x-7x in 2019.
CJSC RTI Microelectronics, a member of RTI
Group, signed a legally binding agreement
with Rostec and JSC Ruselectronics (part
of Rostec) in February 2019 to establish
a joint venture in microelectronic
components. The parties will contribute
controlling stakes in 19 enterprises
that develop, produce and design
microelectronics components to the JV.
INDUSTRY OVERVIEW FOR 20181 2
2018 was marked by diverse trends in RTI’s
areas of operations. In the surveillance
and reporting systems market, total
spending on armaments declined in 2018
by 6.3% year-on-year. Spending in 2019-
2021 is expected to remain at the same
level as 2018. In the Russian market
for automated control systems, high
growth rates (10%-15%) in 2019 are
expected in the segment of service
solutions (geoinformation platforms;
business intelligence) and control systems
for executive authorities. Global trends
include an increasing role for automation
and smartification (including artificial
intelligence) in control and security systems.
The global microelectronics market in 2018
grew by 12% year-on-year to USD 462 billion.
Production of 200 mm wafers (the segment
in which Mikron operates) grew by 14%.
1 Source: company data; World Semiconductor Trade Statistics.
2 Source: company data.
1,381 million
microchips
7 million
chip modules
892 million
export chips
482 million
chips for the Russian market
GLOBAL 12%
MICROELECTRONICS MARKET1
USD BILLION
RUSSIAN MICROELECTRONICS
MARKET2
RUB BILLION
463
134
336
335
339
412
463
126
128
129
131
134
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Demand was driven by industrial electronics,
automotive electronics and the Internet
of things.
RUSSIAN MICROELECTRONICS
MARKET
13%
5%
3%
2%
43%
The Russian microelectronics market
in 2018 grew by 3% to RUB 135 billion.
The largest segment is still production
of microcircuits for the defence industry
and aerospace equipment, including
for the medical and industrial sectors.
Increasing digitalisation of business
processes and automation of production
facilities and infrastructure generate
demand for microcontrollers, representing
an additional driver of demand for Mikron’s
products.
BY SECTOR
32%
Defense industry and aerospace
Industrial, energy and medical electronics
Consumer electronics
ID, RFID, smart cards
IoT
Automotive
Telecom
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
63
JSC
RTI
JSC Bashkir Power Grid
Company
JSC Bashkir Power Grid Company (“BPGC”)
is one of Russia’s largest regional energy
companies.
BUSINESS DEVELOPMENT
STRATEGY
RTI’s strategy is aimed at strengthening its
market position, pursuing organic growth
in segments in which the company operates,
entering adjacent market segments
and civilian markets, boosting exports
in all segments and increasing operating
efficiency.
In the government contracts segment, RTI
is focused on maintaining leading positions
in radio, surveillance and communication
systems, as well as information systems
for managing and supporting decision-
making. In addition to its traditional segment
of very long-range radars, RTI is planning
to develop sales in adjacent segments,
increase exports and enter civilian markets.
The company’s plans in the microelectronics
segment include consolidation of production
and customer bases, development
of export sales through expansion
of the product offering to meet the needs
of the digital economy, and partnerships
with manufacturers of electronic equipment
and systems integrators. The industry’s key
growth drivers in the near future will be
IoT and AI, which require a huge number
of various microchips, most of which are
produced using technologies available
at Mikron’s facilities.
FINANCIAL RESULTS IN 2018
In 2018 RTI’s revenue decreased year-on-
year due to the high-base effect: In 2017
a large volume of work was done as part
of long-term contracts under government
contracts.
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 2018 the OIBDA margin rose by 15.5 p.p.
to 21.5% due to a 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.1 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.
REVENUE
25.7%
22,886 RUB mn
ADJ. OIBDA
168.1%
4,919 RUB mn
SG&A
31.5%
3.7 RUB bn
FINANCIAL
INDICATORS
(RUB million)
Revenue
Adj. OIBDA
Operating income / (loss)
Adjusted loss attributable
to Sistema
Excluding impact of
new IFRS standards
FY 2018
FY 2017
Change
FY 2018
Change
22,886
4,919
921
30,793
1,835
(5,772)
(25.7%)
168.1%
—
22,886
4,611
825
(25.7%)
151.3%
—
(531)
(4,178)
—
(546)
—
1 Net debt includes financial leasing.
BUSINESS MODEL
Electricity
generation
ELECTRICITY TRANSMISSION
AND DISTRIBUTION
Supply Consumption
DMITRY SHAROVATOV
CEO
Conditions and technological parameters by SO UPS (Independent System Operator)
Renewable
energy sources
BGC
Bashkirenergo
Transmission
grids
Distribution
grids
Bashkortostan
Power Sale
Company
OLEG MUBARAKSHIN
Chairman of the Board of Directors
BGC LLC
(Inter RAO Group)
HPP1
TPP1
BPGC Engineering
SISTEMA’S EFFECTIVE STAKE:
91%
BPGC’s subsidiaries include
LLC Bashkir Grid Company
(“BGC”) (transmission grids),
LLC Bashkirenergo (distribution
grids) and LLC BPGC
Engineering (engineering).
8
https://bashes.ru
BPGC’s activities are aimed at ensuring
reliable, high-quality and affordable power
supply to consumers. In addition to its core
operating activities, the company pays
close attention to its role in driving local
economic growth, sustainable development
and cooperation.
Most of the company’s revenue is generated
by its transmission business, which
is a natural monopoly and therefore has its
prices closely regulated by the government.
Other businesses of the group include
utility hookup services, engineering
and construction of power lines
and electrical substations, as well as lease,
IT and communication services.
1 Hydro Power Plant, Thermal Power Plant.
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Key Asset Results
Corporate Governance
Social Responsibility
65
JSC
BPGC
BPGC runs a chain of holding companies that transmit
electricity between central Russia and the Urals, distribute
power to end users in Bashkortostan (a constituent region of
Russia and home of the company), and perform engineering,
construction and refurbishment works at power lines and
electrical substations.
ELECTRIC METERS
220 thsd
GRID LENGTH
>88.5 thsd km
INDUSTRY OVERVIEW FOR 2018
BUSINESS DEVELOPMENT IN 2018
DISTRIBUTION GRIDS
Power generation in Russia in 2018
increased by 1.7%, to 1,091.6 billion kWh,
while new connections grew to 4.5 GW,
with more than 400,000 new users hooked
up to power grids. Total consumption
of electrical power in Russia in the reporting
year rose 1.6%, to 1,076.1 billion kWh.1
According to a recent forecast by the Ministry
of Economic Development, by 2020 power
generation volumes in Russia will have
grown by 2.2%, and power consumption
by 2.4%. To phase out cross-subsidisation,
the government has scheduled 5% p.a.
growth of electricity rates for residential
customers and 3% p.a. growth for all other
users throughout 2018-2020.
The electric grid services market is naturally
monopolistic. All regional distribution grid
companies operate under similar market
conditions and abide by the same tariff
policy. A leader in operational efficiency
among Russia’s power grid companies,
Bashkirenergo achieves high profit margins
despite below-average prices. In 2018,
the average straight-line “common pot”
electricity rate in Bashkortostan reached
RUB 1 per kilowatt hour, up 7.5% from 2017.
The indexation of straight-line electricity
rates effective from July 2018 averaged
9.4% for all voltages, while the electrical
grid maintenance rate grew by an average
of 5.7% and the power loss coverage
rate by 19.0%. Relatively high growth
of the latest electricity rates was driven
by a number of nationwide factors: growth
of wholesale electricity prices in the past
few years, statutory adoption of cost
standards for default suppliers of electrical
power, and a 20x growth of prices charged
by PJSC FGC UES (Russia’s largest
transmission-grid company, serving about
half of the country’s energy consumption).
1 Source: AK&M Information Agency.
With a view to enhancing operating efficiency,
BPGC continued its long-term programmes:
1. energy conservation and improvement
of energy efficiency;
2. overhaul of distribution grids
in Ufa (Bashkortostan’s capital)
and implementation of Smart Grid
solutions;
3. automation of business processes
through the use of information
technology and ERP systems;
4. migration to a two-tier system
of operational and technological
management at LLC Bashkirenergo
as an optimisation move.
LOSSES ON GRIDS, %
1.3%
8.4%
1.2%
8.2%
In 2018, LLC Bashkirenergo installed
more than 50,000 meters designed
specifically for state-of-the-art automated
power control and metering systems.
As a result, the company now operates
some 220,000 meters and 286,000 metering
channels across the region. Power
losses in distribution grids decreased
from 8.36% to 8.23% year-on-year
as a result of a comprehensive programme
of technological solutions.
To improve the reliability and quality
of power supply to Ufa’s consumers, BPGC
refurbished over a hundred distribution
and transformer substations across
the city and laid 15 kilometres of cable
as part of a long-term project aimed
at comprehensive renovation of Ufa’s
distribution grids. In 2019, the company will
refurbish another 87 distribution substations,
lay another 8 kilometres of cable, and install
another 17,000 meters.
At the end of 2018, BPGC opened
a new subdivision near Ufa (“Novoufimsky
Distribution Zone”) to meet growing
demand for electrical power connections
in the suburbs around the city. A product
of a long multi-stage process, the facility
includes a 110 kV substation (“Zubovo”)
and a standalone distribution grid
with a staff of 72 people.
2017
2018
Transmission grids
Distribution grids
The new facility will improve the
reliability of power transmission,
reduce power outages, speed up
connections of new users, and provide
employment to Bashkortostan’s
people.
DEVELOPMENT STRATEGY
BPGC’s key long-term goals include:
1.
Maintaining leadership in operational
efficiency among Russian power grid assets
2.
Generating stable cash flows
for shareholders and maintaining dividends
at the current level, while maximising
shareholder value both organically
and through M&A
OPERATING RESULTS
Parameter
Power in
Power losses
New connections
Connected capacity
POWER IN INCREASE
1.6%
POWER OUT INCREASE
1.8%
2018
2017
%
Units
m kWh
m kWh
%
connections
MW
Bashkirenergo
22,512
1,854
8.2
19,321
380.2
BGC
27,327
326
1.2
1
4
Bashkirenergo
BGC
Bashkirenergo
22,152
1,853
8.4
19,547
334
26,138
333
1.3
1
2.4
1.6%
0.04%
– 0.13 p.p.
– 1.16%
13.8%
BGC
4.5%
– 2.3%
– 0.09 p.p.
0%
69.5%
FINANCIAL PERFORMANCE IN 2018
In Q4 2018 BPGC’s revenue grew
by 8.3% to RUB 19.1 billion. 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 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 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 p.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.
FINANCIAL
INDICATORS
(RUB million)
Revenue
OIBDA
Operating income
Profit attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
19,130
6,369
3,872
2,930
FY 2017
17,671
5,259
2,926
2,369
Change
8.3%
21.1%
32.3%
23.7%
FY 2018
19,569
5,741
3,273
2,492
Change
10.7%
9.2%
11.8%
5.2%
66
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
67
Hospitality assets
Cosmos Group is one of Russia’s leading hotel management
companies, providing a full range of hotel development
services from project consulting and preparing hotels for
opening to cost cutting and increasing asset capitalisation.
Cosmos Group has more than
4,000 rooms under management in
3-5 star hotels in tourist and business
centres: city business hotels and
luxury resorts in Russia, Italy,
Namibia and the Czech Republic.
COSMOS GROUP MANAGES
4 thsd rooms
in hotels of various price segments
BUSINESS MODEL
Cosmos Group provides a broad range
of services, from hotel concept development
and design and construction support
to brand selection and hotel management.
Cosmos Group specialises in managing
existing hotels, including implementation
of service standards, introduction of quality
assurance systems, recruitment, training
and regular assessment of personnel,
administrative and business operations,
adoption of security standards,
improvement of sales, income management
and centralised procurement systems.
BUSINESS DEVELOPMENT IN 2018
The main event of 2018 was the FIFA World
Cup, which attracted more than 2.7 million
tourists to 11 Russian cities. Sistema’s hotels
located in host cities showed substantial
growth of operating indicators.1
In 2018, to increase business efficiency
Cosmos Group separated its hotel ownership
and management functions: Cosmos Group
is in charge of operational management,
while Sistema Hotel Management
is responsible for ownership.
As part of its strategy for its hotel assets
Sistema will conduct a rebranding
of Russian hotels. The Group’s hotels will
start operating under the Cosmos Hotels &
More brand, with the exception of Holiday
Inn Express and Park Inn hotels, which
will continue operating under international
brands. The chain will comprise four brands:
My Cosmos for economy-class city hotels,
Cosmos for classical business hotels,
Cosmos Collection for premium hotels
and CosmosStay for serviced apartments.
ALEXANDER SHWEIN
President
ARTYOM SIRAZUTDINOV
Chairman of the Board of Directors
SISTEMA’S
EFFECTIVE STAKE:
100%
8
http://cosmosgroup.ru
In 2019, Cosmos Group aims to actively
increase its presence in the key region
(Russia) by taking new hotels under
management.
Parameter, RUB mn
2018
2017
%
HOTELS
RevPAR, incl.
Russia
hotels abroad
Occupancy rate, incl.
Russia
hotels abroad
2,415
2,019
12,640
65%
65%
60%
1,849
1,516
9,734
56%
56%
53%
Rooms
4,049
4,049
31%
33%
30%
9 p.p.
9 p.p.
8 p.p.
0%
INDUSTRY OVERVIEW FOR 20183
In 2018, seven hotels operating under
international brands were opened in Moscow
(including the airports of the Moscow
aviation hub) with total accommodation
capacity of 1,728 rooms, leading to an 8.9%
increase in the hotel room supply in Moscow.
In 2018, the supply of quality hotel
rooms grew at the same rate as in 2017.
It is expected that 19 new hotels will be
built in Moscow in 2019, including five
hotels operating under international brands,
with the total of 1,105 rooms.
The average occupancy rate of Moscow
hotels in 2018 was 75%, which is 1.8 p.p.
higher than in 2017. At the beginning of 2019,
for the first time in many years occupancy
of Moscow hotels during the New Year
holidays reached 90%,4 which is comparable
with occupancy during the FIFA World Cup
in 2018.
Hotel accommodation prices increased
by 34% year-on-year on average in all
segments, mostly due to the Football World
Cup. The fastest growth of 50.3% was
recorded at the luxury Moscow hotels.
Steady growth of demand resulted not
only in increased occupancy rates but also
enabled hotels to increase revenue per room
after the FIFA World Cup.
Following a slump in demand for hotel
services in 2014-2015, the Moscow hotel
market is now highly competitive. Hotels
mostly compete for low-budget tourist
groups. In these conditions Sistema’s
hotel assets are diversifying their services,
expanding sales channels and improving
internal business processes.
Cosmos Group’s market share
in terms of accommodation capacity
in the medium price category is more
than 5%. This is one of the key drivers
of the company’s competitiveness,
enabling it to regulate prices in accordance
with supply.
REVPAR2
RUB THSD
2018 RESULTS: NEW BRAND HOTELS
BY SCALE SEGMENT
1.3
1.8
1.5
2.1
9.7
12.6
0%
8%
0%
5%
56%
9%
14%
18%
9%
52%
21%
6%
Cosmos Hotel
Russia
Abroad
Luxury
Upper Upscale
Upscale
Upper Midscale
Midscale
Budget
2017
2018
1 Cosmos, HIEX Paveletskaya and Courtyard by Marriott
in Moscow, Park Inn Sochi City Centre, Park Inn Volgograd,
Park Inn Kazan, and Intourist Kolomenskoye in Moscow, which
is owned by a third party and managed by Cosmos Group.
