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SISTEMA JSFC Investor Presentation November 2003.

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Presentation on theme: "SISTEMA JSFC Investor Presentation November 2003."— Presentation transcript:

1 SISTEMA JSFC Investor Presentation November 2003

2 Agenda Company Overview Strategy and Operations Financial Review

3 Company Overview

4 4 Investment Highlights Largest non-natural resource based holding in Russia Diversified portfolio of assets, asset value of US$5.5bn Strong growth history and perspectives Strategic partnerships with leading international players History of successful management of major projects in Russia Industry leadership Geographic leadership - Moscow market Sistema is a leading Russian holding company with a high growth potential

5 5 History and Ownership 19931994199519961997 1998199920002001 2002 Sistema founded Won privatisation tender for MGTS Invested in MTS Acquired control of MTS and MGTS MTS IPO Acquisition of assets in insurance, retail and technology sectors Consistent development of asset base and transparent ownership structure 2003 Debut $350m Eurobond; purchase of controlling stake in MTS Vladimir Evtushenkov Management and directors 78.1%21.9% TelecomsTechnologyInsurance Real Estate Other businesses Sistema JSFC

6 6 Board of Management Key Shareholders and Managers Company Management Vladimir P. Evtushenkov Majority Shareholder (78%) Chairman of the Board Founder of Sistema Evgeny G. Novitsky Director President of Sistema since 1995 Alexander Y. Goncharuk Director General Director of OAO CSC Arkady I. Volsky Independent Director President of the Russian Union of Industrialists and Entrepreneurs Stanislav V. Emelyanov Independent Director Academician, Head of International Scientific Research Institute of Automatic Control Levan S. Vasadze First Vice President Strategy and Development Alexey N. Buyanov First Vice President, CFO Finance and Investment Shareholder Meeting Chairman of the Board of Directors Board of Directors President Internal Audit Department Corporate Strategy Committee Finance & Investment Committee Finance & Investment Strategy & Development PR and Corporate Communication Property and Legal

7 7 Corporate Governance Strong commitment to establish checks and balances within the Company: –Finance and Investment Committee empowered to vet all major investment decisions –International Consulting Council set up in May 2003 as advisory body for key strategic matters –2 out of 13 BoD members are independent High transparency and disclosure standards –Among first Russian companies to disclose beneficial owners in 2002 –High quality of corporate governance in publicly traded subsidiaries MTS: S&P Corporate Governance Score of 7.4, highest among Russian companies –In 2003, Sistema created Investor Relations Department Single point of contact for investors, analysts and media –In 2003, Sistema initiated semi-annual public disclosure of US GAAP financial reports Sistemas role as an investor in its subsidiaries as a guarantee of the profound understanding of transparency requirements Sistema adheres to the highest standards of corporate governance

8 8 Portfolio Composition Four business sectors make up the core of Sistemas investment portfolio Sistema Asset Value BreakdownSistema Sales Breakdown

9 Strategy and Operations

10 10 Strategic Goals Focused business development strategy Building a balanced portfolio of operating companies Growing size and value of technology, insurance, real estate and retail businesses Portfolio Diversification Return-based Strategy Investing into companies with leading competitive positions Establishing sales and earnings targets for operating companies Disposing of underperforming assets Management capability Attracting, developing and motivating professionals and building an effective management structure Strategic Partnerships Successful development of strategic partnerships Acquiring know-how, management skills and market knowledge

11 11 Telecommunications MTS, the largest mobile operator in Central and Eastern Europe with over 15mn subscribers in November 2003 Sistemas telecom division is the leading telecom provider in the traditional and alternative fixed-line segments in Moscow with over 4.7mn active lines in service and a market share of over 60% in 1H2003 Sistema is Moscows leading dial-up and broadband Internet services provider with a market share of 41% in 2002 The largest diversified telecom portfolio in Russia Wireless P-Com Fixed-line MGTS MTU- Inform Comstar Telmos Internet & data services MTU-Intel Golden Line Alternative operators Incumbent MCC 50.6% 60% 11% 56%* 72% 73% 59% 84% Sistema MTS * voting interest

12 12 Microelectronics Telecom Equipment and Software Industrial & Consumer Electronics Sitronics 99% Technology Russias leading semiconductor manufacturer in Zelenograd with more than 40-year history High-quality manufacturing process is ISO-9001 certified Significant share of export revenues Extensive R&D capabilities, 500 scientists employed Considerable market potential: Sitronics, Russias consumer electronics umbrella brand, operates in $5bn market (2002) Recently established presence in the telecom equipment market in Russia ($3.4bn in 2002) via Czech manufacturer Strom Telecom Leading diversified technology business in Russia Technology Division 100% Scientific Center 56% Mikron 28% Corona Elion 70% Elaks 64% VZPP- Mikron 51% 52% Kvant 28% 70% Strom- Telecom 80% Angstrem 8% Angstrem-M 8% R&D NIITM ICM

