Annual Report 2018 About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 1 SISTEMA Contents ABOUT THE COMPANY 2 CORPORATE GOVERNANCE 82 Profile of Sistema 4 Sistema’s Corporate Governance Principles 84 Investment Portfolio 6 Sistema’s Corporate Governance Structure 85 CEO’s Statement 8 General Meeting of Shareholders 86 Key Events of 2018 10 Board of Directors 88 ONE OF THE LARGEST Mission and Strategy 14 Committees of the Board of Directors 92 FINANCIAL PERFORMANCE 16 President 94 Financial Performance in 2018 18 Management Board 95 PRIVATE INVESTORS Shareholders’ Equity 22 Committees Reporting to the President 96 and the Management Board Report on Dividends 24 Specific Characteristics of Risk Management, Sistema’s Credit Ratings 25 Internal Control and Internal Audit Systems 98 INTO RUSSIA’S KEY ASSET RESULTS 26 Development of the Corporate Governance System in 2018 100 MTS 28 Remuneration Policy 102 Detsky Mir 32 CONTEMPORARY Risks 104 Segezha Group 36 SOCIAL RESPONSIBILITY 110 Medsi 42 ESG and Corporate Responsibility Principles 112 ECONOMY Agroholding “STEPPE” 49 Contribution to Socio-Economic Development 113 Real Estate Assets 54 Social Investment in Technology and Human Capital 113 RTI 60 External Assessment of Sustainable Development 115 8 BPGC 63 For more information about Sistema Hospitality Assets 66 visit our website: Binnopharm 69 https://sistema.com Other Portfolio Companies 72 Funds 74 Ozon 80 2 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 3 PROFILE OF SISTEMA 4 ABOUT INVESTMENT PORTFOLIO 6 CEO’S STATEMENT 8 THE COMPANY KEY EVENTS OF 2018 10 MISSION AND STRATEGY 14 4 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 5 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. Profile 3 Sistema acquired a 25% stake in Etalon Group Plc in February 2019. of Sistema Sistema is one of the largest private investors in the real INVESTMENTS KEY HIGHLIGHTS 20181 UNIQUE PORTFOLIO OF ASSETS sector of the Russian economy. Sistema’s investment AND COMPETENCES IN HIGH-POTENTIAL SECTORS portfolio comprises in sectors including OF THE RUSSIAN ECONOMY Russian companies REVENUE telecommunications, consumer retail, paper and packaging, >150 000 000 agriculture, high-tech, real estate, healthcare and hospitality. Sistema holds controlling interests in most of its portfolio CONSUMERS companies. 777.4 Public RUB billion2 assets: ASSETS MTS, DETSKY MIR, ETALON GROUP3 >15 SECTORS Sistema’s strategic goal is to create RUSSIA’S BIGGEST PRIVATE NON-RESOURCES CORPORATION 1,465.4 long-term growth of shareholder value by boosting returns on ONE OF RUSSIA’S RUB billion investments in existing assets and INVESTS MORE THAN ONE OF RUSSIA’S reinvesting available cash in new investment projects to diversify its 20 portfolio and increase overall returns RUB 100 billion CREDIT RATINGS 50 on investment. LARGEST PRIVATE COMPANIES FROM INTERNATIONAL IN THE FORBES GLOBAL 2000 IN THE RUSSIAN ECONOMY AND RUSSIAN RATING MOST VALUABLE Sistema focuses on improving the EVERY YEAR AGENCIES BRANDS operational efficiency of the assets it acquires by restructuring and by working with relevant partners to enhance expertise and mitigate Top-15 S&P financial risks. RUSSIA’S LARGEST COMPANIES The Corporation’s shares trade on BY REVENUE FITCH B+ Moscow Exchange (ticker: AFKS) and on the London Stock Exchange in the RAEX form of global depositary receipts BB- (ticker: SSA). One GDR represents 20 ordinary shares. RuA- GDRS ON LSE MOSCOW EXCHANGE TICKER SSA AFKS 6 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 7 Leading One of Russia’s Russian leading developers multicategory and manufacturers of Investment online retailer high-tech products 1 Binnopharm OBL Pharm Portfolio One of Russia’s One of leading Cosmos Group largest full-cycle One of Russia’s leading production companies biopharmaceutical hotel management 36.0% 96.0% in the Russian companies companies pharmaceutical market BY PRODUCTION OF HIGH-QUALITY UNBLEACHED SACK PAPER 74.0% No.1 IN RUSSIA 2 3 100% OZON KRONSTADT GROUP No.3 IN THE WORLD LEADING 12.8% RUSSIAN TELECOMS OPERATOR BY PAPER SACK HOSPITALITY by subscriber base, PRODUCTION ASSETS PHARMACEU- Leading revenue and OIBDA Leading Russian TICALS vertically integrated telecommunications IN RUSSIA No.1 forest holding operator and digital services provider No.2 IN EUROPE in Russia Over 105 million 99.9% 50.01% MOBILE SUBSCRIBERS SEGEZHA GROUP MTS RUSSIAN MARKET 482 million chips stores 748 No.1 Leading DETSKY IN RUSSIAN CITIES, player in the children’s RTI Russian high-tech KAZAKHSTAN AND 52.1% MIR 87.0% 4 company BELARUS goods market in Russia MICROCHIPS 1,381 million AGRO- HOLDING BPGC STEPPE AMONG RUSSIA’S 92.8%5 91.0% 6 largest Major agriculture Bashkirian Power Grid LAND