2 Revenue per available room per day.
Moscow and Moscow region
Upscale
Upper Midscale
Midscale
Budget
3 Source: JLL Hotels.
4 Source: the Tourism Committee of Moscow.
56%
14%
9%
21%
Russian regions
Luxury
Upper Upscale
Upscale
Upper Midscale
Midscale
Budget
8%
5%
9%
18%
52%
6%
68
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Key Asset Results
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69
Hospitality assets
COSMOS GROUP
BUSINESS DEVELOPMENT
STRATEGY
Sistema’s development strategy
in the hospitality business envisages
growing the “asset light” business segment
(a model based on hotel management
as opposed to hotel ownership) through
expansion of the portfolio of assets under
management by adding hotels owned
by third parties. Cosmos Group’s expertise
enables the management company to win
contracts for managing both independent
and international branded hotels.
The company intends to focus primarily
on developing the segment of 3-4 star
business hotels. Hotels in this segment enjoy
the highest demand in Russia, which makes
it possible to increase the speed of business
expansion and its further capitalisation.
The main strategy for developing the 5-star
Altay Resort and Izumrudny Les recreational
hotels aims to improve their operating
results. These hotels have been rebranded
as Cosmos Collection (a premium brand
of the Cosmos Hotels and More brand line).
The overall social and economic situation
in Russia is expected to have a favourable
effect on implementation of this strategy.
2018 FINANCIAL PERFORMANCE
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 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.
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 2017.
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%.
REVENUE
22.8%
5,301 RUB mn
SHARE OF HOTELS 2.1 p.p.
OUTSIDE RUSSIA
20.7%
OIBDA
54.7%
1,314 RUB mn
INCREASE IN AVERAGE 69.8%
OCCUPANCY RATE
AT COSMOS HOTEL
11.1 p.p.
FINANCIAL
INDICATORS
(RUB million)
Revenue
OIBDA
Operating profit
Loss attributable to Sistema
Excluding impact of
new IFRS standards
FY 2018
FY 2017
Change
FY 2018
Change
5,301
1,314
555
(532)
4,318
849
198
(517)
22.8%
54.7%
5,301
1,272
22.8%
49.7%
180.3%
530
167.7%
—
(524)
—
JSC Binnopharm ( “Binnopharm”)
is one of the largest Russian full-cycle
biopharmaceutical complexes with an in-house
R&D division.
BUSINESS MODEL
INDUSTRY OVERVIEW FOR 2018
Binnopharm is a full-cycle company
from development and registration
of drugs and production of finished products
to marketing and promotion of drugs
and sales to distributors and pharmacy chains.
The company is focused on expansion
in the commercial segment of the market,
while maintaining limited sales of hospital
products. An in-house sales service has
been established to promote commercial
prescription (Rx) and over-the-counter (OTC)
drugs.
The target segments of Binnopharm’s portfolio
are pulmonology, neurology, and antiviral
and immunomodulating drugs. Modern
production facilities allow the company
to produce a wide range of dosage forms,
including tablets, capsules, ampoules,
suppositories, syringes and solutions.
The Russian pharmaceuticals market
in 2018 grew by 6.1% to RUB 1,329
billion.2 The share of the commercial
segment – the core of Binnopharm’s
business – increased to 73%. At the same
time, the commercial segment’s CAGR
(8%) is faster than the market as a whole
(7%). The growth forecast for 2019 is 1.8%
for the pharmaceutical market and 3.5%
for the commercial segment.
The continuing trend in the market
is growing demand for cheaper generic
drugs3 preferred by consumers over
more expensive original drugs. The share
of generics in total commercial market
volumes increased by 1 p.p. in 2018
compared with 2017 and amounted to 62%
in monetary terms and 84% in physical
terms4.
In money terms, imported drugs continue
to lose market share, and account for less
than 70% of the total.
1
ANDREY MLADENTSEV
CEO
DMITRY ZUBOV
Chairman of the Board of Directors
SISTEMA’S EFFECTIVE STAKE:
RUSSIAN PHARMACEUTICALS MARKET DEVELOPMENT, 6.1%
RUB BILLION
74%
1,022
1,123
1,207
1,252
1,329
1,354
715
307
786
337
855
352
907
345
964
365
998
356
8
https://binnopharm.ru/
Commercial segment
Hospitals segment
2014
2015
2016
2017
2018
2019П
1 Since 5 February 2019. As of 31 December 2018 – Alexey Chupin.
2 According to the analytical agency AlphaRM.
3 Generic drugs are drugs that are equivalent to brand-name products in composition and effect. Generic drugs may differ
from brand-name products in presentation and trade name, and they generally have a lower price.
4 According to the analytical agency DSM Group.
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
71
JSC
BINNOPHARM
The company produces biotechnological
drugs, including a hepatitis B vaccine, a line
of pulmonology and neurology drugs, infusion
solutions, and anti-viral and immunomodulating
drugs.
BINNOPHARM MANAGES
2 modern pharmaceuticals facilities in Moscow region
Legislative initiatives aim to further clear
the market of poor-quality and illegal
products and to simplify and speed up
procedures for registering new drugs.
For example, the Ministry of Education
and Science has developed a bill
allowing the federal government to make
decisions on issuing compulsory licences
for the release of generics while patents
on original drugs are still valid. When the bill
is passed, it will be easier for Russian
companies to bring generics to the market,
while the level of localisation of foreign
drugs may decrease.
BUSINESS DEVELOPMENT IN 2018
In 2018, Binnopharm continued
to implement the strategy of strengthening
its positions in the commercial segment
and diversifying its proprietary drug
portfolio. The company set its own record
by completing the registration of 14 new
drugs, including Hydroxyethyl Starch,
Moxifloxacin, Levofloxacin, Inspirax in two
dosage forms and a combination of Lidocaine
and Tolperisone. A total of over 30 drugs
are in development and are expected to be
released in 2019-2021, further strengthening
the company’s market presence.
The company continued to develop direct
partnerships with pharmacy chains, as this
promotion channel has the highest efficiency.
Several low-margin projects in commercial
distribution of third-party products were
terminated.
The merger with OBL Pharm under
an agreement reached at the end of 2018 will
be a logical step in implementing the strategy
to increase capacity utilisation and business
profitability.
NEW DRUGS
14 items
UNDER DEVELOPMENT
>30 items
BINNOPHARM’S REVENUE STRUCTURE IN 2018
7.8%
2.8%
34.0%
BY PRODUCTS
BY SEGMENT
89.4%
66.0%
Own products
Commercial distribution
Other
Commercial segment
Hospital segment
BUSINESS DEVELOPMENT
STRATEGY
OBL Pharm acquisition
OBL Pharm and Binnopharm
development strategy
At the end of 2018, Sistema announced
a deal that significantly strengthens its
position in the Russian pharmaceutical
market with the acquisition of a stake
in JSC Obolenskoye Pharmaceutical
Enterprise (“OBL Pharm”), one of the leading
Russian pharmaceutical companies.
The transaction aims to create a leading
pharmaceutical group and a top-10 player
in the Russian market by merging OBL Pharm
and Binnopharm. The combined diversified
product portfolio currently includes about
200 drugs. Leaders in their segments are
Venarus (venotonic drugs), Maxilac (probiotic
supplements) and Urdoxa (hepatoprotective
drugs). The combined company’s production
facilities will include four pharmaceutical
plants in Moscow and the Moscow region.
The establishment of the combined company
is expected to be completed in 2019.
2018 FINANCIAL PERFORMANCE
Revenue in 2018 declined by 10.2% year-on-
year to RUB 2.1 billion, after Binnopharm
ceased commercial distribution of some
low-margin third-party products. Sales
of Binnopharm’s own products grew
by 18.5% in 2018. Binnopharm is continuing
to pursue its strategy to reduce the share
of the hospital segment in 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 December 2018, Sistema, in partnership
with VTB Bank and the management of OBL
Pharm, acquired a stake in the leading
pharmaceuticals company, OBL Pharm
though Ristango Holding Limited.
JOINT INTEREST IN OBL PHARM
95.14%
SISTEMA INVESTMENT
1.83 RUB bn
Sistema and VTB signed an agreement
whereby Sistema will acquire VTB’s stake
in Ristango Holding Limited within three
years of the initial transaction.
Complementary business models, assets:
PHARMA FACILITIES IN MOSCOW
AND MOSCOW REGION
4 facilities
PRODUCT PORTFOLIOS
~200 items
Effective utilisation of Binnopharm’s
capacities for production of OBL Pharm
drugs.
Substantial synergies in sales and
marketing, combined R&D competencies,
cost saving.
FINANCIAL
INDICATORS
(RUB million)
Revenue
OIBDA
Operating income
Profit/(loss) attributable to Sistema
FY 2018
2,122
508
342
(10)
FY 2017
2,363
482
323
14
Change
(10.2%)
5.3%
5.8%
—
OIBDA
5.3%
OPERATING INCOME 5.8%
508 RUB million
342 RUB million
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Corporate Governance
Social Responsibility
73
Other assets
LLC Concept Group is one of the leaders
in the Russian market for children’s
and women’s clothes and underwear.
Other assets
LLC Kronstadt Group is a Russian high-tech company that
engineers and manufactures knowledge-intensive products
and solutions for the production, deployment and safe use
of sophisticated air-, sea-, and land-based systems.
ELENA BOGOMOLOVA
CEO
The company has successfully developed
retail chains under the Acoola and Concept
Club brands with an aggregate of over 380
stores, many of which are franchised.
Concept Group’s portfolio includes such
brands as Acoola (clothes for children aged
0-14), Concept Club (clothes for women, men
and children, home textiles1) and Infinity
Lingerie (underwear). Concept Group’s
business is based on a multi-brand
and multi-channel model that allows
the company to diversify its revenue.
A significant portion of revenues is generated
by the nationwide retail chain.
The company operates in Russia (in more
than 130 cities), Belarus, Kazakhstan,
Armenia, Azerbaijan and India both through
its own retail chain and in partnership
with franchise and wholesale partners.
In 2018, the company signed
an agreement with key lenders
on restructuring the Group’s loan
portfolio. The shareholding structure
improved after Sberbank became one
of its shareholders. In 2018, the company
appointed Elena Bogomolova, who has
strong expertise in the clothing retail
segment, as its new CEO.
The key objectives of Concept Group
for 2019 include active development
of online sales and enhancement
of the company’s operational efficiency.
Another important goal is development
of a new strategy that will enable
Concept Group to become one of the top
five market players by opening new-
format retail outlets, strengthening
its design expertise and changing
the marketing policy for its brands.
SERGEY BOGATIKOV
CEO
SISTEMA’S EFFECTIVE STAKE:
SISTEMA’S EFFECTIVE STAKE:
43%
8
https://conceptgroup.ru
1 All lines except for women’s clothing were introduced in 2018.
96%
8
http://kronshtadt.ru
The Group’s substantial intellectual
and engineering potential, its portfolio of key
technologies and competences and state-of-
the-art manufacturing resources enable it
to create high-tech products and solutions
that are in demand in Russia and are also
able to successfully compete on international
markets.
In 2018, Kronstadt Group continued to fulfil
a government contract for development
of an unmanned aerial vehicle (UAV) –
the Orion project. The company also started
developing a new business segment:
provision of commercial services using
drones. It also conducted active operations
in the maritime solutions segment
and provision of modern equipment
for museums.
In 2018, Kronstadt created and updated
electronic navigation maps for 10,000
kilometres of internal water routes in Russia,
signed three contracts with the government
for supplying state-of-the-art hydrographic
on-board equipment for Rosmorrechflot
(the Russian Federal Agency for Maritime
and River Transport), supplied seven
sets of equipment for correcting stations
ordered by Rosmorrechflot, and obtained
a patent for the development of a unique
automated hydrographic trawling system.
Moreover, the company carried out work
on implementation of hardware and software
designed to generate and update digital
terrain data, and supplied four sets
of interactive shooting ranges.
Kronstadt Group continued
making a substantial contribution
to the development of culture and provision
of cutting-edge equipment to museums.
In 2018, the company supplied an interactive
5D unit for the Memorial Museum of Space
(Moscow), equipment for the Space
and Aviation Pavilion at VDNKh (Moscow),
and started providing high-tech equipment
for the largest car museum in Russia
(Yekaterinburg).
Kronstadt continued pursuing its CSR
policy by participating in national Donor’s
Days, enhancing cooperation with cancer
charitable foundations, and organising
volunteer work.
The priority area of the company’s business
is development of high-tech services using
UAV systems as a platform for additional
monetisation of existing technological
competences.
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Social Responsibility
75
Sistema’s investment funds
SISTEMA
VENTURE
CAPITAL
Sistema continues to develop a range of funds specialising in venture and
PE investments. Sistema’s funds and investment companies offer investors
exposure to a unique portfolio of hi-tech assets, as well as assets in real estate,
manufacturing and healthcare.
NEW INVESTMENTS MADE IN 2018
Sistema Venture Capital (Sistema_VС) focuses
on investments in tech companies.
SISTEMA’S STAKE
80%
TARGET SIZE
10 RUB billion
INVESTMENT TARGETS
AND FOCUS
Sistema VC invests in fast-growing Internet
projects with potential to become industry
leaders, as well as in early-stage deep tech
projects.
Priority investment areas include:
¡ Projects leveraging AI and machine
YEAR ESTABLISHED
learning technologies;
¡ Computer vision;
¡ Next-generation infrastructure solutions
(SDN, NFV);
¡ Software as a Service (SaaS), Platform
as a Service (PaaS) and marketplace
solutions, including advertising
technologies, fintech and e-commerce.
In 2018, the fund continued to pursue its
dynamic strategy by investing in three new
companies:
Z ТraceAir (Russia/USA)
Z Connecterra (Netherlands)
Z SQream (Israel)
2016
GEOGRAPHY
Russia, US,
Europe, Israel
INDUSTRY FOCUS
Growth-stage Internet projects
and technology
LIFE
No fixed term
TARGET RETURNS
25–30% (in RUB)
Pentech and US fund Propel Venture
Partners (in Datasine), as well as Alibaba
Group (in SQream).
Some of the transactions closed
in the reporting year (YouDo, Gosu.ai,
TraceAir) were among the top venture capital
deals of 2018 in a ranking published by Inc.
Russia.
Sistema_VC also organised a number
of events involving both large corporations
and startups from the fund’s own portfolio,
such as a big data conference dubbed Big
Data, Meet Big Brother!, the international
computer vision and machine learning
summit Machines Can See (co-hosted
with VisionLabs), and #public_tech, a series
of open discussions of modern technology’s
role in various industries.
TraceAir (USA) is a startup that helps
construction companies reduce errors
through automation. It uses data collected
with drones and other sensors (including
GPS receivers) to create accurate cloud
copies of actual construction sites.
The platform greatly speeds up design
work and reduces contracting costs.
The product has already attracted some
large development companies in the USA,
such as ENGEO (geotechnical engineering)
and Independent Construction (construction),
which are now co-investors in TraceAir along
with some business angels.
SQReam (Israel) is a developer of a leading
GPU-accelerated database for massive
data. The company’s core product
is a data warehouse that relies on machine
learning algorithms and makes it possible
to process terabytes of data 100 times
faster and 10 times cheaper than CPU-
based solutions. The product is already
used by some major companies in telecom,
advertising, media, and other industries
(Orange, Cellcom, Amdocs, PubMatic).
The company received the prestigious Big
Data Excellence Award 2018 for providing
the technology for a large-scale cancer
research programme.
Connecterra (Netherlands), founded
by the former Microsoft executive Yasir
Khokhar, specialises in AI solutions
for the food industry and agriculture.
The technology uses artificial intelligence
to increase the productivity of dairy farms,
and relies on wearable tracking devices
that monitor cow health. The company’s
core product is the Connecterra IDA
platform, which analyses and predicts
behavioural patterns based on data collected
from neck sensors. IDA informs farmers
about behavioural changes, provides
early diagnosis, gives recommendations
about optimising fertility cycles
of cattle, etc. The solution is already used
by Danone and ZLTO (a large farm chain
in the Netherlands).
