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JSFC Sistema (SSA)

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Thursday 17 September, 2009

JSFC Sistema

Half-yearly Report

Half-yearly Report

JSFC Sistema

SISTEMA ANNOUNCES UNAUDITED FINANCIAL RESULTS FOR
THE SECOND QUARTER ENDED JUNE 30, 2009

Moscow, Russia – 17 September, 2009 – Sistema (the “Group”) (LSE:SSA), the largest diversified public financial corporation in Russia and the CIS, which invests in and is a major shareholder of companies operating in different industries, today announced its unaudited consolidated US GAAP financial results for the second quarter ended June 30, 2009.

SECOND QUARTER HIGHLIGHTS

  • Consolidated revenues up 56.0% quarter on quarter to US$ 4,242.3 million and up 13.1% quarter on quarter to US$ 3,074.9 million, excluding results of the Oil & Energy business unit
  • Consolidated OIBDA up 37.7% quarter on quarter to US$ 1,196.6 million with OIBDA margin of 28.2% and up 14.9% quarter on quarter to US$ 998.6 million with OIBDA margin of 32.2%, excluding results of the Oil & Energy business unit
  • Consolidated net income attributable to the Group of US$ 246.2 million, including gains from foreign exchange of US$ 401.5 million, compared to US 395.5 million net loss in the first quarter
  • The Oil & Energy business unit contributed US$ 1,167.4 million to the Group’s consolidated revenues and US$ 198.0 million to Sistema’s OIBDA following its consolidation in the second quarter.

KEY CORPORATE HIGHLIGHTS IN THE SECOND QUARTER AND AFTER THE END OF THE REPORTING PERIOD

  • In August 2009, Sistema Board of Directors agreed to the acquisition of its 50.91% stake in Comstar UTS by MTS for US$ 1.272 billion
  • In August 2009, Sistema placed RUB 20 billion second series five-year bond with a put option exercisable in three years, with an annual coupon rate set at 14.75%
  • In August 2009, Comstar UTS completed the first stage of the reorganization of its regional business through the merger of seven of its largest subsidiaries into CJSC Comstar-Regions
  • In July 2009, MTS placed its fifth ruble bond totaling RUB 15 billion which matures in 2016 and carries a 14.25% coupon rate
  • InAugust 2009, SSTL reached 1.9 million subscribers under MTS brand
  • In May 2009, Sistema signed supplemental agreements for acquisition of a controlling stake in Bashkir Oil and Energy Group for RUB 66.8 billion with no further payments being made
  • In April Sistema signed an agreement with VTB Bank to sell a controlling stake in Sistema-Hals
  • In April 2009, SITRONICS opened a subsidiary in New Delhi, India.

Leonid Melamed, President and Chief Executive Officer of Sistema, commented: “In the second quarter of 2009, Sistema Group has delivered a set of results, which demonstrates the resilience of our businesses when faced with challenging market conditions and the effectiveness of undertaken measures to optimise our operations. The goal is to fully realise our growth potential. We remain focused on implementing our key tasks: the integration of telecommunications assets and the strengthening of our leadership position within the industry; further increase in the operating efficiency of our oil companies and the creation of an attractive investment asset; the minimisation of the impact of the crisis on our consumer sector companies, including through search for strategic partnerships; as well as the expansion of opportunities for private-state partnerships and effective participation in national scale projects.”

FINANCIAL SUMMARY

(US$ millions, except per share amounts)  

2Q 2009

 

2Q 2008

  Year on Year Change  

1Q 2009

  Quarter on Quarter Change
Revenues 4,242.3 4,113.6 3.1% 2,719.3 56.0%
OIBDA 1,196.6 1,501.3 (20.3%) 869.0 37.7%
Operating income 655.4 919.2 (28.7%) 430.9 52.1%
Net income/ (loss) attributable to the Group 246.2 277.3 (11.2%) (395.5) -
Basic and diluted income/ (loss) per share (US cents) 2.65 3.0 (11.2%) (4.26) -

GROUP OPERATING REVIEW

Sistema’s consolidated revenues increased by 3.1% year on year and by 56.0% quarter on quarter primarily as a result of the consolidation of the Oil & Energy business unit in the second quarter of 2009, which contributed US$ 1,167.4 million of revenues, and an upbeat performance of its Telecommunications business unit. Non-telecommunications businesses, including the Oil & Energy business unit, accounted for 43.8% of total Group consolidated revenues in the second quarter, compared to 24.4% and 20.2% for the second quarter of 2008 and the first quarter of 2009 respectively.

Selling, general and administrative expenses increased by 1.6% year on year and by 38.6% quarter on quarter to US$ 886.1 million mainly due to the consolidation of the Oil & Energy business unit.

The Group OIBDA declined by 20.3% year on year mainly due to the appreciation of the US dollar against the local currencies, however OIBDA increased by 37.7% quarter on quarter following the consolidation of the Oil & Energy business unit, an improvement in operating performance and local currencies appreciation. The Group OIBDA margin decreased from 36.5% in the second quarter of 2008 and 32.0% in the first quarter of 2009 to 28.2% in the reporting quarter partially due to the consolidation of the lower margin oil business.

Depreciation and amortisation expense decreased by 7.0% year on year while it rose by 23.5% quarter on quarter.

The Group operating income declined by 28.7% year on year, however it increased by 52.1% quarter on quarter. Operating margin declined to 15.4% in the reporting quarter from 22.3% in the second quarter of 2008 and 15.8% in the first quarter of 2009.

The Group interest expense was US$ 260.8 million in the second quarter, compared to US$ 101.5 million and US$ 192.6 million in the second quarter of 2008 and the first quarter of 2009 respectively, mainly due to the increase in total debt and an average interest rate.

The Group generated net income attributable to Sistema of US$ 246.2 million in the second quarter, compared to net income of US$ 277.3 million in the corresponding period of 2008 and a net loss of US$ 395.5 million in the first quarter of 2009.