OWNERS holding Company — One of Russia’s biggest and one of the Russia’s TOTAL LENGTH OF POWER largest land owners CONCEPT MEDSI power grid companies GRIDS AMONG RUSSIA’S GROUP Over 88,500 sqm 6 largest GRAIN EXPORTERS INVESTMENT 43.0% FUNDS REAL ESTATE 98.5% 1 As at December 31st 2018, Sistema’s direct stake in MTS bank was 43.24%. One of the In February 2019, after the sale of MTS Bank shares to Mobile TeleSystems B.V., largest players No.1 100% subsidiary of MTS, Sistema’s direct stake in MTS bank decreased to 5.0%. Russian in lingerie wholesale private 2 Hereinafter Sistema’s stake refers to effective stake for MTS, BPGC and to total and childrenswear healthcare company ownership for other assets. The stake in Ozon.Ru includes all shares controlled Leader Invest, by revenue in 2018 by Sistema Group. monobrand stores Private equity and asset Business-Nedvizhimost, 3 Sistema acquired 18.7% in Ozon Holdings Limited in March 2019. management funds 6 PATIENT VISITS 4 As of 31 March 2019. As of 31 December 2018 Detsky Mir Group included Etalon Group 743 stores in Russia and Kazakhstan. 6 Sistema acquired 25% of Etalon million per year 5 84.63% as of December 31, 2018. Group in February 2019. 8,5 8 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 9 CEO’s Statement DEAR SHAREHOLDERS, Detsky Mir continues to open new stores Steppe’s OIBDA was up 22% in 2018 due In pharma, Sistema partnered with VTB Looking ahead, we will continue to deliver in new regions of Russia and Kazakhstan. to improved efficiency in the grain segment to acquire a 95% stake in OBL Pharm, which against the strategy adopted in 2018 that Sistema delivered impressive growth of both It has also launched operations in Belarus and the development of agrotrading. we plan to merge with our pharmaceutical centres on three strategic goals: revenue (up 12%) and OIBDA (up 34%) and in the promising pet supplies segment. business, Binnopharm, in the coming in the full year 2018, as our portfolio And online sales almost doubled during Medsi’s revenue for the year (+52%) affirmed months. The two companies possess Z maximising shareholder returns and companies continued to consolidate their the year, reaching almost 8% of sales. its position as Russia’s leading private complementary assets and we have set reducing the discount between market respective markets and expand into new healthcare provider. Adjusted OIBDA rose 83% a medium-term goal of building out a top- capitalisation and NAV; business segments. Our key non-public assets, both exporters in the full year 2018, primarily driven by higher five Russian player in the fast-growing Z attracting third-party capital to enhance and domestic players, strengthened their utilisation rates and an increase in revenue commercial segment of the pharma our investment resources. Our publicly traded assets delivered market positions. per square metre of medical facilities. industry. In April 2019, the Russian Direct sustained growth in revenue and OIBDA Investment Fund, the Russia-China Our strategic focus is on building out four as both MTS and Detsky Mir continue to lead At Segezha Group, where the top line grew Over recent months, Sistema has completed Investment Fund and the largest Middle businesses — Steppe, Segezha Group, their respective sectors. In both the retail by 32% for the full year, growth was driven transactions that crystallise the value of our Eastern funds agreed to join the project, Medsi and Ozon — with a target and telecoms sectors, the operating by the paper and packaging segment, which assets in real estate and the pharmaceuticals which is a solid confirmation of the project’s enterprise value per business environment presents its own challenges. accounted for 70% of total revenue. Adjusted sector. investment appeal and its importance of USD 1–2bn. Our ambition However, both management teams have OIBDA was up 83% for 2018. Growth was for the development of the industry. is to eventually take them shown the ability to successfully monetise driven by: In February 2019, we sold a 51% stake in our to the public markets, opening their customer bases. Moscow real estate development business, Additionally, we have made a strategic bet up whole new sectors Z increased prices for key Segezha’s Leader Invest, to London-listed development on Russian e-commerce, increasing our of the Russian economy MTS posted full year revenue growth products; and construction company Etalon Group. holding in market leader Ozon by buying to equity investors through of 8% year-on-year, despite a 0.4% year-on- Z greater capacity due to a new Subsequently, Sistema acquired 25% of Etalon out MTS’s stake and acquiring stakes fast-growing companies year decrease in subscribers.