KEY INVESTMENTS MADE
IN 2016-2017
It also supported new financing rounds
by existing portfolio companies including
Ozon, VisionLabs, YouDo, Web Technologies,
MEL Science, DataSine and GOSU, bringing
in new partners including French fund
Ventech (a co-investor in GOSU), UK fund
AS AT THE END OF 2018,
THE FUND WAS
85% INVESTED
VisionLabs,
is a developer
of computer vision
and machine learning
solutions;
YouDo, is an online
marketplace for personal
services;
MEL Science,
is an international
company offering
scientific and educational
products based on VR/
AR technologies;
Luden.io, is a developer
of educational games;
Segmento, is a platform
that uses machine
learning technologies
for target advertising.
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Key Asset Results
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Social Responsibility
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Sistema’s investment funds
SISTEMA
ASIA
FUND
Sistema Asia Fund is a venture capital fund, and an active
and recognisable player in the Indian VC market that has
become integrated into the country’s entrepreneurial
ecosystem.
NEW INVESTMENTS MADE IN 2018
The fund’s goal is to efficiently place investors’ money
in promising projects in the fast-growing Indian tech market.
SISTEMA’S STAKE
100%
TARGET SIZE
USD 120 million
with potential increase to USD 150 million
YEAR ESTABLISHED
2015
GEOGRAPHY
India, Southeast Asia
INVESTMENT TARGETS
AND INVESTMENT FOCUS
Sistema Asia Fund invests in tech startups
in India (predominantly) and Southeast Asia
(in exceptional cases) that meet the following
criteria:
1. a proven business model and/or loyal
audience;
The new Sistema Business Scalerator,
a product of cooperation between Sistema
Asia Fund and MTS India, is a business scale-
up platform solution designed for organising
sales for retail and B2B companies
and streamlining operations in marketing,
brand management and customer service.
In March 2018, the platform joined forces
with LendingKart Finance, a non-bank
finance arm of LendingKart.
2. solutions specific for the Indian market;
3. startup founders heavily involved in
FIRST EXIT
business management;
4. co-investors..
In 2018, Sistema Asia Fund team reviewed
over 150 projects, thoroughly studied
over 70 companies, made three new
successful investments, and participated
in follow-on investments in portfolio
companies. The investment rounds were
done at valuations exceeding the pre-money
valuation, which testifies to the strong quality
of the fund’s investments.
In March 2019, SAF completed its first
monetisation by selling a stake in Qwikcilver,
an Indian end-to-end service provider
of gift card and prepaid solutions. Sistema
Asia Fund invested in Qwikcilver in 2016
and exited three years after with solid
returns on the invested capital. With the first
exit in the bag, Sistema Asia Fund remains
an investor in nine businesses.
INDUSTRY FOCUS
Consumer tech (e-commerce, healthcare,
transport, media, finance and education)
and enterprise tech (IoT, VR/AR, platform
solutions, big data, AI and machine learning)
LendingKart, one of the fund’s earliest
projects, maintains a presence in the Fintech
100 – a collaboration between fintech
investment firm H2 Ventures and KPMG
Fintech – for a third consecutive year,
and is the only Indian lender in the list.
LIFE
8 years mandatory
+ 2 years optional,
with an investment stage of 4 years
TARGET RETURNS
3х cash-on-cash
Faasos — is India’s biggest “food on demand”
company, using cloud kitchen technology.
It is also the world’s biggest company
operating in this format. It currently
manages five brands and aims to further
diversify its products.
Kissht — is an online consumer lending
platform based on a proprietary algorithm
for assessing creditworthiness with AI
elements.
HealtifyMe is India’s biggest digital fitness
platform (4 milion users and over 200 sports
instructors and nutritionists) that allows
users to monitor calorie consumption,
set personal fitness goals and monitor
their progress. What makes it really
effective is access to online consultations
with nutritionists and instructors. At the end
of 2017, the company launched a new
service, Ria, which is the world’s first virtual
AI-based nutritionist. The company’s biggest
corporate customers include P&G, Unilever,
Accenture, Cognizant, Shell, and Philips.
INVESTMENTS MADE IN 2016-2017
Wooplr —
is a web platform
for online
communication
and sales of women’s
clothes
Lendingkart —
is a fintech lender
that has created its
very own data-based
lending algorithm
to provide loans
to SMEs
Licious —
is a brand operating
in the meat-
selling business
and leveraging
a full value chain,
from sourcing
suppliers to processing
to delivering
to customers
Mobikon —
is a marketing
platform
for restaurants
to attract customers
Netmeds.com —
is India’s biggest
online pharmacy,
present all over
the country
Seclore —
is a developer
of an EDRM
(Enterprise Digital
Rights Management)
system that enables
corporations
to control the usage
of electronic
files both within
and outside
the company
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Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
79
Investment platform
SCP/
SISTEMA
FINANCE
Sistema Finance S.A. (SF) is an investment platform focusing
on Europe and the United States.
Sistema Capital Partners (SCP) is an arm of SF that invests Russian institutional
capital in developed real estate markets in Europe and the United States.
LLC
SISTEMA
CAPITAL MC
Sistema Capital is a leading Russian asset manager, with more than 17 years
of experience in asset management on global financial markets for individual
and corporate customers.
In 2018 SCP and SF were restructured to improve the efficiency
of both businesses. Starting in 2019, the funds operate under
a single brand, The SCP Group. SCP’s strategic goal is to build
an integrated and diversified investment company focusing
on scalable investments in capital-intensive assets in mature
markets.
INVESTMENT TARGETS
AND FOCUS
29 assets
¡ Industries that benefit from restructuring
ACQUIRED BY BVK IN GERMANY
or rapid growth
SISTEMA’S STAKE
100%
GEOGRAPHY
Mature economies
INDUSTRY FOCUS
¡ Assets that acutely need capital
ASSET AREA
Residential, retail and hotel
rental properties, etc.
IRR
>15%
>120 thsd sq m
IRR
28–36% in EUR
but are often beyond the scope of
interest of institutional investors due
to the relatively investment required
(typical transaction amount from
EUR 10 million to EUR 100 million)
Since 2015, SCP has created a strong
track record both in Europe and in Russia.
It completed a full round of deals involving
German properties — Highstreet IV and HS
Prime I, comprising a total of 29 assets
in various towns in Germany with a total
area of 120,000 sq m — which were sold
to the Bayerische Versorgungskammer
(BVK), Germany’s largest pension fund,
bringing an IRR of 28-36% in EUR.
At the same time, Sistema Capital remains
an active player in the personal wealth
management market. In cooperation
with MTS, the company has already launched
MTS Investments, a “mass-market” app,
with another collaborative B2C project —
integration of an option to purchase
investment fund units in the widely popular
MTS Money Wallet app – also underway.
In 2019, Sistema Capital expects to see
growth in its assets under management,
driven by a general trend for investors
to favour managed investments over bank
deposits with ever-decreasing interest rates.
The strategic goal of Sistema Capital
is to develop as a leading asset management
company oriented towards private
and institutional investors (retail online,
HNWI, non-government pension funds) while
continuing as a manager of Sistema Group’s
liquidity and the vehicle for investment
of Sistema’s funds in marketable securities
with varied risk levels.
The company offers investment products
in both Russian and foreign markets.
These include bonds of Russian
and foreign issuers in various segments
and geographies, shares of companies
from various countries, and derivatives.
As of the end of 2018, the company’s
assets under management (AUM) stood
at RUB 68.3 billion, 1.3 times higher than
in 2017 and an increase of 6.4 times
on 2014. The company ranks ninth in Russia
by the net asset value (NAV) of its mutual
investment funds (MIFs), with an aggregate
NAV of RUB 11 billion as of the end of 2018.
Sistema Capital’s MIFs were among
the highest yielding in the Investfunds 2018
ranking of open-end mutual bond funds
with NAVs of over RUB 50 million.
In 2018, ratings agency RAEX (Expert RA)
confirmed Sistema Capital’s rating at A+,
with a Stable outlook. The agency praised
the company’s high-quality IT system,
strong investment process, reliability
of counterparties and sound quality of AUM.
The company acts as a trust manager
for three non-government pension funds,
including Sberbank’s Pension Fund.
6.4Х
AUM,1
RUB BN
68.3
10.7
22.3
23.7
51.7
68.3
2014
2015
2016
2017
2018
SISTEMA’S EFFECTIVE STAKE:
70%
RATED
А+
«Very high level of reliability»2
Top-10
RUSSIA’S LARGEST
ASSET MANAGERS
YIELDS OF MUTUAL INVESTMENT FUNDS
SC Rezervny. Foreign currencies (Eurobonds)
SC Mobile. Bonds. Foreign currencies (Eurobonds)
SC Rezervny (bonds)
SC Mobile. Bonds (bonds)
SC Mobile. Equity (equity shares)
1 AUM means Assets Under Management.
2 By the RAEX (Expert RA) rating agency.
Currency
Yield/year, in specified currency
USD
USD
RUB
RUB
RUB
2015
+20.4%
n/a
+17.3%
n/a
+56.3%
2016
+7.2%
n/a
+12.1%
n/a
+23.4%
2017
+5.2%
+5.8%
+14.3%
+15.1%
+4.2%
2018
+2.0%
+0.8%
+7.4%
+7.5%
+13.9%
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
81
Online retailer
Ozon is a leading Russian multi-category
online sales platform, ranked fourth by revenue
in the E-Commerce Index Top 100 for 2018 and among
the top five most valuable Russian Internet companies
according to Forbes.
RECORD NUMBER
OF PROCESSED ORDERS
138 thsd per day
SISTEMA’S DIRECT STAKE:1
21.9%
In March 2019, Sistema acquired 18.7%
of equity shares in Ozon Holdings Limited
from PJSC MTS for RUB 7.9 billion, bringing
Sistema’s total stake in Ozon’s equity
to 19.3%. In April 2019, Sistema further
increased its stake in Ozon to 21.9% following
the acquisition of shares from a number
of Ozon minority shareholders.
In addition, Sistema_VC, a venture capital
fund that is part of Sistema Group and invests
in growth-stage tech companies, also holds
16.3% in Ozon.
4 player
1.5 m
IN THE RUSSIAN E-COMMERCE
MARKET BY SALES TURNOVER
UNIQUE CUSTOMERS
DAILY
1.6 m
15.5 m orders
SKUS OFFERED,
ACROSS 24 CATEGORIES
IN 2018
(29 ORDERS PER MINUTE)
1 st
40%
E-COMMERCE BRAND
BY AWARENESS
OF RUSSIA’S POPULATION
HAVE ACCESS TO NEXT-DAY DELIVERY
73%
OZON.RU GMV2 GROWTH
IN 2018 Y-O-Y
115%
GROWTH OF WAREHOUSE AREAS
EXPECTED IN 2019
(new fulfilment centre in the Moscow region
and in Tver)
8
https://ozon.ru
E-commerce is among Russia’s most
promising markets. Even though online
orders in Russia have more than doubled
in the last 5 years3, the market has yet
to reach its full potential. The world’s seventh
largest country by number of Internet users,
Russia still lags far behind leading economies
in terms of e-commerce penetration, at just
5% of total retail revenue in Russia, compared
to 10-15% in mature economies and more
than 20% in China and South Korea. By 2023,
e-commerce penetration in Russia is expected
to reach 10%, with the market growing
from RUB 1.1tn in 2018 to RUB 3.5tn, which
corresponds to a CAGR of 24% p.a4.
Russia’s e-commerce market is heavily
fragmented, there is clear potential
for achieving leadership through
consolidation, which Sistema believes Ozon
has every chance of doing.
In 2018, the company grew at a faster pace
than at any point during the past 10 years. Its
GMV4 growth in the reporting year reached
73% YoY, with GMV totalling 42.5 billion
roubles including VAT. In some categories,
such as clothing and groceries, the growth
rate exceeded 100%.
As of the end of 2018, the company operated
eight fulfilment centres with a total floor area
of around 100,000 sq m, enabling next-day
deliveries to 40% of the Russia’s population.
In December 2018, Ozon hit an all-time
high by number of processed orders
(138,000 per day).
8 fulfilment centres
In 2019, the company plans to stick to its
aggressive strategy, aiming to conquer
the wider market. Immediate initiatives
include large-scale investments
in logistics infrastructure, the expansion
of a distribution centre in Tver,
and the launch of a new fulfilment centre
near Moscow with a total floorspace of over
100,000 sq m.
NEW FULFILLMENT CENTRE AREA
>100 thsd sq m
1 Since April of 2019.
2 Gross Merchandise Value, or total revenue (including marketplace) net of loyalty programme effects.
3 Source: Russian Association for Electronic Communications (RAEC)
4 Source: Morgan Stanley
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About the Company
Financial Performance
Key Asset Results
Corporate Governance
Social Responsibility
83
CORPORATE
GOVERNANCE
SYSTEM
SISTEMA’S CORPORATE GOVERNANCE
PRINCIPLES
SISTEMA’S CORPORATE GOVERNANCE
STRUCTURE
GENERAL MEETING OF SHAREHOLDERS
BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
OF DIRECTORS
PRESIDENT
MANAGEMENT BOARD
COMMITTEES REPORTING
TO THE PRESIDENT AND
THE MANAGEMENT BOARD
SPECIFIC CHARACTERISTICS OF RISK
MANAGEMENT, INTERNAL CONTROL
AND INTERNAL AUDIT SYSTEMS
DEVELOPMENT OF THE CORPORATE
GOVERNANCE SYSTEM IN 2018
REMUNERATION POLICY
RISKS
84
85
86
88
92
94
95
96
98
100
102
104
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Social Responsibility
85
Corporate
Governance System
Sistema believes that high-quality corporate
governance and information transparency
are important elements of the Corporation’s
strategy as an investment company.
Sistema aims to meet best international standards
of corporate governance and transparency, and improve
its corporate governance practices on an ongoing basis
through timely implementation of required changes
and high efficiency of managerial decision-making.
SISTEMA’S CORPORATE GOVERNANCE PRINCIPLES
CLEAR AND EFFECTIVE
PROCEDURES
for taking investment decisions
A DIVIDEND POLICY
that takes due account of both
the reasonable expectations of investors
and Sistema’s financial resources
SPECIAL FOCUS
of the Board of Directors on related-party
transactions and potential conflicts of interest
SISTEMA’S CORPORATE GOVERNANCE STRUCTURE
AS OF 31 DECEMBER 2018
Sistema’s corporate governance bodies:
¡ General Meeting of shareholders;
¡ Board of Directors;
¡ President;
¡ Management Board.
GENERAL MEETING
OF SHAREHOLDERS
Corporate Secretary
BOARD OF DIRECTORS
Committees
of the Board of Directors
PRESIDENT,
CHAIRMAN
OF THE MANAGEMENT
BOARD
Internal Control
and Audit Department
MANAGEMENT BOARD
PROFESSIONALISM
of the Board of Directors and its active
involvement in strategic planning, management
and oversight of business processes
REASONABLE TRANSPARENCY
of management processes for investors
and partners
Sistema is guided by these principles
in all of its activities, including strategic
and financial management, HR and social
policy, preparation of financial statements,
control and audit, and risk management.
These principles form the foundation
for strengthening the Corporation’s
investment case.
In its corporate governance practices
Sistema abides by applicable legislation,
the Listing Rules of Moscow Exchange, the
recommendations of the Russian Corporate
Governance Code1 and the guidelines set out
in the UK Corporate Governance Code2 3.
In accordance with Russian legislation and
best international practice, the Corporation’s
Charter and internal regulations define
its corporate governance principles
and procedures, as well as the composition,
procedures and powers of its governance
and control bodies.
1 The text of the Corporate Governance Code recommended by the letter of the Bank of Russia No 06-52/2463 dated 10 April 2014
is available at: http://www.cbr.ru/Queries/XsltBlock/File/48285?fileId=-1&scope=1518 (in Russian).