SEGMENTAL OPERATING REVIEW1

TELECOMMUNICATIONS BUSINESS UNIT

(US$ millions)  

2Q 2009

 

2Q 2008

  Year on Year Change  

1Q 2009

  Quarter on Quarter Change
Revenues 2,385.7 3,104.4 (23.2%) 2,170.0 9.9%
OIBDA 1,032.8 1,508.6 (31.5%) 901.8 14.5%
Operating income 588.0 966.8 (39.2%) 493.1 19.3%
Net income/ (loss) attributable to the Group 264.9 386.9 (31.5%) (119.5) -
MTS
Revenues 2,022.4 2,635.5 (23.3%) 1,809.0 11.8%
OIBDA 953.7 1,349.5 (29.3%) 831.5 14.7%
Operating income 548.1 857.3 (36.1%) 464.2 18.1%
Net income/ (loss) attributable to the Group 313.7 354.4 (11.5%) (32.2) -
Comstar UTS
Revenues 363.6 417.3 (12.9%) 334.4 8.7%
OIBDA 149.1 159.3 (6.4%) 130.7 14.1%
Operating income 104.9 107.1 (2.0%) 86.6 21.2%
Net income attributable to the Group 17.8 15.7 13.4% 7.5 138.1%
SSTL
Revenues 7.2 6.1 18.9% 5.4 34.9%
OIBDA (41.1) (3.3) - (30.4) -
Operating loss (46.3) (4.9) - (36.4) -
Net loss attributable to the Group (22.9) (13.7) - (49.1) -
Sistema Mass Media
Revenues 9.3 51.3 (81.9%) 20.0 (53.4%)
OIBDA (11.4) 12.3 - 0.9 -
Operating loss (17.8) (3.8) - (6.8) -
Net loss attributable to the Group (17.6) (6.8) - (4.0) -

The Telecommunications business unit comprises MTS; Comstar UTS; Sistema Shyam TeleServices Ltd. (SSTL) and Sistema Mass Media. The unit’s revenues decreased by 23.2% year on year, however revenues were up 9.9% quarter on quarter due to subscriber growth and increase in voice and data usage at MTS and followed by price increases in certain of Comstar UTS’ regulated services and growth in ‘Calling Party Pays’ volumes; as well as the appreciation of the Russian ruble against the US dollar in the second quarter. The Telecommunications business unit accounted for 56.2% of the Group’s consolidated revenues in the second quarter of 2009.

The Telecommunications business unit’s OIBDA declined by 31.5% year on year, however OIBDA increased by 14.5% quarter on quarter as a result of revenue growth and local currencies appreciation at MTS and Comstar UTS. OIBDA margin was 43.3% in the second quarter of 2009, compared to 48.6% and 41.6% in the second quarter of 2008 and the first quarter of 2009 respectively.

The Telecommunications business unit reported net income of US$ 264.9 million in the second quarter, compared to US$ 119.5 million loss in the first quarter of 2009, largely as a result of the robust performance of MTS and Comstar UTS and the appreciation of the Russian ruble against the US dollar.

MTS added approximately 2.9 million subscribers during the second quarter of 2009 resulting in the total consolidated subscriber base of approximately 99.5 million customers as at June 30, 2009. MTS revenues decreased by 23.3% year on year, however revenues increased by 11.8% quarter on quarter due to subscriber growth, increase in voice and data consumption, seasonal usage factors and the appreciation of the local currency against the US dollar. The average monthly service revenue per subscriber (“ARPU”) in Russia decreased from RUB 260.7 in the second quarter of 2008 to RUB 245.4 in the reporting period, however it was up quarter on quarter from RUB 233.5 in the first quarter of 2009. Russian subscribers’ monthly Minutes of Use (MOU) increased to 216 in the second quarter of 2009 from 207 in the prior period of 2008.

MTS’ OIBDA declined by 29.3% year on year, however OIBDA was up 14.7% quarter on quarter as a result of revenue growth, optimized spending and local currency appreciation. The OIBDA margin declined in the second quarter to 47.2% compared to 51.2% and increased compared to 46.0% in the second quarter of 2008 and the first quarter of 2009 respectively.

Comstar UTS’ revenues declined by 12.9% year on year, however revenues increased by 8.7% quarter on quarter, mainly as a result of the consolidation of Stream-TV, Interlink and UTC; growth in ‘Calling Party Pays’ volumes; the average 8% regulatory ruble price increase for MGTS residential and corporate voice services from March 1, 2009; the average 12% ruble price increase for Comstar UTS residential and corporate services from March 1, 2009 and the launch of direct sales of long distance voice services from October 2008. Comstar UTS’ broadband subscriber base increased by 32% year on year to 1.18 million customers in the second quarter.

Comstar UTS’ OIBDA decreased by 6.4% year on year and was up 14.1% quarter on quarter. The OIBDA margin increased to 41.0% in the second quarter, compared to 38.2% and 39.1% in the second quarter of 2008 and the first quarter of 2009 respectively, despite the consolidation of the lower margin STREAM-TV business, which was offset by the tariff increases and the ongoing cost optimization programme.

SSTL’s revenues increased by 18.9% year on year and by 34.9% quarter on quarter as a result of the strong growth in total mobile subscriber base and expansion of network coverage into three new circles: Kolkata, West Bengal and Bihar. The total fixed line subscriber base reduced further to 243,000 users as a result of the continued fixed to mobile substitution. SSTL’s mobile subscriber base reached 1,057,000 customers in the end of the second quarter. Mobile ARPU declined to US$ 2.5 in the second quarter of 2009, compared to US$ 2.9 in the first quarter of 2009 as a result of the growth in prepaid customers. Subscribers’ MOU increased from 338 in the first quarter of 2009 to 402 in the second quarter following a successful marketing campaign aimed at promoting customer loyalty and attracting new subscribers by offering a competitive in-network calling tariff.

