Message of the President

Dear shareholders,

I am pleased to announce the completion of another successful year for MTS: in 2015, MTS Group continued its steady growth for the benefit of shareholders, subscribers, employees and, ultimately, societies of all the countries where we operate and build long-term partnerships under complicated economic conditions.

MTS strengthened its leading position in the info-communication market of Russia as a successful multi-service telecommunication company focused on steady growth, innovation implementation and improvement of people’s lives. Over the past year, the MTS Group subscriber base increased by 3.5 percent reaching 107.8 million subscribers and by 3.6 percent in Russia reaching 77.3 million subscribers. This means that high-quality communication and high-speed mobile Internet provided by MTS are becoming more available, including in remote regions, and this fact opens up new opportunities for our business and customers contributing to overcoming the digital inequality, to the economic development of Russia and the countries where we operate.

We were building modern data transfer networks at a quickened pace, offering new products and services and developing a unique ecosystem for the Russian market at the junction of various fields and industries like IT services, trade, finance, TV broadcasting and content distribution. Consistent implementation of the 3D “DATA. DIFFERENTATION. DIVIDENDS” strategy resulted in increased revenue both within the Group and in Russia being our main market.

Growth factors

Despite the ongoing macroeconomic instability in the markets where we operate, the weakening of the rouble, lower incomes of citizens and aggressive actions committed by competitors in the retail distribution in Russia, the MTS Group revenue increased by five percent exceeding RUB 431 billion. The total 2015 MTS revenue in Russia increased by 4.4 percent to RUB 391.2 billion and OIBDA reached RUB 165.1 billion as compared to RUB 165.0 billion a year earlier. It should be noted that our company was growing in opposition to the market trends: at year-end 2015, MTS was the only company among the leading Russian communication market players, who showed an increase of total revenue and OIBDA.

The main contribution to revenue growth was brought by the growing demand for data transfer services in all markets where we operate. In particular, our business was positively impacted by the revenue growth of our active subscribers in Russia due to the pricing policy and increased penetration of smartphones, growth of high-quality subscriber base in Russia resulting from the updated retail development strategy, launch of a 3G network in Ukraine after obtaining a license for rendering communication services in this standard and resumption of operation in Uzbekistan.

Data

Providing the key element of our strategy being DATA, we were the first among Russian communication operators to launch LTE networks in all 83 regions where we operate by the end of 2015. Herewith, more than 53% MTS base stations in Russia are high-speed 3G and 4G data transfer networks. In order to ensure our future growth, we obtained a federal lot of frequencies in the 2,600 MHz band at two auctions, alongside with additional 1,800 MHz bands in five regions. We signed an agreement with VimpelCom communication operator for the joint frequency spectrum use in more than 20 regions of Russia to accelerate the construction of LTE networks and cost savings.

We promoted the sale of devices focused on the consumption of Internet traffic and data, developed our own sales channels, thus, constructing Russia’s largest non-food retail network currently featuring more than 5,000 showrooms throughout the country by the end of 2015. In terms of the fixed business, we are increasing the mass market share steadily due to the update of communication networks and promotion of new package offers in the field of television and broadband access. We also strengthened our position in Ukraine by signing a strategic partnership with Vodafone, one of the world’s largest telecommunication companies.

Thanks to the efficient and prudent business strategy and skilful cash flow management, in 2015, MTS paid to shareholders record-setting dividends amounting to RUB 52 billion.

Differentation

In order to DIFFERENTIATE our business, we were actively developing financial services, e-commerce, M2M-solutions; we offered corporate customers a variety of industry products based on converged and cloud solutions, as well as entered the system integration market. We increased the share of our Moscow subsidiary, MGTS, in the market for fixed broadband access and pay-TV services to individuals as a result of the completion of a large-scale GPON network deployment project. In addition, we launched and promoted the satellite TV service throughout Russia.

Investments, debt load, dividends

In 2015, capital expenditures of MTS Group in all the markets of operation amounted to RUB 96.1 billion. Despite significant capital expenditure of the Group, in 2015, we managed to maintain the ratio of net debt to LTM OIBDA at a comfortable level of 1.2x. Moreover, almost 70 percent of our debentures are denominated in roubles being the main currency of our revenue, which reduces the risks associated with the exchange rate volatility.

Sustainable development

We went on building harmonious business relations with all the stakeholders: society, state, professional communities and employees. The company was doing its best to increase transparency and develop corporate culture focused on prevention of violations of anti-corruption and anti-trust legislation. Thus, last year, MTS established the first comprehensive anti-trust compliance system in the Russian telecommunication industry.

We participate actively in social programs and charity projects aimed at supporting the vulnerable segments of the population, treating sick children and developing children’s creativity. Last year, more than one million people received our help and support and, in general, our corporate social responsibility projects cover more than 10 million people. Our efforts were recognised by authoritative communities: we became the Runet Prize Laureate, the Leader in Corporate Charity and SABRE Awards runner-up for charity. MTS Projects were recognized as the “Best Social Projects in Russia” and the “Best IT projects in Education and Healthcare”.

We owe our high results to the efforts of our well-knit team and competent HR-policy. In 2015, the level of MTS staff involvement in the company affairs in Russia rose by seven percentage points to 80 percent. Working at MTS is becoming increasingly attractive, as evidenced by the reduction of staff search time by 12 percent. As a result, at year-end 2015, we were recognised the best employer in Russia as per AoN Hewitt, entered the TOP-5 Russian Employers Rating and became the leaders among telecommunication companies, won the People Investor Prize and became a three-time winner of the Russian HR-Brand Award.

2016 forecast

In 2016 we will go on implementing the 3D strategy, which will allow relying on the growth of the Group’s revenue by more than 4% despite the circumstances of continued macroeconomic instability and uncertain consumer demand. Therefore, we will continue building LTE networks, encouraging the consumption of data transfer services, fixed broadband access and pay-TV in the markets of our operation; we will promote convergent solutions in related areas and respond to market challenges proactively and flexibly when implementing retail strategy.

We hope that our operation in these areas will ensure the ongoing company development, increase its operating efficiency, as well as investment attractiveness, and strengthen the leadership of MTS in the Russian telecommunication market. We also acknowledge our commitment to the principles of long-term and sustainable development based on the harmonious combination of business interests, human values and national development priorities.

Andrey Dubovskov,
President of MTS PJSC