2 The conformity of Sistema’s corporate governance practices with the standards set out in the Corporate Governance Code of
Russia and the UK Corporate Governance Code is analysed in Annexes 5 and 6 to this report. If Sistema’s corporate governance
practices diverge from the standards recommended in the above documents, the Corporation provides an explanation of how it
ensures that the balance of interests envisaged in applicable corporate governance standards is observed.
3 The text of the UK Corporate Governance Code is available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-
d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf.
The Corporate Governance and Ethics
Code of Sistema sets out the additional
commitments of the Corporation, its top
management and employees in terms
of social responsibility, transparency
and ethical business principles.
Managing Partner
Managing Partner
Managing Partner
Finance and investment
Department
External Relations
Department
Corporate Governance and legal
Department
Security
Department
Strategy
Department
GR Department
Managing Partner
HR Department
Managing Partner
Managing Partner
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Each shareholder is entitled to take part
in General Meetings of shareholders
and to vote on agenda items either in person
or through a representative (if the General
Meeting is held as an in-person meeting
of shareholders).
Shareholders may complete ballot
papers and send them to Sistema
ahead of the General Meeting. Sistema’s
shareholders may also use
the e-voting system available on the website
of the Corporation’s registrar, JSC Reestr.
To use this service, shareholders should
apply for access to a personal shareholder
account on the website of JSC Reyestr.
If a shareholder has a personal account
on the e-government portal, they may get
access to the service without applying
to the registrar.
8
More detailed information on the procedure
for connecting to the e-voting service
is available on the website
of the Corporation’s registrar http://www.
aoreestr.ru/shareholders/e-voting.
Holders of Sistema’s global depositary
receipts (GDRs) may vote on General
Meeting agenda items by a proxy vote
in line with the established procedure via
a depositary bank servicing Sistema’s GDR
programme. In 2018, Sistema’s depositary
bank was Citibank, N.A.
8
For more information
on the depositary bank and voting
procedures please visit the bank’s website
www.citiadr.idmanagedsolutions.com.
GENERAL MEETING
OF SHAREHOLDERS
OBSERVANCE OF SHAREHOLDERS’
RIGHTS
The General Meeting of shareholders
is the supreme governing body
of the Corporation. The activities
and powers of the General Meeting
of shareholders are governed
by Russian legislation, the provisions
of Sistema’s Charter and the Terms
of Reference of the General Meeting
of shareholders. The Corporation
seeks to create the most favourable
conditions for shareholders
to participate in the General Meeting.
8
All materials relating to the General
Meeting’s agenda items are published
on the Corporation’s website in Russian
and in English (www.sistema.ru
and www.sistema.com, respectively)
Proposing agenda items
for the General Meeting
of shareholders and nominating
candidates to the Corporation’s
governance bodies
Shareholders who own at least 2%
of the Corporation’s voting shares
are entitled to propose items
for the agenda of the Annual General
Meeting of shareholders (AGM) and nominate
candidates to the Corporation’s governance
and control bodies. Such proposals should
be submitted to the Corporation no later than
100 days after the end of the reporting year,
in accordance with the Terms of Reference
of the General Meeting of shareholders
and other internal regulations
of the Corporation.1 Candidates nominated
by shareholders to the governance
and control bodies of the Corporation are
provisionally reviewed by the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors.
Participation in General Meetings
of shareholders and voting
on agenda items
Sistema aims to ensure maximum protection
of the right of shareholders to take part
in the governance of the Corporation
by participating in the General Meetings
of shareholders, voting on agenda
items and receiving income in the form
of dividends.
To ensure shareholders have the right
to take part in the General Meeting, all
materials relating to the General
Meeting’s agenda items are published
on the Corporation’s website in Russian
and in English (www.sistema.ru and www.
sistema.com, respectively) at least 30 days
before the date of the meeting. The notice
of the General Meeting of shareholders,
ballots and all other materials are also
sent by mail to shareholders whose rights
to the shares of the Corporation are recorded
in the shareholder register, and to nominee
shareholders in electronic form.
After the end of the reporting period,
the Board of Directors, taking into
account the need to maintain a balance
between reducing debt, continuing
investment activities and ensuring returns
for shareholders, recommended that
the General Meeting of shareholders approve
dividends for 2018 in the amount of RUB 0.11
per share.
To maintain a balance between
the rights and interests of all shareholders
and the Corporation’s ability to pay
dividends, the Board of Directors, when
determining the amount of dividends,
will take into account the acceptable rate
of debt reduction and the proportionality
of dividends to the Corporation’s current
cash flows. After achieving the goal
of reducing the debt burden, the Board
of Directors plans to return to consideration
of dividend payments as a means
of strengthening Sistema’s equity investment
case.
Shareholders’ access
to the Corporation’s documentation
An important guarantee of the right
of shareholders to participate in managing
the company is the right to access
documents that the Corporation is obliged
to provide to shareholders in accordance
with article 91 of the Federal Law on Joint-
Stock Companies. To exercise this right,
shareholders should send a written request
for access to the relevant documents
to Sistema’s Corporate Secretary. After
the time for providing the documents
is agreed upon, the requested documents
will be provided to the shareholder.
When shareholders are granted access
to confidential documents, they sign
a written non-disclosure obligation,
thereby guaranteeing the rights
of all the Corporation’s shareholders are
protected. If shareholders require any
copies of documents, the shareholders
bear the costs incurred by the Corporation
(RUB 10 per page).
Votes of GDR holders about whom
information has been disclosed
to the depositary are collected
by the depositary bank via clearing systems
and are included in the general ballot along
with all votes cast for and against proposed
draft resolutions, as well as abstentions.
The results of voting on agenda items
of General Meetings of shareholders held
as in-person meetings are announced before
the close of the meeting. After the minutes
of the meeting are drafted, shareholders
may also view the voting results
on the Corporation’s website.
Dividend policy
The Corporation announces the amount
of dividends recommended by the Board
of Directors and the record date in advance.
Shareholders are thus able to take informed
decisions with respect to disposing of their
shares.
In determining the recommended
amount of dividends for 2017,
the Board of Directors took due account
of the priority of the strategic goal
of reducing the Corporation’s debt,
and recommended that the General Meeting
of shareholders approve dividends totalling
RUB 1,061,500,000, or RUB 0.11 per share,
thus supporting the Corporation’s deviation
from the current dividend policy2.
INFORMATION ABOUT GENERAL MEETINGS OF SHAREHOLDERS IN 2018
ANNUAL GENERAL MEETING OF SHAREHOLDERS
Date and venue
Form of the meeting
30 June 2018, Moscow, 13/1 Mokhovaya St
Meeting (in-person)
Items reviewed and decisions taken
¡ Annual report and financial statements for 2017 were approved;
¡ Dividend for 2017 of RUB 1,061,500,000, or RUB 0.11 per ordinary share (RUB 2.2 per GDR),
was approved;
¡ The Board of Directors and the Audit Review Commission were elected;
¡ Auditors were appointed for RAS and IFRS audits for 2018.
Attended
Shareholders holding a combined 78.5% of votes
Date and reference number of the minutes
4 July 2018, No 1-18
1 If an Extraordinary General Meeting of shareholders is conducted and its agenda contains an item on election of the Board of Directors, shareholders who own a sufficient number of shares are
entitled to nominate candidates to the Board of Directors. Proposals to this effect must be received by the Company no later than 30 days before the date of such a meeting.
2 The current version of the Dividend Policy was adopted in April 2017.
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BOARD OF DIRECTORS
The Board of Directors
is a collective governance body
in charge of oversight and strategic
management of the Corporation.
Under Sistema’s Charter the responsibilities
of the Board of Directors include:
¡ Supervising the operations
of the Corporation in general;
¡ Formulating strategic and financial
development plans;
¡ Determining investment principles
and criteria;
¡ Assessing management’s performance;
¡ Defining corporate governance
principles;
¡ Approving transactions and strategic
projects in accordance with applicable
legislation and the Corporation’s internal
regulations.
THE COMPOSITION OF THE BOARD
The Board of Directors effective
as of 31 December 2018 was elected
at the AGM held on 30 June 2018.
Independent directors account for 45%
of the Board of Directors.
9%
45.5%
Composition of the Board of Directors of Sistema PJSFC in 2018
(re-elected on 30 June 2018)1
MEETINGS OF THE BOARD
OF DIRECTORS
Sistema’s Board meetings are held
on a regular basis in accordance
with the approved annual work plan
of the Board of Directors, which is made
based on Sistema’s strategic planning
and reporting cycle.
12 meetings
Over the reporting period the Board
of Directors considered the following key
items:
THE BOARD OF DIRECTORS HELD
4. Managing and creating value for
VLADIMIR
EVTUSHENKOV
Board Chairman2
ANNA
BELOVA3
SERGEY
BOEV
Deputy Chairman of the Board
of Directors until 31 March 2018
In 2018, the Board of Directors held
12 meetings: eight scheduled in-person
meetings and four unscheduled meetings
with absentee voting. The Board of Directors
reviewed a total of 74 agenda items in 2018.
1. Sistema’s development strategy;
2. Sistema Group’s strategic planning cycle;
Investment policy, strategy of Sistema’s
3.
investment funds and priority areas for
investment in 2018-2019;
ANDREY
DUBOVSKOV
FELIX
EVTUSHENKOV
Deputy Chairman of the Board
of Directors until 12 October 2018
RON
SOMMER
NUMBER OF IN-PERSON
MEETINGS
NUMBER OF ABSENTEE
VOTES
8
4
8
8
7
4
ROBERT
KOCHARYAN4
JEANNOT
KRECKÉ3
ROGER
MUNNINGS5
2017
2018
2017
2018
NUMBER OF ITEMS IN ACCORDANCE
WITH THE BOARD’S WORK PLAN
ACTUAL NUMBER OF ITEMS
REVIEWED BY THE BOARD
48
74
46
48
81
74
Sistema’s investments in the following
areas:
Z Telecom assets;
Z Consumer (retail) assets, including
e-commerce assets;
Z Agricultural assets;
Z Timber processing and pulp and paper
assets;
Z Banking assets;
Z Assets in financial services and
investment management in capital
markets;
Z High-tech assets;
Z Real estate assets;
Z Healthcare assets;
Z Power grid assets;
Z Hotel assets.
5. Sistema’s results and performance
against budget;
6. Budget planning, approval of the
consolidated budget of Sistema PJSFC
and management’s KPIs for 2018-2019;
7. Functional strategies (for financial
management and financial planning,
human resources management,
corporate security, etc);
8. Management of the Corporation’s risks;
9. Report of the Internal Control and Audit
Department;
10. HR matters and employee incentive
systems;
11. Assessment of corporate governance
including the results of assessment of
the Board of Directors and Committees
of the Board of Directors of Sistema
PJSFC;
12. Corporate Social Responsibility;
13. Mandatory corporate procedures,
including calling the AGM and developing
the work plan of the Board of Directors;
14. Composition of Board Committees
and determining the status of Board
members;
15. Approval of internal regulations;
16. Approval of transactions, including
acquisition of equity stakes.
11 MEMBERS
MIKHAIL
SHAMOLIN
DAVID
IAKOBACHVILI6
45.5%
Independent directors
Non-Executive directors
Executive directors
1 Short bios and information on Members’ stakes in Sistema’s authorized capital is available in Appendix 1.
2 Chairman of the Board and the Deputies were elected at the first Meeting of the Board on June 30th 2018.
3 A. Belova was elected to the Board of Directors based on the proposal of minority shareholders.
4 In line with Moscow Exchange listing rules, R. Kocharyan was deemed independent by Sistema. Information pertaining
to the decision is available on Sistema’s website.
5 In line with Moscow Exchange listing rules, R. Munnings was deemed independent by Sistema. Information pertaining
to the decision is available on Sistema’s website.
6 In line with Moscow Exchange listing rules, D. Iakobachvili was deemed independent by Sistema. Information pertaining
to the decision is available on Sistema’s website.
2017
2018
2017
2018
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SUBJECTS OF THE ITEMS
CONSIDERED BY THE BOARD OF DIRECTORS IN 2018
10%
8%
5%
3%
32%
11%
15%
16%
Business strategies, investments and new business segments
Approval of transactions
Appointments and HR policy
Financial reporting, planning and audit
Corporative governance and securities
Shareholding in portfolio companies, groups, JVs; branches
Functional strategies
Approval of internal documents
Most of the items considered by the
Board of Directors in 2018 related to
the Corporation’s business strategy,
value creation by its investments
in various industries, HR policy and
approval of transactions (including
shareholdings in companies). In light
of the goals of the Corporation for
strategic and structural optimisation,
a substantial proportion of items
regarding business strategy and
HR policy also focused on corporate
governance at Sistema Group.
THE BOARD OF DIRECTORS
REVIEWED A TOTAL OF
74 agenda items
30
24
11
12
4
11
7
8
14
7
8
6
5
4
2
2
Business strategies,
investments and new
business segments
Approval of
transactions
Appointments
and HR policy
Financial reporting,
planning and audit
Corporative
governance
and securities
Shareholding
in portfolio
companies, groups,
JVs; branches
Functional
strategies
Approval of internal
documents
¡ Organisation of the work of the Board
of Directors: content of agendas of
the meetings, quality and timeliness of
submission of materials, and quality of
discussion at the meetings.
¡ Functional areas of the Board’s work,
including strategic management, finance
and internal control, HR policy and
corporate governance.
As a result of the analysis of the Board’s
performance the total score on a 5-point
scale was 4.33 an improvement compared
to 4.16 score in 20161). Further increase
in the quality of work with proposals
and initiatives from the executive
management team was indicated as an area
for improvement.
PREPARATION FOR MEETINGS
AND QUORUM OF THE BOARD
OF DIRECTORS
ASSESSMENT OF THE WORK
OF THE BOARD OF DIRECTORS
AND ITS COMMITTEES
Current preparation procedures for Board
meetings are designed to ensure best use
of the experience and expertise of Board
members. Materials on the agenda items
are published on the Board’s electronic
portal at least 10 days before the meeting,
which gives members sufficient time
to form an informed opinion on all agenda
items. Most agenda items (including
approval of transactions) undergo
a mandatory preliminary review at meetings
of the Board’s Committees.
The Corporation has introduced a procedure
of challenging speakers on key items
of the Board’s agenda to enable Board
members (as a rule, independent members)
to conduct an in-depth review of materials
and hold discussions with management.
This makes it possible to increase
the involvement of Board members
in the development of the Corporation’s
strategy.
Meetings of Sistema’s Board of Directors
usually have a high attendance rate:
the average quorum of meetings in 2018 was
95.5%.
Assessment of the Board of Directors’
performance is an important tool that helps
identify areas where the work of the Board
of Directors may be improved.
In 2018, Sistema continued the practice
of an annual comprehensive assessment
of the work of the Board of Directors and all
its Committees. The assessment was carried
out in the form of a survey of members
of the Board covering the following areas:
¡ Composition and structure of the Board
of Directors: number of Board members
and balance of their knowledge, skills
and industry experience;
THE AVERAGE QUORUM
OF MEETINGS
95.5%
PARTICIPATION OF BOARD MEMBERS
IN MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES IN 2018
Board of Directors
Strategy Committee
Audit, Finance and
Risk Committee
Nomination,
Remuneration and
Corporate Governance
Committee
Ethics and Control
Committee
Investor Relations
and Dividend Policy
Committee
V. Evtushenkov
A. Belova
S. Boev
A. Dubovskov
F. Evtushenkov
R. Sommer
R. Kocharyan
J. Krecké
R. Munnings
M. Shamolin
D. Iakobachvili
12/122
12/12
11/12
12/12
9/12
12/12
11/12
12/12
12/12
11/12
12/12
12/12
8/12
10/12
9/12
5/12
6/12
10/12
5/12
Attendance
13/14
14/14
14/14
14/14
13/14
10/10
10/10
9/10
10/10
8/10
7/8
8/8
6/8
7/8
8/8
5/5
5/5
5/5
5/5
1 In 2016 and 2018, the Board of Directors was assessed according to the same methodology, which makes it possible to compare the results of analysis.