SSTL generated an OIBDA loss of US$ 41.1 million in the second quarter of 2009 due to additional expenses associated with the rollout of new networks.

Sistema Mass Media’s revenues declined by 81.9% year on year and 53.4% quarter on quarter, primarily as a result of the sale of Stream-TV business to Comstar UTS and the fall in programming and advertising revenues. The segment sold 424 hours of programming in the second quarter, compared to 327 hours in the first quarter. The subscriber base of operators, which offer access to Stream-Content’s channels, was up by 3.0% quarter on quarter to over 5 million customers as at the end of the second quarter, whilst Stream-Content ARPU was up to US$ 0.46 (RUB 14.4), compared to US$ 0.43 (RUB 13.5) in the first quarter.

Sistema Mass Media reported an OIBDA loss in the second quarter of 2009.

In June 2009, SSTL launched services in the fifth Indian circle and expanded coverage under the MTS brand to eleven districts of West Bengal, following the successful entry into Kolkata state in May 2009.

In May 2009, MTS launched the first phase of its 3G network in Moscow.

In May 2009, SSTL announced that Ron Sommer was appointed Chairman of the Board of Directors, Sergey Cheremin - Deputy Chairman, Mikhail Shamolin - a Director and Mr. Madhukar - an Independent Director.

In April 2009, MTS launched its 3G network in Armenia.

CONSUMER BUSINESS UNIT

(US$ millions)  

2Q 2009

 

2Q 2008

  Year on Year Change  

1Q 2009

  Quarter on Quarter Change
Revenues 427.0 567.0 (24.7%) 348.3 22.6%
OIBDA (7.6) 24.3 - (20.9) -
Operating (loss)/ income (18.3) 8.4 - (29.9) -
Net loss attributable to the Group (52.7) (2.8) - (108.7) -
Banking
Revenues 174.9 189.1 (7.5%) 163.0 7.3%
OIBDA 15.2 24.1 (36.9%) 11.5 32.7%
Operating income 11.3 17.6 (36.0%) 8.7 29.2%
Net income attributable to the Group 4.8 11.8 (59.1%) 6.7 (27.9%)
Retail
Revenues 124.6 173.0 (28.0%) 116.7 6.8%
OIBDA (30.1) (9.4) - (28.2) -
Operating loss (33.7) (15.3) - (31.3) -
Net loss attributable to the Group (27.3) (10.8) - (50.0) -
Tourism
Revenues 96.4 164.2 (41.3%) 42.5 126.9%
OIBDA 7.0 13.3 (47.6%) (7.4) 194.3%
Operating income/ (loss) 5.1 10.6 (52.3%) (9.5) 153.5%
Net income/ (loss) attributable to the Group 4.2 5.7 (26.1%) (13.0) 132.3%
Healthcare
Revenues 30.3 31.4 (3.5%) 26.6 14.0%
OIBDA 1.2 1.7 (28.1%) 2.5 (50.8%)
Operating income 0.04 0.8 (95.8%) 1.4 (97.4%)
Net loss attributable to the Group (0.03) (0.1) - (2.5) -

The Consumer business unit comprises the Banking; the Retail; the Tourism and the Healthcare businesses. The Consumer business unit’s revenues declined by 24.7% year on year, however revenues increased by 22.6% quarter on quarter, largely due to the robust performance of the Tourism business. The unit accounted for 10.1% of consolidated results in the second quarter.

The Consumer business unit reported a reduction in OIBDA loss in the second quarter, compared to the first quarter, as a result of growth in OIBDA in the Tourism and Banking businesses.

The Consumer business unit generated a smaller net loss in the second quarter, compared to the first quarter, largely due to net profit received by the Tourism business and a reduced loss produced by the Retail business.

The Banking business’ revenues decreased by 7.5% year on year as a result of the decline in net income received from transactions in foreign currency and financial instruments; however revenues were up 7.3% quarter on quarter following the increase in interest income and income from commissions, as well as net income generated from transactions with financial instruments, compared to the first quarter of 2009.

The loan portfolio, excluding leases, increased by 9.9% quarter on quarter to US$ 5,092.8 million as at June 30, 2009. Interest income received from retail and corporate lending operations remained stable year on year and amounted to US$ 294.7 million in the second quarter. The retail banking business included 176 points of sales, including 29 points of sales in Moscow and 147 points in 37 Russian regions as at June 30, 2009.

The Banking business OIBDA declined by 36.9% year on year as a result of decrease in net income received from transactions in foreign currency and financial instruments. The segment OIBDA increased by 32.7% quarter on quarter following the decrease in loan provisions and operating and commission expenses, as well as the increase in interest income and net income generated from transactions with financial instruments.

Revenues from the Retail business decreased by 28.0% year on year mainly due to the Russian ruble devaluation against the US dollar, however revenues were up 6.8% quarter on quarter, following a seasonal increase in the second quarter. By the end of the second quarter the network of retail outlets included 125 stores located in 66 Russian cities, whilst the aggregate retail space was 215,000 square metres. During the quarter the Retail business opened a class A distribution center totaling 21,000 square metres.

The Retail business reported an OIBDA loss in the second quarter as a result of decline in consumer spending and pricing pressure on retail margins.

The Tourism business’ revenues declined by 41.3% year on year as a result of the decrease in travel activity, which was adversely impacted by the global financial crisis. Business’ revenues more than doubled quarter on quarter, largely due to the seasonality effect. The business serviced 170,000 customers in the second quarter of 2009, compared to 73,000 in the first quarter of 2009. The hotel group’s total number of rooms owned and under management totaled 3,236 at the end of the second quarter. The business’ sales turnover2 more than doubled quarter on quarter in the second quarter to US$ 131.0 million, as a result of the seasonality effect.

OIBDA for the Tourism business declined by 47.6% year on year, however OIBDA nearly doubled quarter on quarter mainly due to the appreciation of local currency.