13 13 Insurance One of the leading insurance companies in a high-growth Russian insurance market of $9.6bn (in 2002) Strategic partnership with Allianz AG (45.27% of ROSNO) bringing industry expertise and improving efficiency Nationwide coverage: 78 branches located throughout the Russian Federation Diversified portfolio (over 160) of tailor- made insurance products Prudent insurance policies based on international standards Top 3 Russian insurer leveraging on combination of local experience and international know how 47% (51% voting) Insurance Division ROSNO

14 14 Real Estate Highly prominent segment with high cash generation capacity Sistema Hals is one of the leading real estate developers in Moscow with numerous international awards Real estate was one of our initial businesses - we started it early in 90s Specializes in developing premium offices, luxury apartments, retail space and cottages We have an excellent track record in developing premium offices for foreign corporates, having completed projects for Daimler-Chrysler, Dresdner Bank, BNP, Samsung Electronics, and others Very attractive portfolio of projects in Moscows booming real estate market 98% LandchaftSistema Hals 98% Real Estate Division Hals-ManagementSistema-Temp 86%99%

15 15 Other Businesses: Ownership Structure Other Businesses Retail Detsky Mir Detsky Mir Center Travel services Oil & GasMass media Pharmaceu- ticals International operations VAO Intourist Sistema- NEFT Sistema Mass Media Medical Technology Holding Company ECU-Gest 71% 100% 91%95% 100%74%99% Belkamneft UPK Nedra 33% 83% Banking and Finance MBRD East-West United Bank 30% 56%

16 16 Portfolio Management Core businesses: –Main recipients of Sistemas own investments –Board level involvement mainly –Emphasis on strategy, cash flow and key managers Non-core businesses: –Mostly self-funded, recipients of residual Sistemas own investments –Sistema closely involved with business process engineering Sistemas approach to managing an individual operating company is based on the business segment and development stage

17 Financial Review

18 18 Financial Strategy Sound approach to financing: –Core businesses financing through a combination of Sistemas equity, own debt and involvement of strategic partners –Non-Core Businesses financing mostly through internal cash flow generation and partnering initiatives Commitment to optimize the quality and maturity profile of the debt portfolio Diversification of debt instruments: –Domestic ruble market (holding and subsidiary level financing) –International debt capital markets Sistema US$350mn Reg S Eurobond issue outstanding Sistema 144A/ Reg S Eurobond planned Established MTS Eurobond curve (Global and 144A/Reg S issues) Project financing Equity financing (potential application of MTS model to other subsidiaries)

19 19 Financial Strategy: Cash Flow Sources As an operating holding company, Sistema has three major cash flow sources: Dividend Cash Flows –Starting in 2002 MTS has changed its policy of dividend distribution with payout levels established in a shareholder agreement between Sistema and Deutsche Telekom, which should provide holding company with sound cash upstream –In future, as our businesses mature, we expect dividends to become a significant recurring cash flow source for the holding company Income from Real Estate –Real Estate segment is different from our other business lines as it is capable to generate significant cashflows for the holding company in the short to mid term while other businesses (except for MTS) are at earlier stages of development Capital Gains Potential –We are quite flexible in respect of non-core asset disposals and are taking a tactical approach to managing our interests in these businesses In addition to three major sources, Sistema receives consulting/management fees which are generally balanced against holding companys administration costs

20 20 Sistema in Russian Economy Context Rapid improvement in Russian economic profile creates unique opportunities for Sistema rapid development Strong economic growth: 6.2-6.4% GDP growth expectations for 2003 Large FX (US$61bn) and fiscal (US$7bn) reserves Budget surplus since 2000 (2% of GDP so far in 2003) Stable exchange rate and declining inflation (13.2% as of September 2003) Wide spread corporate restructuring and growing labour productivity Progress of structural reforms in key areas (tax, natural monopolies, land and administration) Moodys upgrade to investment category (Baa3 rating) as an evidence of economical and political progress recognition GDP / Industrial Production Growth, %YOY CPI, %YOY

21 21 Financial Performance Selected Items from US GAAP Audited Consolidated Financial Statements Significant change of financial results in 1H2003 due to MTS consolidation (1)Total Debt excludes notes payable and includes capital leases

22 22 Profitability Sustainable profitability and efficient use of capital Return on Capital EmployedReturn on Total AssetsReturn on Equity Note: 1. ROCE calculated as (Operating Income + Depreciation&Amortisation) / Average (Shareholders Equity + Total Debt) 2. ROTA calculated as (Operating Income + Depreciation&Amortisation) / Average Total Assets 3. ROE calculated as Net Income / Average Shareholders Equity

23 23 Credit Ratio Analysis Moderate level of debt as compared against operating statistics and asset base CFO / Net InterestTotal Debt / CFOTotal Debt/Total Assets 33.5% 27.7% 25.7% 36.6% 2000200120021H2003 Note: 1. CFO/Net Interest is calculated as Cash flow from operations / (Interest Expense - Interest Income)

24 24 Asset Protection On the holding company level, Sistemas credit strength is supported by a sufficiently large portfolio of traded securities - MTS and MGTS shares Sistemas two largest investments include listed companies, MTS and MGTS (MTS is listed on NYSE, MGTS is listed in Russia) MTS and MGTS stakes value exceeds the total amount of consolidated debt by a significant margin

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