2 The first number shows the number of meetings attended by the Board member, the second number is the total number of meetings.
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COMMITTEES
OF THE BOARD OF DIRECTORS
Strategy
Committee
Audit, Finance
and Risk Committee
Nomination, Remuneration
and Corporate Governance
Committee3
Ethics and Control
Committee
Investor Relations
and Dividend Policy Committee
SISTEMA HAS
5 committees
of the Board of Directors:
¡ Strategy Committee;
¡ Audit, Finance and Risk Committee;
¡ Nomination, Remuneration and
Corporate Governance Committee;
¡ Ethics and Control Committee;
¡ Investor Relations and Dividend Policy
Committee.
The main role of the Committees is to assist
the Board in preparation and adoption
of decisions in specific functional areas,
as well as to ensure prior in-depth scrutiny
of matters put forward for consideration
by the Board of Directors.
8
The status, procedures for nominating
members, responsibilities and decision-
making processes of the Board’s
Committees are regulated by the Terms
of Reference of the relevant committees
as approved by the Board of Directors
and published on the Corporation’s website
in the Corporate Documents section http://
www.sistema.ru/o-kompanii/korporativnoe-
upravlenie/korporativnye-dokumenty/.
1 R. Munnings and J. Krecke, both part of the Committee, are
experts in finance and audit with many years of experience
in the sector.
2
Independent
Non-Executive
Executive
Functions
Functions
Z Analysis of strategic management issues
Z Facilitating and supervising the processes
of Sistema Group;
Z Reviewing the strategy planning
methodology;
Z Reviewing M&A transactions with a value
exceeding USD 100m;
Z Reviewing Sistema Group’s investment
projects related to entry into new
geographies or industries and projects
with significant state ownership.
of preparing and auditing the Company’s
financial statements;
Z Assessing the quality of audit services
based on the audit of Sistema’s financial
statements and making preliminary
recommendations to the Board of
Directors with respect to the selection of
RAS and IFRS auditors;
Z Assessing the risk management system
and ensuring compliance with applicable
legal requirements in financial reporting,
audit and planning;
Z Provisional appraisal of transactions
submitted to the Board of Directors;
Z Budgeting and financial modelling.
V. Evtushenkov (Committee Chairman)
S. Boev
A. Dubovskov
F. Evtushenkov
R. Sommer
R. Kocharyan
M. Shamolin
D. Iakobachvili
Composition
R. Munnings (Committee Chairman)1
A. Belova
R. Sommer
J. Krecké1
D. Iakobachvili
Z Forming an efficient system of economic and
Z Strengthening the Corporation’s
corporate security;
investment case;
Z Monitoring compliance with the
Z Supporting effective relations with the
requirements of the Ethics Code of the
Corporation;
Z Introducing a system for preventing
corruption and fraud and other misconduct
related to violations of applicable legislation
at Sistema Group companies.
financial community;
Z Developing Sistema’s dividend policy,
including recommendations for the
Corporation’s Board of Directors with
respect to the amount of payable
dividends;
Z Protection of the rights and interests of
Sistema’s shareholders.
Z Facilitating the development of an efficient
corporate governance system meeting
international standards at the Corporation
and its portfolio companies;
Z Preliminary review of candidates:
¡ for the Board of Directors of Sistema
PJSFC;
¡ for the boards of directors of portfolio
companies;
¡ for senior management positions at the
Corporation and its portfolio companies;
¡ for the position of the Corporation’s
Corporate Secretary;
Z Development of the Corporation’s
incentive and remuneration policies;
Z Organising the assessment of the
performance of the Board of Directors.
R. Kocharyan (Committee Chairman)
S. Boev
R. Sommer
R. Munnings
D. Iakobachvili
Composition
F. Evtushenkov (Committee Chairman)
A. Belova
S. Boev
R. Kocharyan
R. Munnings
A. Belova (Committee Chairwoman)
J. Krecké
R. Munnings
D. Iakobachvili
Director participation2
Director participation2
25%
62% 13%
80%
20%
60%
40%
60%
40%
100%
Number of meetings in 2018
12
14
Topics discussed
Z Value creation by the Corporation’s
investments in various industries;
Z Investment projects;
Z Strategic management and planning
system.
Z Assessment of the quality of audit
services, results of the tender
for provision of audit services,
recommendations for the Board of
Directors on appointing an external
auditor;
Z Review and approval of the Corporation’s
quarterly and annual financial reports, the
annual report, annual budget and report
on performance against the Corporation’s
budget;
Z Review of management’s reports on risk
management at Sistema, risk maps and
mitigation plans;
Z Preliminary review and evaluation of
transactions to be submitted to the Board
of Directors.
10
Z Development of corporate governance at
Sistema Group, including the structural
transformation of the Corporate Centre;
Z Incentive system and key parameters,
performance assessment and bonuses
for the key managers and employees of
Sistema;
Z HR process and preview of candidates to
top management positions at Sistema and
nominees to the boards of directors of the
key portfolio companies.
Number of meetings in 2018
8
Topics discussed
5
Z Performance of the Internal Control and
Z Communications and interaction with
Audit Department in 2017 and work plan for
2019;
minority shareholders;
Z Amount of dividends and dividend policy
Z Results of ethics assessment of the
of the Corporation;
Corporation’s employees;
Z Compliance system at Sistema;
Z System for preventing fraud and corruption
at Sistema.
Z The Corporation’s charity strategy
Z Market analysis and monitoring,
perception of Sistema by the investment
community.
3 The President of Sistema PJSFC attends Committee meetings in the capacity of a permanent invitee and does not vote on the matters submitted for consideration of the Committee.
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PRESIDENT
The President is a permanent chief
executive officer whose main tasks
include managing the current
operations of the Corporation
and dealing with matters outside
the remit of the General Meeting of
shareholders, the Board of Directors
and the Management Board, with the
aim of ensuring the Corporation’s
profitability and safeguarding
the rights and legitimate interests
of its shareholders. The President
reports to the Board of Directors
and General Meeting of shareholders
of Sistema PJSFC. The President
performs the functions of chairman
of the collective executive body
(Management Board).
On 13 March 2018, the Board
of Directors approved Andrey Dubovskov’s
appointment as President and Chairman
of the Management Board of Sistema PJSFC
for a three-year term.
Andrey Dubovskov
Born in Alma-Ata (now Almaty) in 1966.
In 1993, graduated from the Gerasimov Institute of Cinematography.
Has extensive experience in telecoms companies: since 1993, held
multiple managerial positions at Millicom International Cellular S.A.,
Millicom International Cellular B.V., LLC Regional Cellular
Telecommunications, CJSC 800, and other companies in Moscow,
Alma-Ata, Nizhny Novgorod, Yekaterinburg, Perm and Kiev.
2002–2004 – CEO, Tele2 (Nizhny Novgorod).
In 2004, joined OJSC MTS as head of the company’s Nizhny
Novgorod branch.
2006–2007 — Director of the MTS Ural Macroregion.
In 2007, became First Deputy CEO of CJSC UMS (MTS Ukraine);
in 2008, appointed head of the MTS Ukraine business unit.
2011–2018 — President of PJSC MTS.
On 13 March 2018, appointed President of Sistema PJSFC
following approval by the Board of Directors.
Member of the Board of Directors of Sistema PJSFC and the Board
of Trustees of Sistema Charitable Foundation.
MANAGEMENT BOARD
The Management Board of Sistema PJSFC
determines methods for implementation
of the Corporation’s development strategy,
formulates development plans, determines
and monitors investment processes
and previews most matters subsequently
submitted to the Corporation’s Board
of Directors.
MEMBERS OF THE MANAGEMENT BOARD OF SISTEMA PJSFC
AS OF 31 DECEMBER 2018
Andrey Dubovskov
President, Chairman of the Management Board
1.
2.
3.
4.
5.
Igor Alyoshin
Alexey Guryev
Artyom Zasursky
Alexey Katkov
6. Oleg Mubarakshin
7.
8.
9.
Andrey Pilipenko
Vsevolod Rozanov
Artyom Sirazutdinov
Vice President for Security
Vice President for HR
Vice President for Strategy
Managing Partner
Managing Partner
Vice President for Government Relations
Managing Partner
Managing Partner
MANAGEMENT BOARD CONSISTED OF
11. Vladimir Travkov
Vice President for Finance and Investment
10. Joshua Tulgan
Vice President for External Relations
14 members
12. Ali Uzdenov
13. Sergey Shishkin
14. Maxim Yanpolsky
Managing Partner
Vice President for Corporate Governance and Legal Matters
Managing Partner
In 2018, the Management Board held
11 meetings and reviewed 43 agenda items
in the following key areas:
1. Sistema’s development strategy;
2. Management strategy and structure of
Sistema’s investment funds;
3. Sistema Group’s strategic planning cycle;
4. Development strategy, value creation
and monetisation of Sistema’s
investments in various industries;
5. Sistema’s functional strategies;
6. Budget execution, budget planning and
key performance indicators;
7. Debt and liquidity management;
8. Sistema’s corporate social responsibility;
9. Review of specific transactions.
THE MANAGEMENT BOARD HELD
In April 2018, the powers of the previously
elected Management Board were terminated,
and the Board of Directors approved a new
Management Board for a three-year term.
11 meetings
and reviewed 43 agenda items
CHANGES TO SISTEMA’S MANAGEMENT BOARD IN 2018
12 March
M. Shamolin
terminated
13 March
A. Dubovskov
appointed
01.01
01.02
01.03
01.04
01.05
01.06
01.07
01.08
01.09
01.10
01.11
President, Chairman of the Board
01 April
A. Gorbunov
F. Evtushenkov
L. Monosov
M. Cherny
E. Chuikov
V. Shukshin
terminated
01.03
01.01
01.02
Members of the Board
02 April
I. Alyoshin
A. Katkov
V. Travkov
appointed
24 July
J. Tulgan
appointed
07 September
A. Pilipenko
appointed
24 September
M. Yanpolsky
appointed
01.04
01.05
01.06
01.07
01.08
01.09
01.10
01.11
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COMMITTEES REPORTING
TO THE PRESIDENT AND
THE MANAGEMENT BOARD
To improve management decision-
making, Sistema has committees
that report to the President
and the Management Board,
namely the Finance and Investment
Committee, the Risk Committee
and the Tender Committee.
These committees are permanent
consultative collective bodies tasked
with detailed analysis of current
affairs and processes within their
remit and with assisting the President
and the Management Board
in decision-making.
FINANCE AND INVESTMENT
COMMITTEE
The responsibilities of the Finance and Investment Committee include:
Expert Council
Z Review of the Corporation’s investment
Z Recommendations regarding feasibility
projects at different stages from
conception to completion;
of projects, exit scenarios and sources of
financing;
Z Approval of financial models, business
Z Review of external financing terms.
plans and key performance indicators of
investment projects;
An Expert Council reports to the Finance
and Investment Committee and considers
all of the Corporation’s new investment
ideas and projects for acquisitions of assets
in new and related industries, as well
as in industries where Sistema already has
a presence.
RISK
COMMITTEE
TENDER
COMMITTEE
The Risk Committee’s responsibilities
include:
The responsibilities of the Tender Committee
include:
Z Assessment of risks facing the
Z Organising tenders for goods, works,
Corporation and its portfolio companies;
Z Ensuring preparation of a risk register
and a generalised risk map of Sistema;
Z Preparation of proposals regarding
acceptable risk level for Sistema
(Sistema’s risk appetite);
Z Coordination of risk management
and services;
Z Ensuring acquisition of goods,
works, and services and sale of the
Corporation’s property on the best terms
available;
Z Ensuring transparency of purchasing
procedures;
action plans and monitoring of their
implementation.
Z Facilitating prevention of corruption
and other wrongdoing in purchasing.
THE COMMITTEE CONSISTS OF
THE EXPERT COUNCIL CONSISTS OF
THE COMMITTEE CONSISTS OF
THE COMMITTEE CONSISTS OF
10 members
13 members
10 members
7 members
As of 31 December 2018, the Chairman
of the Committee was the Corporation’s
President ANDREY DUBOVSKOV
The Deputy Chairman was
VLADIMIR TRAVKOV,
Vice President for Finance and Investment
As of 31 December 2018,
the Chairman of the Expert Council was
ARTYOM ZASURSKY,
Vice President for Strategy.
As of 31 December 2018,
the Chairman of the Committee was
VLADIMIR TRAVKOV,
Vice President for Finance and Investment.
As of 31 December 2018,
the Chairman of the Committee was chaired
by VLADIMIR TRAVKOV,
Vice President for Finance and Investment.
IN 2018,
THE COMMITTEE HELD
30 meetings
IN 2018,
THE EXPERT COUNCIL HELD
IN 2018,
THE COMMITTEE HELD
12 meetings
5 meetings
IN 2018,
THE COMMITTEE HELD
24 meetings
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SPECIFIC CHARACTERISTICS OF
RISK MANAGEMENT, INTERNAL
CONTROL AND INTERNAL AUDIT
SYSTEMS
RISK MANAGEMENT
Sistema’s risk management system employs
a two-level approach, under which the risks
identified at Sistema and its portfolio
companies are consolidated to assess their
impact on Sistema Group as a whole.
The enterprise risk management system
(ERM) used in the Corporation addresses
the following tasks:
Z Identification of risks at all levels of
the management (from the top to line
management), which includes identifying
risk owners and making risk passports;
Z Primary assessment of the materiality of
identified risks and their analysis (VaR
methodology);
Z Ranging risks by management levels;
Z Assessment of the aggregate influence
of material risks on the Corporation’s
key financial indicators (Monte Carlo
modelling);
Z Development of plans to mitigate
identified risks at all management levels;
Z Regular monitoring of performance
against mitigation plans and assessment
of their effectiveness;
Z Risk monitoring, quarterly reports on
risks facing the Corporation.
Sistema’s risk management procedures are
carried out by a dedicated risk management
unit.
The Corporation’s risks are monitored
on a quarterly basis by Sistema’s
Management Board and Risk Subcommittee,
which review the effects of mitigation
and response measures taken and reassess
persisting and/or new risks.
Sistema’s senior executives make
regular reports on risk management
at the Corporation to the Audit, Finance
and Risk Committee. The annual report
is submitted to the Board of Directors
of Sistema PJSFC.
INTERNAL CONTROL SYSTEM
¡ The Finance and Investment Committee
3. Enhancing awareness among the
The Internal Control Policy was approved
by the Corporation’s Board of Directors
and is an internal top level document
describing the key principles of internal
control as a continuous and integrated
process that involves all units
and governance bodies of the Corporation.
The key objectives of the internal control
system are:
1. Creating control mechanisms that will
ensure efficient business processes and
the implementation of the Corporation’s
investment projects;
2. Ensuring the safety of the Corporation’s
assets and efficient use of its resources;
3. Protecting the interests of the
Corporation’s shareholders and
preventing and resolving conflicts of
interest;
4. Creating conditions for timely
preparation and submission of reliable
reports and other information that is
legally required to be publicly disclosed;
5. Ensuring the Corporation’s compliance
with applicable laws and requirements
of regulators.
In accordance with the «three lines
of defence» principle, the efficiency
of the Corporation’s internal control
system is ensured at three levels
(in addition to the Board of Directors
and the Corporation’s senior management):
Z Level 1:
Heads of subdivisions and employees
of the Corporation are responsible
for assessing and managing risks
and building an efficient internal control
system within their remit;
Z Level 2:
At this level, the function is performed
by several subdivisions and Committees
of the Corporation. For example:
¡ The risk management function and the
Risk Subcommittee are responsible
for developing and monitoring the
implementation of an effective risk
management practice;
of the Corporation approves and
monitors the implementation of
investment projects;
¡ The Discipline Committee reviews
matters related to breaches of the Ethics
Code and disciplinary offences;
¡ The Security Department is responsible
inter alia for economic security,
prevention of corruption, and information
security.