The Healthcare Services business’ revenues declined by 3.5% year on year, however revenues were up 14.0% quarter on quarter following the opening of new clinics and seasonality of the business. The total number of visits to medical clinics increased by 20.9% quarter on quarter to 862,300. The business provided approximately 1.6 million medical services during the quarter. As at June 30, 2009 the network consisted of 29 medical clinics, including 17 in Moscow and 12 in the regions.

OIBDA for the Healthcare Services business declined by 28.1% year on year and 50.8% quarter on quarter as a result of additional costs incurred after opening new clinics.

TECHNOLOGY & INDUSTRY BUSINESS UNIT

(US$ millions)  

2Q 2009

 

2Q 2008

  Year on Year Change  

1Q 2009

  Quarter on Quarter Change
Revenues 341.6 446.5 (23.5%) 227.5 50.2%
OIBDA 32.2 27.0 19.1% 3.6 793.1%
Operating income/ (loss) 17.5 6.7 161.5% (11.7) 249.6%
Net loss attributable to the Group (15.8) (8.8) - (31.5) -
High Technology
Revenues 247.1 332.0 (25.6%) 156.9 57.5%
OIBDA 20.3 19.6 3.8% (6.9) 394.9%
Operating income/ (loss) 7.6 1.1 559.3% (19.6) 138.7%
Net loss attributable to the Group (20.3) (11.3) - (29.4) -
Radars and Aerospace
Revenues 83.9 107.6 (22.1%) 63.9 31.2%
OIBDA 13.4 13.5 (1.0%) 10.0 34.1%
Operating income 12.0 12.3 (2.8%) 7.8 54.5%
Net income/ (loss) attributable to the Group 7.6 4.5 69.9% (1.1) 815.3%
Pharmaceuticals
Revenues 8.2 11.2 (26.7%) 5.0 66.3%
OIBDA (0.9) (3.5) - (0.8) -
Operating loss (1.4) (4.3) - (1.2) -
Net loss attributable to the Group (2.3) (3.9) - (1.7) -

The Technology and Industry business unit comprises the High Technology business, the Radars and Aerospace business and the Pharmaceuticals business. The unit’s revenues declined by 23.5% year on year, however revenues increased by 50.2% quarter on quarter due to robust results of the High Technology business. The unit contributed 6.2% of the Group’s consolidated revenues in the second quarter of 2009.

The Technology and Industry business unit’s OIBDA increased by 19.1% year on year and was up nearly eight times quarter on quarter following the improvement in the High Technology business’s operating performance.

The Technology and Industry business unit reported a net loss in the second quarter largely as a result of a loss from the sale of distribution business by the High Technology business in April 2009.

Revenues for the High Technology business declined by 25.6% year on year, however revenues were up 57.5% quarter on quarter due to seasonally stronger quarter.

The High Technology business’ OIBDA was up by 3.8% year on year and increased nearly four fold quarter on quarter following the growth in the business and a reduction in operating expenses, which resulted in improved operating efficiency levels.

The Radars and Aerospace business’ revenues declined by 22.1% year on year, however revenues increased by 31.2% quarter on quarter due to the seasonally weak first quarter. The operating performance in the second quarter reflected the cyclicality of the business which traditionally peaks towards the year end. Additionally, the business won several tenders held by ROSKARTOGRAFIA, the Russian Federal Service for Geodesy and Cartography.

OIBDA of the Radars and Aerospace business declined by 1.0% year on year, however OIBDA increased by 34.1% quarter on quarter as a result of the higher profitability of projects completed during the reporting period.

The Pharmaceuticals business’ revenues declined by 26.7% year on year following the closing of its distribution business, however revenues increased by 66.3% quarter on quarter as the business began shipments of Hepatitis B vaccine under a new contract signed with Rospotrebnadzor, the Russian Health and Consumer Rights Agency. The vaccine was manufactured using a full production cycle at the business’ plant for the first time in Russia. The new production facility was opened in Zelenograd, and the business is currently testing production lines of aerosols, ampoules and tablets, and plans to start the certification of its products, as well as shipments of medications from new production lines by November 2009.

OIBDA loss of the Pharmaceuticals business contracted year on year and remained relatively stable quarter on quarter. The segment recorded a non-cash charge for bad debts against losses incurred under the contract for the delivery of Hepatitis B vaccine to Nigeria.

In April 2009, SITRONICS sold part of its IT distribution division, in line with its stated strategy to focus on higher margin and less capital intensive businesses.

In April 2009, SITRONICS opened a subsidiary in New Delhi, India. The company started its operations in the Indian market in May 2009.

In June 2009, RTI Systems acquired a minority stake in Radio Technical Institute named after Professor A. L. Mints, a leading Russian R&D institute for radio electronics, radio detectors and telecommunications systems, thus increasing its holding to 51.19%.

OIL & ENERGY BUSINESS UNIT

(US$ millions)  

2Q 2009

Revenues 1,167.4
OIBDA 198.0
Operating income 128.9
Net income attributable to the Group 92.0
Bashneft
Revenues 574.6
OIBDA 124.2
Operating income 101.4
Net income attributable to the Group 51.3
BashTEK Refinery
Revenues 289.2
OIBDA 9.6
Operating loss (13.4)
Net loss attributable to the Group (8.8)
BashkirEnergo
Revenues 336.0
OIBDA 57.4
Operating income 39.5
Net income attributable to the Group 12.0
Bashkirnefteproduct
Revenues 132.6
OIBDA 14.3
Operating income 12.8
Net income attributable to the Group 8.1

The Oil & Energy business unit was created in April 2009 and comprises oil and energy companies of the Bashkir Oil & Energy Group. The unit’s performance is included for the first time in Sistema’s results for the second quarter of 2009. The unit contributed 27.5% of the Group’s consolidated revenues in the second quarter of 2009. The unit’s liabilities include approximately US$ 2.6 billion of debt borrowed for the acquisition of Bashkir Oil & Energy assets.

Bashneft is one of the top ten Russian oil producers. The unit’s crude oil production amounted to 2.9 million tonnes in the second quarter of 2009. The company exported 465,100 tonnes of crude oil in the second quarter, or 16.3% of its production. The company drilled 48,000 metres and commissioned 39 new oil rigs during the period.

BashTEK Refinery consists of four oil refinery companies, including JSC Ufaneftekhim, JSC Ufimsky NPZ, JSC Novoil and JSC Ufaorgsintez. The unit refined 4.8 million tonnes of crude oil in the second quarter of 2009. In the second quarter, the capacity utilization reached 71.8%, refining depth was 83.1% and light-product amounted to 59.5%.

The energy business, Bashkirenergo, supplies the Ural region and the Republic of Bashkortostan with electric and thermal energy. Bashkirenergo generated 4,342.2 million kW of electricity in the second quarter of 2009. The energy business contributed 28.8% of the unit’s total revenues.

Bashkirnefteproduct sells the unit’s refined products across the Republic of Bashkortostan. As at the end of the second quarter 2009, the total number of petrol stations was 316.

In May 2009, Sistema signed supplemental agreements with Agidel-Invest LLC, Ural-Invest LLC, Inzer-Invest LLC and Yuryuzan-Invest LLC to fix in rubles the total acquisition price of a controlling stake in Bashkir Oil and Energy Group, including ANK Bashneft JSC, Ufaneftechim JSC, Novoil JSC, Ufaorgsintez JSC, Ufimskiy NPZ JSC and Bashkirnefteproduct JSC. According to the terms of supplemental agreements, the total price already paid for this transaction is RUB 66.8 billion (approximately US$ 2 billion) with no further payments being made.

The unit generated net income of US$ 92 million in the second quarter, including US$ 122.8 million of foreign exchange gains, and after the deduction of US$ 85.6 million in interest expense on the debt assigned to the Oil & Energy business unit.

CORPORATE & OTHER

(US$ millions)   2Q 2009   2Q 2008   Year on Year Change   1Q 2009   Quarter on Quarter Change
OIBDA1 Adjusted for non-recurring items (24.3) (26.2) - (12.4) -

Net loss

(18.8) (16.3) - (125.5) -

The Corporate and Other segment comprises the companies that control and manage the Group’s interests in its subsidiaries. The segment reported an OIBDA loss of US$ 24.3 million in the second quarter of 2009.

In April 2009, Sistema signed an agreement with VTB Bank to sell a controlling stake in Sistema-Hals. VTB Bank acquired a 19.5% stake in Sistema-Hals for RUB 30 and also received a call option to acquire a further 31.5% stake in the company for RUB 30. Furthermore, both parties have agreed the terms for the restructuring of Sistema-Hals’ debt to VTB. Following the disposal of the controlling stake in Sistema-Hals, the Group has excluded the operating results of Sistema-Hals from the consolidated operating results of the Consumer business unit for all periods presented.

FINANCIAL REVIEW

Net cash provided by operations decreased by 22.9% year on year and 28.7% quarter on quarter to US$ 620.1 million mainly due to changes in the working capital.

Net cash used in investing activities totalled US$ 3,026.7 million in the second quarter of 2009, with US$ 829.2 million spent on capital expenditure, compared to US$ 1,101.1 million in the second quarter of 2008 and US$ 872.7 million for the first quarter of 2009. The Group spent US$ 1,534.0 million, net of cash received on the acquisition of businesses in the second quarter, which represents purchase of shares in oil exploration and processing companies in the Republic Bashkortostan. The Group also spent US$ 41.5 million in the second quarter of 2009 on purchase of additional shares in its subsidiaries, namely Dagtelecom and K-Telecom.

Net cash provided by financing activities amounted to US$ 3,413.8 million in the second quarter, compared to US$ 1,577.3 million and US$ 110.5 million in the second quarter of 2008 and the first quarter of 2009 respectively. Major changes in financing in the second quarter included EUR 413 million in three separate loan agreements signed by MTS with the EBRD, the Nordic Investment Bank (NIB) and the European Investment Bank (EIB); RUB 15 billion bond with maturity in 2014 which was placed by MTS; the redemption of two ruble bonds totaling RUB 4.5 billion by MTS; the repayment of US$ 100 million Eurobond issue and US$ 75 million loan from Dresdner Bank by MBRD; and the placement of RUB 5 billion bond issue by MBRD.

The Group’s cash balances stood at US$ 2,543.1 million as at June 30, 2009, compared to US$ 1,419.8 million as at March 31, 2009. The Group’s net debt (short-term and long-term debt less cash and cash equivalents) amounted to US$ 10,334.0 million as at June 30, 2009, compared to US$ 7,951.3 million as at March 31, 2009.

SIGNIFICANT EVENTS FOLLOWING THE END OF THE REPORTING PERIOD

Telecommunications Business Unit

In August 2009, Comstar UTS completed the first stage of the reorganization of its regional business through the merger of seven of its largest subsidiaries into CJSC Comstar-Regions.

In July 2009, MTS placed its fifth ruble bond totalling RUB 15 billion which matures in 2016 and carries a 14.25% coupon rate.

In July 2009, MTS closed the syndication of its US$ 695 million term loan facility which was originally signed in May 2009. The three-year facility carries a LIBOR/EURIBOR plus 6.5% annual interest rate and has a two-year grace period.

In July 2009, SSTL announced the launch of services under the MTS brand in Bihar, the second largest circle and the sixth circle of its operation, following Rajasthan, Tamil Nadu, Kerala, Kolkata and West Bengal.

Technology & Industry Business Unit

In July 2009, RTI Systems acquired a minority stake in OKB-Planet, a high-tech R&D institute, thus increasing its holding to 100%.

Oil & Energy Business Unit

In August 2009, Ufaneftekhim launched Delayed Coking Unit (DCU) with a raw production capacity of 1.2 million tonnes per year. The new DCU will allow the refinery to convert heavy raw materials into higher value light products with the refinery depth reaching 96%-98%. In addition, the construction of a new hydrogen production unit was completed.