Z Level 3:
The Internal Control and Audit Department
conducts independent assessments
of the efficiency of the internal control
system, as well as risk management
and the corporate governance procedures.
All of the Corporation’s employees
in charge of various control procedures
bear responsibility for the efficiency of such
controls and risk management activities
as prescribed in their job descriptions
and internal regulations.
INTERNAL AUDIT
The body in charge of internal control
at the Corporation and the companies
of Sistema Group is the Internal Control
and Audit Department, which reports
to the Board of Directors (functionally)
and Sistema’s President (administratively).
The head of the Department is appointed
and dismissed by the President based
on resolutions passed by the Corporation’s
Board of Directors following preliminary
approval by the Board’s Ethics and Control
Committee.
The main objectives of the Internal Control
and Audit Department are:
1. Helping shareholders and management
improve the internal control system
by performing regular audits of the
efficiency of the Corporation’s internal
control, risk management and corporate
governance systems;
2. Supplying management and
shareholders with objective information
on existing internal risks and their
probability;
Corporation’s management team about
the performance of Sistema Group
companies;
4. Monitoring achievement of the goals
of shareholders of the Corporation and
Sistema Group companies.
To meet these objectives, the Internal
Control and Audit Department carries out
the following functions:
Z Performing independent audits of
individual operations, processes and
units;
Z Assessing the effectiveness of the
internal control system;
Z Assessing the effectiveness of the risk
management system;
Z Assessing the effectiveness of the
corporate governance system,
preventing violations of legislation
and the Corporation’s regulations,
ensuring observance of professional
and ethical standards and preparing
recommendations for improving them;
Z Developing recommendations to remedy
deficiencies identified and monitoring
execution of remedial actions;
Z Monitoring compliance with procurement
procedures;
Z Administering the Hotline and ethics
assessment.
The Internal Control and Audit Department
has all the resources and powers required
to perform the above functions.
The Internal Control and Audit Department
works closely with independent
auditors, coordinates audits and offers
consultations in the course of preparing
the Department’s annual audit plans
with regard to assessment of the efficiency
of internal controls applied to financial
statements, as well as during discussions
and assessment of identified risks.
Ethics assessment makes it possible
to identify and manage conflicts of interests
in a timely manner, thus preventing
shareholders’ interests from being
compromised.
EXTERNAL AUDIT
In compliance with the decision
of the Audit, Finance and Risk Committee,
the Corporation uses the following
procedures to appoint the independent
auditors of Sistema’s financial statements.
The Committee performs an annual
assessment of the quality of audit
services received. If the quality of services
provided by the current auditor is deemed
insufficient, the Audit Committee organises
a tender to hire a new auditor. If the quality
is deemed sufficient, Sistema negotiates
the price of services with the current
auditor for the following period. According
to the decision of the Audit, Finance and Risk
Committee, a tender for external audit
services should be held at least every five
years to ensure the auditor’s impartiality
and objectivity.
In 2018, the Internal Control and Audit
Department conducted 49 audits to assess
the effectiveness of the Corporation’s
internal control, risk management
and corporate governance systems. Audits
performed by the Internal Control and Audit
Department did not uncover any weaknesses
or risks that could affect the sustainability
of the Corporation’s business as a whole.
Regular reports on the results of the work
of the Internal Control and Audit Department
are reviewed by the Audit, Finance
and Risk Committee and Ethics and Control
Committee of the Board of Directors,
and are also submitted for consideration
by the Board of Directors at the end
of the year.
RESOLUTION OF CONFLICTS
OF INTEREST
Matters related to conflicts of interest
are governed by the Corporation’s Code
of Ethics. The Corporation has an ethics
assessment procedure: all top managers
of the Corporation annually (or as conflicts
of interest arise) fill out Ethics and Conflict
of Interest Declarations. All new employees
must complete the training course and learn
the requirements of the Code of Ethics
and the procedure to fill out the Declaration.
In 2018, the Corporation held its
ethics assessment for the third time.
The results were reviewed by the President
and the Ethics and Control Committee
of Sistema’s Board of Directors. In most
cases, declared conflicts of interest were not
confirmed and did not require any resolution
measures. However, action plans on conflict
resolution were implemented with respect
to several declarants in accordance with best
corporate governance practice.
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MANAGING PARTNERS
INCENTIVE SYSTEM
In 2018, a new long-term incentive
programme (over one year)
for the Corporation’s employees was
developed and approved — the Option
Plan. The main focus of the Option Plan
is increasing the Corporation’s market
capitalisation, and the remuneration of key
employees is linked to this.
Participants in the Option Plan are granted
the right to receive a certain share
of the amount of any increase in market
capitalisation. The programme is designed
for four years and represents a mechanism
that directly links the goals of Sistema’s
shareholders and managers.
A new version of the Policy on Remuneration
and Compensations for Members
of the Board of Directors will be submitted
for consideration by the General Meeting
of shareholders in 2019, and will link
the amount of additional remuneration
of members of the Board of Directors to any
increase in Sistema’s market capitalisation
in the reporting year.
In 2018, Sistema adopted a partnership
management model that allows key
executives (Managing Partners) to share
the risks and returns from investment
activities with shareholders. Managing
Partners are fully responsible
for implementation of the investment
strategies of their portfolio companies,
including the creation and maintenance
of effective corporate governance systems.
In most cases, Sistema’s Managing Partners
chair the boards of directors of their
respective portfolio companies.
Incentives offered to Managing Partners
are linked to increasing Sistema’s market
capitalisation, maximising the value of assets
under management and monetisation,
and raising outside capital under
management. Managing Partners co-invest
in their portfolio assets, thereby sharing
risks with the Corporation.
RELATIONS WITH MINORITY
SHAREHOLDERS
A page for shareholders’ questions has
been created on the Corporation’s website
in the Investors & Shareholders section. Any
shareholder or potential investor interested
in information about the Corporation can
submit questions using the electronic form
and get answers. That page also provides
answers to frequently asked questions.
CORPORATE GOVERNANCE
ACROSS SISTEMA GROUP
The quality of strategic planning
and investment appeal of Sistema’s portfolio
companies depends, inter alia, on the quality
of the corporate governance procedures.
To increase the value of its investments
Sistema pays special attention to improving
the quality of corporate governance at its
portfolio companies.
The Corporation aims to carry out
strategic management of its key portfolio
companies through their boards of directors
by including professional independent
members with expertise in the companies’
industries, as well as in strategy,
finance, audit and corporate governance.
Independent directors account for about
one-third of members of the boards of key
portfolio companies (depending on the level
of the company’s organisational maturity).
The Corporation continuously improves
its corporate governance system
in order to increase efficiency and remain
in line with best practice. Improving
the quality of corporate governance
processes at portfolio companies
and attracting competent professionals
to their boards of directors is designed
to increase the quality of decision-making
and the shareholder value of Sistema’s
portfolio assets.
Boards of directors of portfolio companies
ensure control and coordination,
and support management in decision-making
in the following functional areas:
Z Strategy and key transactions;
Z Budget planning;
Z HR policy;
Z Internal audit.
DEVELOPMENT OF
THE CORPORATE GOVERNANCE
SYSTEM IN 2018
INDEPENDENT DIRECTORS
ON THE CORPORATION’S BOARD
OF DIRECTORS
In 2018, 11 members were elected
to the Corporation’s Board of Directors. Five
of them qualify as independent directors
or are recognised as independent according
to Moscow Exchange’s Listing Rules
and the Russian Corporate Governance Code.
The current Board includes the following
independent directors:
¡ Anna Belova;
¡ Robert Kocharyan;
¡ Jeannot Krecké;
¡ Roger Munnings;
¡ David Iakobachvili.
All of the Corporation’s independent
directors have extensive experience
in managing large organisations and strong
professional reputations. They are therefore
able to exercise independence in their
judgements and freedom from the influence
of the Corporation’s management
and shareholders when making decisions.
Roger Munnings and Jeannot Krecké,
as members of the Audit, Finance and Risk
Committee, are experts in finance and audit
with extensive relevant experience.
Independent directors are directly involved
in discussing and formulating the strategy
of the Corporation. For this purpose, working
groups headed by independent members
of the Board and including representatives
of the Strategy Function and the Finance
and Investment Function are established
to formulate substantiated positions
of the Board of Directors on strategic issues
related to development of the Corporation.
PLANS FOR DEVELOPMENT
OF CORPORATE GOVERNANCE
The Nomination, Remuneration
and Corporate Governance Committee
of Sistema’s Board of Directors each
year develops and approves an action
plan for improving corporate governance
at Sistema in the following year. The plan
for 2019 envisages the following activities:
2.
1.
Introducing changes to the system of
remuneration payable to members
of the Board of Directors in order to
harmonise it with the incentive system
for senior management (in the first half
of 2019);
Introducing changes to the Corporation’s
internal documents regulating the
activities of its governing bodies in order
to integrate new provisions of corporate
law (in the first half of 2019);
Improving the management structure of
the Corporation’s investment funds and
determining the remuneration policy for
the funds’ management (during 2019);
4. Formalising a succession plan for key
managers of the Corporation (during
2019).
3.
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REMUNERATION POLICY
APPLIED TO BOARD MEMBERS
OF SISTEMA PJSFC
Remuneration for the work of members
of the Board of Directors is calculated
and paid in accordance with the Policy
on Remuneration and Compensations
Payable to Members of the Board
of Directors of Sistema PJSFC1.
BASIC REMUNERATION OF MEMBERS
OF THE BOARD OF DIRECTORS
Basic remuneration of members
of the Board of Directors amounts
to RUB 13.7m or RUB 17.8m per year
depending on whether a director is a tax
resident of Russia. Basic remuneration
is paid to Board members in cash in equal
quarterly instalments.
SUPPLEMENTARY REMUNERATION
OF MEMBERS OF THE BOARD
OF DIRECTORS
In accordance with the Policy
on Remuneration and Compensations
Payable to Members of the Board
of Directors of Sistema PJSFC effective
in 2018, additional remuneration of members
of the Board of Directors is paid once
a year in the form of ordinary shares
of Sistema PJSFC subject to achievement
of the Corporation’s investment targets
in the reporting year: (i) the arithmetic mean
of TSR and iTSR exceeds or equals CoE2,
or (ii) TSR exceeds or equals the amount
of change of the MSCI index (ΔMSCI),
provided that iTSR exceeds or equals
CoE. The number of ordinary shares
to be provided to members of the Board
of Directors is calculated using the following
formula:
Amount of remuneration in monetary terms
Weighted average price of one share
For the purpose of calculating the number
of shares to be transferred to members
of the Board of Directors, the amount
of remuneration in monetary terms is equal
to the amount of basic remuneration less
applicable taxes, and the weighted average
price of one share is calculated based
on the price of the Corporation’s global
depositary receipts during the month
preceding the date of the Annual General
Meeting of shareholders.
In 2019, the General Meeting of shareholders
of the Corporation will be asked to approve
a new version of the Policy on Remuneration
and Compensations Payable to Members
of the Board of Directors of Sistema
PJSFC in which the terms of payment
and the amount of additional remuneration
are harmonised with the long-term
management incentive scheme. Additional
remuneration will be payable only
subject to growth of Sistema’s market
capitalisation in the relevant financial year.
The amount of additional remuneration is set
as a variable amount equal to 0.1% or 0.125%
(depending on tax residency) of the increase
in capitalisation for the financial year, but
in any case not higher than the amount
of basic remuneration less applicable taxes.
REMUNERATION FOR PERFORMANCE
OF ADDITIONAL DUTIES
Board members who perform additional
duties, i.e., the Chairman of the Board,
Deputy Chairman of the Board and Chairmen
of the Board Committees, receive
remuneration on a quarterly basis
in the amount stipulated by the Policy
on remuneration and compensations payable
to members of the Board of Directors
of Sistema PJSFC.
COMPENSATIONS AND OTHER
CONDITIONS
Members of the Board of Directors are
reimbursed for expenses incurred during
performance of their duties, including
participation in meetings of the Board
of Directors and Board Committees.
Sistema PJSFC insures the liability
of members of the Board of Directors.
Sistema PJSFC does not provide loans
to members of the Board of Directors.
REMUNERATION POLICY APPLIED
TO SENIOR MANAGEMENT OF
SISTEMA PJSFC
SHORT-TERM INCENTIVE SYSTEM
The short-term (up to 1 year) incentive scheme
for the top managers of Sistema PJSFC
in 2018 consisted of:
¡ A fixed monthly salary determined in line
with the internal system of job categories
(grades);
¡ Bonuses paid for project implementation
and generating cash income.
Remuneration is paid based on employees’
individual performance and positive cash
flow generated by projects implemented
by the teams of Managing Partners and
Departments of Sistema. Payments may
amount to up to 20% of cash income.
For the purpose of calculating bonuses, cash
income means the increase in the value
of an asset (in case of an asset sale or an IPO)
or the amount of dividends (in case of dividend
payment), net of the following amounts:
¡ A hurdle rate determined by the Finance
and Investment Committee of the
Corporation prior to the commencement of
a project or the acquisition of an asset;
¡ Investment in an asset and project costs.
1 Approved by the General Meeting of shareholders on 27 June 2015.
2 This investment target was not achieved in 2018, since TSR was -32.9% and iTSR was -7%, while CoE was 17% and ΔMSCI was -5.5%. CoE represents the minimum level of return that a company
must provide to its shareholders for the expectation of profit and risk. CoE is calculated as the sum of risk-free returns (such as government bonds) and the risk premium associated with investing
in the stock market, taking into account the capital structure of the asset in question and country risk.
LONG-TERM INCENTIVE SYSTEM
In 2018, a new long-term (more than
1 year) incentive programme for Sistema’s
employees was developed and approved –
the Option Plan. The main focus of the Option
Plan is increasing the Corporation’s market
capitalisation. Participants of the Option
Plan are granted the right to receive
a share of the amount of increase in market
capitalisation. The programme is designed
for four years and represents a mechanism
that directly links the goals of Sistema’s
shareholders and managers.
of the Corporation’s shareholders
and senior executives in terms of long-term
management and development of portfolio
companies by granting rights to acquire
participation interests in the Corporation’s
privately held portfolio companies
with growth prospects.
The Co-Investment Programme is designed
for the President, heads of departments,
as well as employees of the Corporation
who hold positions not lower than Executive
Director or Senior/Chief Investment Director.
Other terms and conditions
No extra compensation above the level
stipulated by Russian labour legislation is paid
to the President or other senior executives
in case of termination of employment.
Sistema does not pay remuneration
to executive management for serving
on the Management Board.
The Corporation does not provide loans
to senior executives.
Co-investment programme
Participants of the Co-Investment Programme
use their own funds to acquire:
In 2016, the Board of Directors approved
a programme enabling Sistema’s senior
managers to co-invest in the Corporation
and/or its portfolio companies (“the Co-
Investment Programme”). The Co Investment
Programme is designed to align the interests
¡ Shares/interests in Sistema’s portfolio
companies; and/or
¡ Ordinary shares in Sistema PJSFC.
The amount of co-investment is limited by one
average annual income of a participant.
REMUNERATIONS PAID TO SISTEMA’S BOARD MEMBERS AND SENIOR MANAGEMENT IN 20183
Members of Sistema’s Board of Directors received the following remuneration in 2018:
Cash remuneration
Remuneration for work on the Board of Directors and fulfillment of additional duties, as well as salary
and bonus following the results of 2018 for those members of the Board of Directors who were also
Sistema employees in 2018.4
Remuneration in the form of ordinary shares of Sistema PJSFC
Remuneration to members of the Board of Directors based on the results of work in the 2017-2018
corporate year, as well as remuneration under the long-term incentive program for those members
of the Board of Directors who were also Sistema employees in 2018.4
2018
2017
RUB 432,497,258
RUB 320,193,625
5
—
RUB 218,287,983
Reimbursement of expenses incurred by Board members in connection with their duties
RUB 1,191,028
RUB 2,477,710
Members of Sistema’s Management Board6 received the following remuneration in 2018:
Cash remuneration
7
The amount includes fixed salaries and bonuses.