In July 2009, Ufa Oil Refinery commissioned two new reactors for the hydro treatment of vacuum gas oil within the framework of the plant’s modernisation programme. The installation of new reactors is aimed at improving the environmental performance and reducing the sulphur content in gasoline in accordance with the international standard Euro-4.

Corporate & Other

In August 2009, Sistema placed RUB 20 billion unconvertible second series five-year bond with a put option exercisable in three years following the sixth coupon payment. The annual coupon rate was set at 14.75% for the first six semi-annual coupon payments.

In August 2009, Sistema’s Board of Directors agreed to the acquisition of Sistema’s 50.91% stake in Comstar-UTS by MTS for US$ 1.272 billion. The Board of Directors has also set October 1, 2009 as the date for the EGM in order to vote on the proposed transaction.

In July 2009, Sistema obtained EUR 120 million 3-year loan from the EBRD. Sistema also bought back from the EBRD its minority stake in SITRONICS.

Conference call information

Sistema management will host a conference call today at 9 am (New York time) / 2 pm (London time) / 3 pm (CET) / 5 pm (Moscow Time) to present and discuss the second quarter results.

The dial-in numbers for the conference call are:

UK/International:   + 44 20 7190 1595
US: +1 480 629 9724

A replay will then be available for 7 days after the conference call. To access the replay, please dial:

UK/International:   + 44 20 7154 2833
US: + 1 303 590 3030

PIN number: 4154200#

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

Sistema Investor Relations             Shared Value Limited
Pavel Kim Larisa Kogut-Millings
Tel: +7 495 692 22 88 Tel: +44 (0) 20 7321 5010

ir@sistema.ru

sistema@sharedvalue.net

Sistema is the largest public diversified financial corporation in Russia and the CIS, which manages companies serving over 100 million customers in the sectors of telecommunications, high technology, oil and energy, radars and aerospace, banking, retail, mass-media, tourism and healthcare services. Founded in 1993, the company reported revenues of US$ 4.2 billion for the second quarter of 2009, and total assets of US$ 33.8 billion as at June 30, 2009. Sistema’s shares are listed under the symbol “SSA” on the London Stock Exchange, under the symbol “AFKS” on the Russian Trading System (RTS), under the symbol “AFKC” on the Moscow Interbank Currency Exchange (MICEX), and under the symbol “SIST” on the Moscow Stock Exchange (MSE).

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

SISTEMA JSFC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Amounts in thousands of U.S. dollars)

Three months ended   Six months ended
    June 30,

2009

    June 30,

2008

June 30,

2009

  June 30,

2008

 
Sales $ 4,070,390 $ 3,927,463 $ 6,630,593 $ 7,285,843
Revenues from financial services 171,900 186,082 330,947 334,810
       
TOTAL REVENUES 4,242,290 4,113,545 6,961,540 7,620,653
 
Cost of sales, exclusive of depreciation and amortization shown separately below (1,956,144) (1,574,407) (2,941,605) (2,832,450)
Financial services related costs, exclusive of depreciation and amortization shown separately below (99,540) (91,109) (204,664) (146,583)
Selling, general and administrative expenses (886,134) (872,357) (1,525,515) (1,656,963)
Depreciation and amortization (541,217) (582,107) (979,367) (1,141,222)
Provision for doubtful accounts (22,774) (31,918) (67,905) (62,097)
Loss from impairment (11,185) - (11,647) -
Other operating expenses, net (86,252) (56,564) (127,938) (72,808)
Equity in net income of investees 16,330 26,334 2,683 47,432
(Loss)/Gain on disposal of interests in subsidiaries and affiliates - (12,198) (19,356) 18,759
       
OPERATING INCOME 655,374 919,219 1,086,226 1,774,721
 
Interest income 37,546 20,052 60,374 39,485
Change in fair value of derivative instruments (2,418) 149 (8,444) 14,518
Interest expense, net of amounts capitalized (260,758) (101,487) (453,368) (212,050)
Currency exchange and translation (loss)/gain 401,500 35,891 (269,580) 205,045
       
Income from continuing operations before income tax, equity in net income of energy companies in the Republic of Bashkortostan 831,244 873,824 415,208 1,821,719
 
Income tax expense (208,367) (284,960) (197,833) (536,777)
Equity in net income of energy companies in the Republic of Bashkortostan, net of minority interests of US $25,411, US $2,076 and US 33,759, respectively - 78,596 4,400 120,978
       
Income from continuing operations 622,877 667,460 221,775 1,405,920
 
(Loss)/income from discontinued operations, net of income tax benefit/(expense) of US$ 278, US$ 5,539, US$ 826 and US$ (10,859), respectively (2,483) (10,853) (63,431) 10,126
 
(Loss)/gain from disposal of discontinued operations, net of income tax effect of US$ nil and US$ 280, respectively (59,360) - (59,360) 2,053
       
NET INCOME $ 561,034 $ 656,607 $ 98,984 $ 1,418,099
 
Non-controlling interest (314,851) (379,287) (248,237) (742,104)
       
NET INCOME attributable to JSFC Sistema 246,183 277,320 (149,253) 675,995
 
 
Earnings/(loss) per share, basic and diluted
(US cent per share): (US cent per share):
2.7 3.0 (1.6) 7.3

SISTEMA JSFC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS OF JUNE 30, 2009 AND DECEMBER 31, 2008
(Amounts in thousands of U.S. dollars, except share amounts)

June 30,
2009
  December 31,
2008
 
ASSETS
 
CURRENT ASSETS:
Cash and cash equivalents $ 2,543,079 $ 1,936,414
Short-term investments 918,416 717,329
Loans to customers and banks, net 3,467,407 3,330,974
Accounts receivable, net 1,265,925 1,012,216
Prepaid expenses, other receivables and
other current assets, net other current assets, net
1,326,231 1,266,117
VAT receivable 188,707 176,845
Inventories and spare parts 1,068,181 683,426
Deferred tax assets, current portion 351,486 262,722
Assets of disposed segment - 1,988,908
   