Remuneration in the form of ordinary shares of Sistema PJSFC
The shares transferred under the long-term incentive programme.
2018
2017
RUB 1,705,947,9278
RUB 1,768,437,846
9
—
RUB 245,821,873
3 All figures in this section are given before the applicable income tax.
4 Excluding members of Sistema’s Board of Directors who were members of its Management Board.
5 Additional remuneration in the form of shares was not paid to members of the Board of Directors in 2018 due to non-compliance with the conditions for its payment established by the Policy on
Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC.
6 Including the President of Sistema PJSFC.
7 Bonuses for 2018 were paid to Sistema’s employees in February 2019.
8 In February 2019, members of the Management Board spent part of their cash bonuses for 2018 to purchase ordinary shares of the Corporation, which is consistent with Sistema’s strategy to
increase the shareholding of its employees in the Corporation. Members of the Management Board and other employees of Sistema PJSFC purchased a total of 19,669,389 shares in the Corporation.
9 Remuneration in the form of shares was not paid to members of the Management Board in 2018 due to non-compliance with the conditions for its payment established by the Corporation internal
regulations.
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Risks
¡ the Group must maintain high credit
ratings as assigned by international
rating agencies.
Risk management reports are submitted
for review to the relevant collective
governance bodies of the Corporation
at least once a quarter. Each risk
management report contains a revaluation
of risks and their impact on the Corporation’s
financials, an assessment of the effectiveness
of risk mitigation and response plans,
and potential risk areas (areas of concern)
identified for future periods.
The Corporation’s long-established common
compliance system serves to mitigate anti-
corruption, anti-monopoly, stock exchange
and sanctions compliance risk, as well
as risks relating to security of personal data,
confidential information, and prevention
of money laundering and financing
of terrorism.
Below is provided a description of key risks
covered in Sistema’s ERM system.
ENTERPRISE RISK MANAGEMENT
AND RISK APPETITE
Sistema defines risks as adverse processes
and factors over which it has little or no
influence. However, the Corporation can
take measures to reduce the negative
consequences of such factors should
a certain risk occur. This makes
efficient assessment of existing risks
and the probability of their occurrence,
as well as efficient risk management,
an important part of Sistema’s strategy.
Risk management is part of all
processes at Sistema, and is integrated
into strategy planning and execution,
the investment process, budgeting,
procurement and day-to-day operations.
The enterprise risk management (ERM)
system operating at Sistema was built
in compliance with international standards
and recommendations, as well as best risk
management practices. It is designed to keep
risks at a level acceptable to Sistema’s
shareholders and management.
As part of quarterly ERM procedures,
the risk managers of Sistema Group:
¡ compile risk registers for subsidiaries
and a consolidated risk register for
the Group;
¡ prioritise risks and aggregate them into
portfolios;
¡ assess the probability and materiality of
all risks;
¡ study the impact that material risks
have on the financial results of specific
subsidiaries and Sistema Group as
a whole, using simulation and financial
modelling methods.
One of the key principles of risk management
in Sistema Group is to take proper account
of risk appetite. This approach implies
identifying and monitoring the Corporation’s
target risk profile in accordance
with its strategic goals and in the context
of their integration into risk management
procedures.
Sistema Group’s risk appetite determines
the level of risk that is acceptable
for shareholders, and includes the following
basic provisions:
¡ the amount of potential losses
under the risks accepted by Sistema
Group must not reach a level leading
to the termination of the Group’s
operations, including under stressed
conditions;
¡ the cash flows of Sistema Group
companies must be sufficient to
guarantee timely fulfilment of obligations
to counterparties in the short and long
term;
¡ in its operations, the Group aims to avoid
any increased concentration of risk by
counterparty, industry and region;
¡ the Group must be able to support
sustainable growth and economic
efficiency in the long term;
¡ all members of the Group must comply
with the requirements of national
regulators in countries where they
operate, as well as the standards and
recommendations of international
authorities;
¡ the Group must maintain an impeccable
reputation;
GLOBAL AND COUNTRY
RISKS
INDUSTRY
RISKS
These are risks associated with changes
in Russia’s political and economic
environment. Although most of Sistema’s
business is carried out in Russia, some
companies are also present in other
countries of the CIS, as well as the EU,
Turkey and India. Many of their products
are sold in other CIS markets, Southeast
Asia, Eastern Europe and North Africa.
In the event of any major political turmoil
in these regions, the Group’s business may
be discontinued or put on hold, which may
lead to material losses. The company’s
businesses may also potentially suffer
from the imposition of additional sanctions,
a full freeze on imports and/or exports
in the event of political changes, and military
conflicts involving Russia.
Recent developments in Ukraine have
caused Western countries to impose
sanctions on several Russian individuals
and companies. The potential remains
for the sanctions list to be extended
to include more names or introduce new
categories of sanctions, which could
affect some companies of the Group
or their management. Any further increase
in tensions between Russia and other
countries, as well as any escalation
of related conflicts, potential new sanctions,
or continuing uncertainty as to the scale
of any such sanctions, may adversely impact
Russia’s economy, the financial status
of the Group’s partners and suppliers,
the Group’s ability to undertake commercial
and financial activities and obtain funding
on commercially reasonable terms,
and the volatility of Sistema’s securities.
These are risks related to Sistema’s
involvement in various industries. The most
material risks in this category are those
associated with the telecoms business,
power generation, retail, hospitality,
healthcare, pharma, the forest products
industry, agriculture and real estate.
SISTEMA’S
EXTERNAL RISKS
FINANCIAL RISKS
Sistema’s business is inextricably connected
to the global economy and financial markets,
and is sensitive in particular to movements
in prices for oil, gas, and other commodities
that Russia exports. Further weakening
of the rouble against the US dollar
and the euro amid a slump in the oil prices
and sanctions being imposed on Russia
may result in a rise in costs and a drop
in revenues or impede the achievement
of financial targets and repayment of debt
by Sistema Group companies.
An exodus of foreign investors from Russia,
as well as restrictions introduced on foreign
companies in Russia as a result of sanctions,
may have a negative impact on Sistema
Group’s joint ventures (partnerships)
and new investment projects.
A rise in inflation may result in higher
expenses and therefore put pressure
on profit margins, and also affect demand
in Russia for products and services
of Sistema Group companies.
Servicing of the Corporation’s current
and future debt may require substantial
amounts of cash. If sanctions are maintained
over the medium term and Russian
banks and businesses continue to have
restricted access to foreign debt, this
may significantly increase the current
liquidity deficit in the market and result
in a further increase in interest rates,
making it difficult for Sistema Group to raise
funding for its operations and to refinance
the debt of the Corporation and its portfolio
companies. Should the Corporation prove
unable to obtain sufficient funding when
and how required, it may face significant
barriers to business development as well
as to its operating and investment activities.
An unfavourable macroeconomic
environment in many countries where
Sistema’s assets operate may make it
necessary to re-evaluate goodwill at some
of the assets.
Currency control and restrictions on capital
repatriation may adversely affect Sistema’s
business by posing barriers to capital
flows, and reduce the value of Sistema’s
investments in Russia.
The bankruptcy of any of the Russian banks
with which Sistema routinely cooperates may
result in a reduction in sources of borrowing
for the Corporation and portfolio companies,
and may lead to direct losses of funds
deposited in the accounts of such banks.
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POLITICAL, SOCIAL,
AND ENVIRONMENTAL RISKS
LEGAL RISKS
The influence of geopolitical risks
on the Corporation and its portfolio
companies remains strong, as protectionism
and economic sanctions are increasingly
being used as a tool for achieving
geopolitical goals.
The imposition of sanctions against Russia
as a state or against individual Russian
companies and Russian citizens may result
in disruptions to international payment
systems, which in turn may prevent
the Corporation and its portfolio companies
from properly making payments and reduce
Sistema’s investment appeal.
Decreasing living standards and a potential
rise in social unrest in the regions where
Sistema Group companies operate may
threaten the Corporation’s profits.
The operational activities of a number
of Sistema’s portfolio companies involve
potential threats to employees’ health
and safety.
Emergencies and incidents at Sistema
Group’s production sites may have
a significant impact on the environment, such
as pollution of land and water, emissions
above allowable limits, discharge of waste
waters or leaks of hazardous substances.
Irrational use of natural resources (land,
forest) by Sistema’s portfolio companies may
deplete their raw materials/production base
and compromise economic performance.
In view of the increased threat of global
and regional terrorist attacks, any such
incidents at the Group’s enterprises
and infrastructure facilities may cause
significant economic damage and affect
health and life.
There is a risk of unpredictable court rulings
and administrative decisions with respect
to Sistema Group’s business. Such rulings
or decisions may have an adverse effect
on the Group’s business as a result
of numerous factors including:
¡ possible discrepancies and ambiguities
in: (i) federal and other laws; (ii) bylaws
issued by executive authorities in
states where Sistema Group operates;
(iii) regional and local laws, rules and
requirements;
¡ gaps in legislation and a lack of court
and administrative guidelines regarding
the interpretation of some laws, as
well as conflicts between some court
guidelines and rulings;
¡ influence of political, social and
commercial factors on the judicial
system;
¡ potential selective or arbitrary actions of
government authorities.
international trade and investments that
may be introduced by foreign states
or international organisations.
Since Russian corporate law makes
shareholders liable for the obligations
of a company’s affiliates, Sistema may incur
financial losses related to the liabilities of its
portfolio companies.
Minority shareholders of Sistema’s
subsidiaries may contest or vote against
related-party or other transactions,
which may limit Sistema’s ability
to close investment deals and restructures
businesses.
If the Russian Federal Anti-Monopoly Service
concludes that Sistema PJSFC or one
of its material subsidiaries has violated
existing anti-monopoly legislation, this may
result in serious administrative sanctions
involving losses for the Corporation.
The Federal Anti-Monopoly Service may also
prevent the Corporation and its portfolio
companies from closing and/or undertaking
certain transactions, which may also limit
Sistema’s capacity to do investment deals
and restructure businesses.
Gaps in Russia’s existing corporate
and securities legislation may create barriers
to raising funds in the future.
TAX RISKS
A lack of clarity about the applicability
to Sistema’s business of the Federal Act
on the Procedure for Foreign Investment
in Companies of Strategic Importance
to the National Defence and State Security
and the regulations of the Eurasian Customs
Union (EACU) may have a negative impact
on Sistema Group’s business, as the Group
has foreign shareholders.
There is a risk of legislative amendments
being adopted in countries where Sistema
Group companies operate, due to potential
changes in laws and regulations governing
Tax laws, regulations and practices
of jurisdictions where Sistema’s assets
operate are intricate, opaque and prone
to frequent modifications and ambiguous
interpretations. If the Corporation’s
actions are interpreted as being in breach
of tax law, this may have an adverse effect
on the business of Sistema Group.
Russian law on transfer pricing may make it
necessary to introduce adjustments to price-
setting practices used at Sistema Group’s
companies and result in additional tax
liabilities related to some transactions.
On 1 January 2015, new rules were
introduced relating to the taxation of retained
profits of controlled foreign companies
and gains on indirect sales of Russian real
estate properties, along with a new concept
of beneficiary owners and tax residency
for foreign companies in Russia. These rules
have undergone a series of revisions, with all
the amendments having retroactive effect.
As a result of the need to apply new taxation
rules, the Group’s companies may face new
tax liabilities arising due to uncertainty
around interpretation of tax law and a lack
of relevant precedents.
CAPITAL MARKET RISKS
A deterioration of the geopolitical
situation, the imposition of sanctions
on Russian companies, a worsening
of the macroeconomic environment,
and capital and investor flight
from the Russian market led to a reduction
in market valuations of Russian companies
in 2014-2018. In view of these circumstances
Sistema’s access to investor funding
through capital markets may be restricted
further as a result of the introduction
of sectoral sanctions against Russian
companies in business segments where
Sistema operates and/or due to a cautious
approach among investors to Russian
companies in general. In particular,
Sistema’s ability to raise funding via bond
issues may be limited, potentially leading
to a lack of working capital and cash
available for investment and affecting
the Corporation’s financial performance.
RISKS RELATED
TO ACTIVITIES
OF SISTEMA PJSFC
IMPLEMENTATION OF THE BUSINESS
STRATEGY
The Corporation’s strategy aims to develop
a balanced and diversified asset portfolio
in sectors and regions where Sistema PJSFC
has expertise and competitive advantages,
and to attract leading international
and Russian partners. Despite having
a clearly formulated strategy, Sistema
PJSFC cannot guarantee the achievement
of its stated goals, efficient management
of portfolio companies, or benefits from new
investment opportunities. This is due
to a variety of reasons, including a high level
of debt and a constrained investment budget.
Sistema’s failure to achieve goals set out
in its strategy may undermine its financial
results.
The development of Sistema Group
companies depends on numerous factors,
including receipt of necessary permits
from state authorities, sufficient demand
from consumers, successful development
of technologies, efficient risk and cost
management, timely completion of R&D
and the introduction of new products
and services. Weaknesses in any of these
areas may have a detrimental effect
on the development of Sistema Group
companies and on the Corporation’s financial
performance.
ACQUISITION, INTEGRATION,
DISPOSAL OR RESTRUCTURING
OF ASSETS
Sistema PJSFC implements its strategy via
acquisitions, disposals, and restructuring
of assets. New investment opportunities
come with certain risks, including failure
to find relevant targets or their not being
available for acquisition, inadequate due
diligence of the target company’s operations
and/or financial situation, and potential
overvaluation of assets. These risks can also
affect Sistema’s financial performance.
Acquisition of assets may increase pressure
on the Corporation’s cash position and create
a need to raise external funding.
Delays to the completion of investment
deals or failure to close them may obstruct
the achievement of Sistema’s strategic goals
and affect its performance, financial position
and investment case.
Sistema may struggle to construct
an efficient system for managing
and controlling new assets. The top risks
in this area include:
¡ inability to efficiently integrate operating
assets and personnel of an acquired
company;
¡ inability to establish and integrate
necessary control mechanisms,
including those related to logistics and
distribution;
¡ conflicts among shareholders;
¡ hostility and/or unwillingness
to cooperate on the part of the
management and staff of an acquired
asset;
¡ loss of customers by the acquired asset.
If one or several of the above risks
materialise, the relevant asset may
lose part of its value and/or experience
in deterioration in its financial performance.
When disposing of its assets the Corporation
may face the following risks:
¡ delays or failure to close the transaction
due to an inability to obtain corporate or
state approvals;
¡ mistakes in asset valuation;
¡ assumption of excessive obligations
towards the buyer;
¡ loss of synergies with other assets
remaining in the portfolio.
If one or several of the above risks
materialise, the Corporation may lose
potential profit and thus see poorer financial
performance.
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MANAGEMENT AND KEY PERSONNEL
LOAN COVENANTS
PRIVATISED COMPANIES
BRAND QUALITY AND REPUTATION
The implementation of Sistema’s strategy
in many respects depends on the efforts
and professionalism of the management
team. Failure to hire a sufficiently competent
and motivated management team can
jeopardise Sistema’s business, performance,
financial position and development
prospects.
CASH FLOW FROM SISTEMA GROUP
COMPANIES
The Corporation’s financial performance
depends on the ability of Sistema Group
companies to generate the cash flows
needed to service the Corporation’s financial
liabilities, including repayment of debt
and interest, and to make other investment
activities in the future. This cash-generation
capacity may be restricted due to regulatory,
tax or any other barriers, which may have
an adverse effect on the financial position
and liquidity of the Corporation.
BORROWINGS
Cash flows from portfolio companies may be
insufficient to absorb all of the Corporation’s
expenses scheduled for a particular time.
This can make it necessary to borrow more
funds, increasing the Corporation’s debt
burden, which in turn can compromise
the credit ratings of Sistema and its portfolio
companies. A downgrading of a credit rating
can lead to a rise in the cost of servicing
of existing loans, higher interest rates,
barriers to borrowing, and in some cases
even demands for early repayment
of credit facilities. The risk of downgrades
or withdrawals of credit ratings correlates
with reputational and liquidity risks.
Loan and debt securities agreements signed
by Sistema and its portfolio companies
contain certain restrictive covenants. These
covenants restrict further borrowings,
encumbrance of property with pledges, sale
of assets, and transactions with affiliates.
They may also restrict certain aspects
of Sistema’s operations, such as financing
of capital expenses, or limit its capacity
to repay debts and service other liabilities.
Breach of covenants, however inadvertent,
may entitle creditors of the Corporation
and/or its portfolio companies to demand
early repayment of loans, which represents
a threat to the Corporation’s financial
performance.
LICENCES AND PERMITS
The operations of Sistema Group’s
companies are regulated by different
government bodies and agencies that
issue and renew licences, approvals
and permits, and also depend on applicable
laws, regulations, and standards.
Regulating authorities to a large extent rely
on their own judgment when interpreting
and implementing legal requirements,
issuing and extending licences, approvals
and permits, and monitoring compliance
with such licences. There is no guarantee
that the existing licences and permits,
including those issued to the Group’s
companies, will be extended, that new
licences and permits will be issued, or that
the companies will be able to comply
with the terms of such licences. Any of these
circumstances can have material negative
consequences for the business of Sistema
PJSFC.
Sistema’s portfolio contains several
privatised assets. It is also probable
that the Corporation will take part
in privatisations in the future. Since Russia’s
privatisation-related legislation remains
somewhat unclear and inconsistent,
and contradicts some other legal provisions,
the privatisation of many companies can
potentially be contested, however selectively,
which may have a material adverse effect
on the Corporation’s business, financial
status, performance and development
prospects.
ANTI-CORRUPTION RULES
Sistema’s operations are regulated by anti-
corruption law of relevant jurisdictions,
including Russian legislation, the UK Bribery
Act and/or the US Foreign Corrupt Practices
Act (FCPA). Any investigation into potential
violations of the FCPA, Bribery Act or other
anti-corruption laws of the US, UK or other
jurisdictions may affect the reputation,
business, financial position and performance
of Sistema PJSFC.
COMPETITION
All business segments in which Sistema
PJSFC operates are open to competition.
The telecom, retail, media, tourism,
private healthcare, pharma, property
development, forestry and agricultural
markets in Russia and elsewhere are
highly competitive. Any inability of Sistema
Group’s companies to compete efficiently
may have a material negative impact
on the business, performance, financial
situation and development prospects
of the Corporation.
Developing and maintaining brand
awareness for the Group’s companies
is crucial to shaping public opinion
around their existing and future products
and services. Sistema believes that company
brand is becoming increasingly vital in highly
competitive markets.
Successful development and improvement
of brand awareness depends in large part
on the efficiency of marketing and ability
to provide quality products and services
at competitive prices. Effort and money spent
on brand development may prove greater
than the income yielded, which means
potential financial losses for the Group’s
companies.
Sistema’s reputation may be damaged
in the event of unethical business conduct,
professional errors (including medical),
gross negligence, abuse of human rights,
leakage of inside information and corrupt
practices at Sistema and/or its portfolio
companies.
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CORPORATE
SOCIAL
RESPONSIBILITY
ESG AND CORPORATE RESPONSIBILITY
PRINCIPLES
CONTRIBUTION TO SOCIO-ECONOMIC
DEVELOPMENT
SOCIAL INVESTMENT IN TECHNOLOGY
AND HUMAN CAPITAL
EXTERNAL ASSESSMENT OF SUSTAINABLE
DEVELOPMENT
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113
113
115
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Responsible
Investment
Sistema’s responsibility as a strategic investor in Russia’s
socio-economic, innovative and technological development
is in efficiently managing portfolio assets and funds with
a view to growing their value, contributing to the sustainable
development of industries and regions where Sistema
operates, and building shared value for the state, business,
society and the environment.
ESG AND CORPORATE
RESPONSIBILITY PRINCIPLES
Sistema shares the international financial
community’s commitment to integrating
principles for responsible investment
in asset valuation and decision-making
practices. The Corporation does business
in conformity with the UN Global Compact
and the Social Charter of Russian Business,
taking due account of environmental,
social, and governance (ESG) factors
when choosing industries and assets
to invest in and interacting with all
stakeholders: shareholders, investors,
employees, partners, suppliers, consumers,
the government, nonprofits and local
communities. When making investments
or carrying out social programmes,
Sistema draws upon its versatile
expertise and synergistic partnerships
with the government, academia, and civic
and nonprofit organisations.
5. Promotion of transparency and
implementation of uniform corporate
governance standards, best practices,
advanced digital technologies, and
certified management systems across
the entire Sistema Group;
6. Helping portfolio companies and funds
in raising funds, finding partners,
structuring deals and developing
businesses;
7. Enhancement of operating efficiency and
financial performance by refining critical
business processes (procurement,
supply chain management, prevention of
corruption, risk management, corporate
communications and CSR initiatives);
8. Building synergies between assets and
funds across the group via joint business
and social projects, with and without
outside partners;
9. Consolidated management of the
social investment portfolio through the
corporate charitable foundation and by
means of general corporate initiatives
in CSR1;
10. Monitoring compliance with sustainable
development requirements put forward
by shareholders and investors by
regular publication of corporate non-
financial reports.
Sistema sees its primary responsibility
in creating and maintaining a level
of strategic planning, corporate governance
and controls conducive to a reasonable
balance of the financial and non-financial
(environmental, social, technological,
etc.) risks and opportunities required
to support the sustainable development
of the Corporation’s investment portfolio
in terms of its impact on the economy,
society and the environment.
SISTEMA IMPLEMENTS ESG
AND RESPONSIBLE BUSINESS
PRINCIPLES THROUGH:
1. Choosing industries and assets for
investment in accordance with the UN
Sustainable Development Goals as well
as national and regional priorities;
2. Fair competition, non-discrimination,
strict adherence to business ethics and
human rights, and compliance with
shareholder, antitrust, anti-corruption,
employment, and environmental law;
3. A multi-level system of selection and
examination of investment projects
based on both financial and non-financial
parameters and involving a collective
transaction approval mechanism;
4. Assessment of the potential effect of key
industrial, regional and other ESG risks
on the financial stability of certain assets
and Sistema’s investment portfolio as
a whole;
CONTRIBUTION TO SOCIO-
ECONOMIC DEVELOPMENT
Sistema and its portfolio companies
make a significant contribution
to forming a competitive labour market
and procurement market (including
purchases from small and medium-sized
businesses); modernising infrastructure,
industry and agriculture; increasing
the affordability of housing and essential
products, goods and services; improving
technological, social, food and drug security;
developing the healthcare and education
systems; and ensuring regional social
and environmental well-being through large-
scale investment programmes, digitalisation
of businesses and support for innovative
projects, as well as social, charitable,
educational and volunteer programmes that
contribute to building up intellectual capital,
adapting and humanising new technologies,
and increasing digital literacy, social activity
and quality of life.
To learn more, please refer
to the table “Contribution to Socio-Economic
Development” in the Annex.
SOCIAL INVESTMENT
IN TECHNOLOGY AND HUMAN
CAPITAL
In the past three years, the Corporation has
made approximately RUB 4 billion in social
investments. Of this, about a third was spent
by Sistema Charitable Foundation ( “SCF”),
which accumulates funds from Sistema
Group companies for the Corporation’s
infrastructure programmes.
In 2018, Sistema Charitable Foundation
thoroughly revised its strategy of charitable
activities in accordance with the general
development strategy of the Corporation,
shifting the focus to technology-related
projects, i.e., development and adoption
of modern digital tools that can improve
the efficiency of social sector practices.
The foundation’s activities were aimed
at achieving two global objectives
at once: development of human capital
and creation of technologies that improve
quality of life. Over RUB 200 million was
allocated for the implementation of three
key programmes: Lift to the Future,
Culture and Arts, and Social Projects
and Volunteering. Meanwhile, Sistema
Group companies spent more than
RUB 840 million on charity in 2018, including
30% as contributions to SCF and 70%
to implement their own social programmes..
The flagship corporate programme Lift
to the Future, created seven years ago
to support modern engineering education
in Russia, has been transformed into a whole
range of technological and educational
initiatives. For instance, in partnership
with Sistema Group’s Mikron, the largest
Russian microelectronics enterprise, SCF
established its own supplementary education
programme for student teams from Russia’s
nine leading technology universities.
Publishing and literary projects in the field
of technology have become a logical step
for Lift to the Future. Almost 2,000 authors
from 32 countries took part in the new
project Future Time, which supports talented
science fiction writers. The best sci-fi
stories selected in this contest with a prize
fund of RUB 1 million were published
as an anthology, and part of the proceeds
will be used towards SCF’s new literary
projects. Also in 2018, the foundation,
in partnership with the publishing house
Delo, translated into Russian and published
three foreign bestsellers about the way
technology affects our lives. Educational
and cultural institutions can get books
from SCF’s collection for free.
IN 2018, SISTEMA GROUP SPENT
OVER
NUMBER OF AUTHORS THAT TOOK
PART IN FUTURE TIME PROJECT
RUB 1.1 billion
on charitable and social programmes, including
social programmes of individual companies
and their donations to the corporate charitable
foundation
~2 thsd
FROM 32 COUNTRIES
1 Corporate Social Responsibility.
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In the Year of Volunteers in Russia, Sistema
started a project to help volunteer search
and rescue teams. A lack of effective
technologies to search for missing people
in the natural environment prompted SCF
to launch a large-scale research initiative,
Odyssey, in the charitable sector’s first
attempt to engage the tech community
in solving social problems. Contestants
with the best technical solutions to find
a person lost in a forest without any means
of communication in less than 10 hours —
rain or shine, day or night — will be able
to receive funding of up to RUB 75 million.
More than 120 engineering teams
from 40 cities of Russia are already willing
to offer their ideas to complete this socially
significant task.
Support for volunteering also forms part
of the Social Projects and Volunteering
programme. SCF launched two national
contests with a total grant pool
of RUB 3 million: Search Trajectory
for volunteer rescuers across the country
and Good Cause System for corporate
volunteers to support the most relevant
and socially important projects initiated
by the Corporation’s volunteer movement,
which has been in development for several
years.
SCF received an award from the Russian
national contest Good Cause Champions
for its contribution to the development
of corporate volunteering, while Medsi won
in the Competence Volunteering category
with its Volunteer Ambulance project,
in which its doctors provided volunteer
ambulance services to the elderly, supported
by the Ageing Gracefully Foundation.
In two years of cooperation between Medsi
and the foundation, volunteers performed
off-site medical examinations of over
300 people and organised several corporate
charitable events around the International
Day for Older Persons, during which Medsi
employees collected over 400 kilograms
of humanitarian supplies for nursing homes.
SCF has been supporting development
in the key areas of the country’s cultural
life for many years. Last year, one-third
of the total funds allocated for charity
(or 2% of all investments in culture,
sports and entertainment in the country)
went to the Culture and Art programme,
which includes support for the Russian
State Museum and the new Cultural
Weekend outreach project. As part
of the long-term partnership programme
with a budget of up to RUB 500 million
to be disbursed through 2023, Sistema
assisted the museum with organising
large-scale exhibitions, which were visited
by more than 220,000 people last year.
The Cultural Weekend national project, which
seeks to make museums more affordable
and promote culture and art, gathered
an unprecedented amount of visitors,
with 70,000 people in 10 Russian cities.
In 2018, SCF and Medsi continued
to provide high-tech medical aid to war
veterans under a programme developed
in conjunction with the Moscow city
government and the Moscow City Council
of Veterans. Since 2015, over 2,000 WWII
veterans and similar categories of citizens
have received free outpatient care
and rehabilitation services. Segezha Group
annually gives drugstore certificates to war
and labour veterans: in 2016-2018, almost
1,000 people received financial support
from the company to buy medicines.
PARTICIPANTS OF COUNTRY-WIDE
OUTREACH PROJECT CULTURAL
WEEKEND
>70 thsd
IN 10 CITIES
EXTERNAL ASSESSMENT OF
SUSTAINABLE DEVELOPMENT
Information openness and a continuous
dialogue with stakeholders are the basic
principles of Sistema’s operations as a public
company, reducing potential reputational
risks and increasing the Corporation’s
attractiveness for investors and partners,
with due consideration of sustainable
development efforts and independent ESG
assessments.
Sistema views public non-financial reporting
under GRI standards as an important
component of its CSR and sustainable
development management system.
Since 2015, it has annually received
public assurance of its consolidated
reports on sustainable development
from the Russian Union of Industrialists
and Entrepreneurs (RUIE). In accordance
with the best practices of responsible asset
management, Sistema encourages its key
portfolio companies and funds to disclose
significant non-financial information.
As of 2018, reports on CSR and sustainable
development have been issued
by MTS, Detsky Mir, Segezha Group, BPGC
and Sistema Charitable Foundation.
In June 2018, FTSE Russell, an analytical
agency of the London Stock Exchange,
upgraded Sistema’s ESG rating
and confirmed its status as a constituent
of the FTSE4GOOD Index Series, which
measures the ESG performance of public
companies across more than 110 criteria,
including labour relations, adherence
to human rights, impact on local
communities, anti-corruption practices,
responsible supply chain management,
and climate and environmental impact.
Since 2016, Sistema has invariably
been among leaders of RUIE indices
related to sustainable development,
which became stock market indices
in 2019. In 2018, the Corporation was one
of the top five companies in the national
corporate transparency ranking1 of private
and strategic Russian companies,
getting maximum scores for disclosure
of information on anti-corruption efforts
and procurement and high scores
for corporate and strategic governance
and sustainable development practices.
The AK&M rating agency included Sistema
in the first-ever social efficiency ranking
of major Russian companies judged
to be of highest value to society per unit
of ecosystem load. The Corporation was
also ranked among the top 20 companies
for information openness. In addition,
Sistema was declared Leader in Corporate
Charity 20182.
Sistema was the only private listed
Russian company to be included
in the list of 250 best regarded
international companies among the
Forbes Global 2000 for reliability,
work ethics, socially responsible
conduct, quality of products and
services, and as an employer. The list
is compiled based on assessments
of 15,000 respondents from
60 countries3.
Тop-5
NATIONAL CORPORATE
TRANSPARENCY RANKING1
№ 1
LEADERS IN CORPORATE
CHARITY RANKING, 20182
1 According to the annual survey conducted by the Russian Regional Network for Integrated Reporting.
2 According to the Russian national ranking of the Donors’ Forum, PwC and the Vedomosti newspaper.
3 Global 2000: Best Regarded Companies 2018.
116
SISTEMA
Annual Report 2018
sistema.com
DISCLAIMER
Certain statements in this report may
contain assumptions or forecasts in respect
to forthcoming events within Sistema.
The words “expect”, “estimate”, “intend”,
“will”, “could” and similar expressions
identify forward-looking statements. We wish
to caution you that these statements are
only predictions and that actual events
or results may differ materially. We do not
intend to update these statements to reflect
events and circumstances occurring after
the above-mentioned date or to reflect
the occurrence of unanticipated events.
Many factors could cause Sistema’s actual
results to differ materially from those con-
tained in our projections or forwardlooking
statements, including, among others, deteri-
orating economic and credit 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.
CONTACTS
INVESTOR RELATIONS DEPARTMENT:
+7 495 730-66-00
+7 495 692-22-88
PRESS CENTER:
+7 495 228-15-32
INQUIRY DESK:
+7 495 737-01-01
ADDRESS:
13, Mokhovaya Str., Moscow 125009
118
SISTEMA
Annual Report 2018
sistema.com
INQUIRY DESK:
+7 495 737-01-01
ADDRESS:
13, Mokhovaya Str., Moscow 125009