Total current assets 11,129,432 11,374,951
 
NON-CURRENT ASSETS:
Property, plant and equipment, net 13,736,608 9,251,631
Advance payments for non-current assets 430,676 197,028
Goodwill 1,404,107 1,351,202
Licenses, net 1,106,254 1,174,503
Other intangible assets, net 1,759,076 1,694,157
Investments in affiliates 314,307 1,350,110
Investments in shares of Svyazinvest 1,165,226 1,240,977
Loans to customers and banks, net of current portion 1,426,439 1,402,298
Debt issuance costs, net 79,947 39,388
Deferred tax assets, net of current portion 232,242 168,056
Long-term investments 837,554 245,971
Other non-current assets 158,472 133,151
   
Total non-current assets 22,650,908 18,248,472
   
TOTAL ASSETS $ 33,780,340 $ 29,623,423

SISTEMA JSFC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED), AS OF JUNE 30, 2009 AND DECEMBER 31, 2008
(Amounts in thousands of U.S. dollars, except share amounts)

  June 30,
2009
  December 31,
2008
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
CURRENT LIABILITIES:
Accounts payable $ 1,229,313 $ 1,584,877
Bank deposits and notes issued, current portion 3,373,745 3,584,772
Taxes payable 612,437 192,531
Deferred tax liabilities, current portion 52,401 70,903
Subscriber prepayments, current portion 436,544 493,870
Derivative Financial Instruments - 86,370
Accrued expenses and other current liabilities 2,366,505 1,114,899
Short-term loans payable 1,688,410 1,298,712
Current portion of long-term debt 2,700,088 2,218,642
Liabilities of disposed segment - 1,796,476
   
Total current liabilities 12,459,443 12,442,052
 
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 8,488,587 6,022,848
Subscriber prepayments, net of current portion 111,153 119,481
Bank deposits and notes issued, net of current portion 1,120,355 803,112
Deferred tax liabilities, net of current portion 503,771 466,335
Asset retirement obligation and decommissioning provision 335,957 85,371
Postretirement benefits obligation 33,975 35,464
Deferred revenue 109,603 115,732
   
Total long-term liabilities 10,703,401 7,648,343
   
TOTAL LIABILITIES 23,162,844 20,090,395
 
 
 
Commitments and contingencies - -
 
Redeemable non-controlling interest 196,394 92,200
 
SHAREHOLDERS’ EQUITY:
Share capital (9,650,000,000 shares issued; 9,278,981,940 shares outstanding as of June 30, 2009 and December 31, 2008 with par value of 0.09 Russian Rubles) 30,057 30,057
Treasury stock (371,018,060 shares as of June 30, 2009 and December 31, 2008 with par value of 0.09 Russian Rubles) (466,345) (466,345)
Additional paid-in capital 2,417,238 2,417,238
Retained earnings 3,804,390 3,953,673
Accumulated other comprehensive income (417,388) (446,770)
Total JSFC Sistema shareholders’ equity 5,367,952 5,487,853
 
Non-controlling interest in subsidiaries 5,053,150 3,952,975
   
TOTAL SHAREHOLDERS’ EQUITY 10,421,102 9,440,828
   
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 33,780,340 $ 29,623,423

SISTEMA JSFC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Amounts in thousands of U.S. dollars)

Six months ended

June 30,

2009

  June 30,

2008

CASH FLOWS FROM OPERATING ACTIVITIES:
 
Net income $ 98,984 $ 1,418,099
 
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 979,367 1,149,253
Loss / (gain) from disposal of discontinued operations 59,360 (2,141)
Loss from discontinued operations 63,431 4,282
Equity in net income of investees (7,083) (168,229)
Deferred income tax benefit (131,244) (94,190)
Change in fair value of derivative financial instruments 8,444 (14,518)
Foreign currency transactions loss/(gain) on non-operating activities 269,615 (233,227)
Debt issuance cost amortization 10,374 11,724
Non-cash compensation to employees of subsidiaries 6,554 16,759
Loss /(gain) on disposal of interests in subsidiaries and affiliates 19,356 (18,759)
Gain on disposal of long-term investments - (30,091)
Loss from impairment of other long-lived assets 11,647 -
Loss/ (gain) on disposal of property, plant and equipment 2,141 (11,077)
Amortization of connection fees (28,706) (31,664)
Provision for doubtful accounts receivable 67,905 65,931
Allowance (recovery of allowance) for loan losses 14,883 (9,372)
Inventory obsolescence expense 18,002 4,382
 
Changes in operating assets and liabilities, net of effects from purchase of businesses:
Trading securities (78,590) (90,355)
Loans to banks issued by the banking division (133,237) 310,968
Accounts receivable (136,165) (171,826)
VAT receivable (11,736) 98,822
Other receivables and prepaid expenses 441,416 (417,992)
Inventories (43,546) (173,968)
Accounts payable (649,497) 59,320
Subscriber prepayments (22,400) 41,007
Taxes payable 172,174 168,030
Accrued expenses, subscriber prepayments and other liabilities 407,062 43,997
Dividends received 82,380 8,132
Postretirement benefit obligation (1,489) 3,456
   
Net cash provided by operations $ 1,489,402 $ 1,936,753

SISTEMA JSFC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Amounts in thousands of U.S. dollars)

Six months ended

June 30,

2009

  June 30,

2008

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property, plant and equipment (1,489,657) (1,580,043)
Payments for purchases of intangible assets (212,232) (501,477)
Payments for purchases of businesses, net of cash acquired (1,613,809) (114,881)
Increase of share in subsidiaries (330,084) (832,174)
Proceeds from sale of subsidiaries, net of cash disposed 5,090 224,784
Payments for purchases of long-term investments (32,632) (22,203)
Payments for purchases of short-term investments (178,225) (167,220)
Payments for purchases of other non-current assets (654,852) (105,311)
Proceeds from sale of other non-current assets 74,039 120,817
Decrease in restricted cash 8,100 340,221
Proceeds from sale of property, plant and equipment 2,575 49,318
Proceeds from sale of long-term investments - 30,091
Proceeds from sale of short-term investments 164,695 147,516
Net increase in loans to customers of the banking division (194,554) (1,075,714)
 
Net cash used in investing activities $ (4,451,546) $ (3,486,276)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net 538,117 972,843
Net increase in deposits from customers of the banking division 123,383 986,261
Net (decrease)/increase in promissory notes issued by the banking division (112,284) 74,063
Proceeds from long-term borrowings, net of debt issuance costs 4,423,621 1,946,742
Debt issuance costs (50,933) (807)
Principal payments on long-term borrowings (1,393,164) (1,800,540)
Principal payments on capital lease obligations (4,378) (2,852)
Proceeds from capital transactions of subsidiaries - 131,000
Proceeds from sale of treasury stock - 3,020
 
Net cash provided by financing activities $ 3,524,362 $ 2,309,730
 
Effects of foreign currency translation on cash and cash equivalents $ 44,447 $ 33,476
 
INCREASE IN CASH AND CASH EQUIVALENTS $ 606,665 $ 793,683
 
CASH AND CASH EQUIVALENTS, beginning of the period 1,936,414 1,061,733
 
CASH AND CASH EQUIVALENTS, end of the period $ 2,543,079 $ 1,855,416
 
 
CASH PAID DURING THE PERIOD FOR:
Interest, net of amounts capitalized $ (397,409) $ (152,216)
Income taxes (156,310) (606,100)

SISTEMA JSFC AND SUBSIDIARIES
UNAUDITED SEGMENTAL BREAKDOWN
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Amounts in thousands of U.S. dollars)

For the six months ended June 30, 2009   Telecommunications   Technology
and Industry
  Consumer Assets   Oil and Energy Unit   Corporate and Other   Total
 
Net sales to external customers (a) 4,553,250 457,644 766,749 1,167,418 16,479 6,961,540
Intersegment sales 2,479 111,425 8,611 - 5,959 128,474
Equity in net income of investees 2,459 - 224 - 4,400 7,083
Interest income 41,346 9,065 1,537 8,922 50,172 111,042
Interest expense 231,244 36,471 20,568 85,554 123,552 497,389
Net interest revenue (b) - - 23,166 - - 23,166
Depreciation and amortization 853,510 30,001 19,700 69,105 7,051 979,367
Operating income 1,081,059 5,799 (48,167) 128,853 (43,732) 1,123,812
Income tax (expense) / benefit (194,358) (1,245) 2,855 (41,102) 36,017 (197,833)
Investments in affiliates 316,408 8,661 2,570 - 6,259 333,898
Segment assets 17,451,519 2,492,426 9,635,716 6,355,484 3,611,774 39,546,919
Indebtedness (c) 5,833,555 764,468 1,153,665 2,702,805 2,422,593 12,877,086
Capital expenditures 1,402,633 37,258 25,781 151,184 61,299 1,678,155

(a) – Interest income and expenses of the Banking segment are presented as revenues from financial services in the Group’s consolidated financial statements.

(b) – The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue, not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.

(c) – Represents the sum of short-term and long-term debt

 
For the six months ended June 30, 2008   Telecommunications   Technology and Industry   Consumer Assets   Oil and Energy Unit   Corporate

and Other

  Total
 
Net sales to external customers (a) 5,924,068 704,691 957,173 - 34,721 7,620,653
Intersegment sales 9,000 144,021 3,464 - 1,608 158,093
Equity in net income of investees 47,434 (2) - - 154,737 202,169
Interest income 32,353 4,774 3,327 - 33,071 73,525
Interest expense 100,582 22,510 11,909 - 70,938 205,939
Net interest revenue (b) - - 56,248 - - 56,248
Depreciation and amortization 1,066,253 37,569 29,037 - 8,363 1,141,222
Operating income 1,810,135 12,980 13,821 - 15,296 1,852,232
Income tax (expense) (422,677) (18,652) (3,670) - (91,778) (536,777)
Investments in affiliates 482,204 11,564 2,077 - 1,005,660 1,501,505
Segment assets 19,449,405 2,858,399 8,088,304 - 3,368,741 33,764,849
Indebtedness (c) 4,479,670 897,599 1,028,238 - 2,091,717 8,497,224
Capital expenditures 1,480,691 180,462 42,995 - 81,624 1,785,772
                   
(a) – Interest income and expenses of the Banking segment are presented as revenues from financial services in the Group’s consolidated financial statements.

(b) – The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue, not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.

(c) – Represents the sum of short-term and long-term debt

 

Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin. OIBDA represents operating income before depreciation and amortization. OIBDA margin is defined as OIBDA as a percentage of our net revenues. Our OIBDA may not be similar to OIBDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of mobile operators and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the wireless telecommunications industry. OIBDA can be reconciled to our consolidated statements of operations as follows:

    Mar – Jun 2009   Mar – Jun 2008
 
Operating Income 655.4 919.2
     
 
Depreciation and Amortisation 541.2 582.1
     
 
OIBDA 1,196.6 1,501.3

1 Here and further, in the comparison of period to period results of operations revenues are presented on an aggregated basis, which is revenues after the elimination of intra-segment (between entities in the same segment) transactions, but before inter-segment (between entities in different segments) eliminations, unless accompanied by the word “consolidated”. Amounts attributable to individual companies, where appropriate, are shown prior to both intra-segment and inter-segment eliminations and may differ from respective standalone values due to certain reclassifications and adjustments.

2 Turnover comprises the total proceeds from all service agreements, including agency agreements.