Edited Transcript of AFKS.MZ earnings conference call or presentation 7-Apr-20 2:00pm GMT

In 2019, Sistema demonstrated sustained growth in its public and nonpublic assets, significantly lowered its financial obligations at the Corporate Centre, continued to invest in high potential businesses and realized several successful monetization. Strong performance from MTS, Steppe, Medsi, Bashkir Power Grid Company and RTI contributed to the group’s revenue increase of 5.1% year-on-year to RUB 656.9 billion. The group’s adjusted OIBDA remained largely unchanged at RUB 223.9 billion. That’s softer global markets, but good measure on the performance of our effort relative to investment.

Strategically, in 2019, we focused on expanding our presence in markets where further consolidation offers potential for growth. Through the integration of Leader Invest, our Moscow developer, with Etalon Group, one of our leading real estate developers, we created one of the largest players in the high-growth property market in Moscow and St. Petersburg.

We increased our holding in Ozon, Russia’s biggest and rapidly expanding multi-category online platform. Having both stakes from MTS and other shareholders and following a debt-to-equity conversion in December 2019, we now own approximately 43%.

We are taking the opportunity to establish a top 3 player in the segment of the pharmaceutical market by merging Binnopharm with OBL Pharm under the brand, new brand Alium, and acquiring a stake in Sintez. In addition to proceeds generated by our transactions with Etalon, Sistema continued to show a strong track record of successful portfolio asset monetization.

First of all, the public offering of 175 million shares in Detsky Mir achieved a price of RUB 91 per share and raised RUB 12.5 billion in funds. The SPO substantially increased the company’s free float, thereby significantly improving liquidity and strengthened Detsky’s investment proposition.

Sistema benefited from a special dividend payout from MTS amounting to RUB 10.3 billion in cash flow related to its disposal of its Ukraine asset. We have now fully divested from MTS Bank where its consolidation into MTS has already started to show the synergy benefits.

In the first quarter of 2020, we invested additional RUB 3 billion into Ozon, supporting the management’s strategy of aggressive expansion and growing its market. In early 2020, we expanded our venture capital portfolio by establishing the Sistema SmartTech fund, the RUB 5 billion fund, to which we are committing RUB 1.5 billion, being primarily focused on Russian tech projects across diverse sectors. This will allow Sistema to both leverage and hopefully expand its experience in managing digitalization efforts and investment in technology applications in a wide range of economic segments.

As Vladimir will comment in greater detail in 2019, Sistema also further reduced its debt portfolio and strengthened its balance sheet. And Vladimir, over to you, please.

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Vladimir Travkov, Sistema Public Joint Stock Financial Corporation – VP, Chief of Financial & Investment Department and Member of Management Board [4]

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Thank you, Andrey. Sistema’s financial results for full year 2019 reflect the group’s focus on expansion in promising markets while taking advantage of attractive monetization opportunities. And I’m happy to report that the group has substantially improved its overall debt position.

Full year 2019, Sistema’s consolidated revenue increased by 5.1% year-on-year to RUB 656.9 billion, driven by strong performance of the key assets. The group’s adjusted OIBDA for the full year 2019 has slightly declined year-on-year by 0.9% to RUB 223.9 billion. This was driven by the impact of the weaker global market environment on the performance of key nonpublic assets. Segezha Group’s dynamics suffered from the rapid decline of global prices for paper, plywood and sawn timber. Agroholding Steppe’s OIBDA for 2019 was affected by a decline in global grain prices.

The group’s adjusted OIBDA dynamic was also impacted by equity pickup of increased net loss at Ozon as Ozon invested in expansion of the logistics infrastructure and last-mile delivery network, resulting in a record high pace of growth in GMV of roughly 100%. And Sistema has increased stake in this business up to almost 43% as a result of conversion of the loans provided last year. Sistema’s adjusted OIBDA margin remained stable in 2019 at 34.1%.

Looking at the group SG&A, 2019 saw an increase of 8.4% year-on-year to RUB 129 billion. The SG&A to revenue ratio remained almost unchanged year-on-year, with the increase mostly occurring at MTS, where salaries increased and the company expanded headcount in the digital areas, complementary to core telecom businesses, and at the Corporate Centre as a result of higher expenses on the back of asset monetization. Accordingly, the Corporate Centre SG&A to revenue ratio increased by 0.5 percentage point year-on-year to 2% in 2019.

In 2019, Sistema continued to strengthen balance sheet of the group. Our consolidated financial liabilities decreased by RUB 86.9 billion or 11.9% to RUB 646.3 billion and driven by a debt reduction at MTS, Corporate Centre and the deconsolidation of Detsky Mir and the microelectronics business. We also dramatically reduced FX exposure with the FX-denominated portion of group debt portfolio at the end of 2019, representing only 8% compared to 16% at the end of 2018.

At the group center level, we used proceeds from the monetizations, including SPO for Detsky Mir and divestiture of Leader Invest, to reduce gross debt by RUB 34 billion or 15.2% to RUB 189.2 billion.

We have also systematically decreased the foreign exchange risk of our debt portfolio throughout 2019. In May, we retired our USD 500 million eurobond. And in fourth quarter, we repaid a U.S. dollar-denominated bank debt. As a result, the share of Corporate Centre FX-denominated liabilities has decreased to 4%.

In addition to limiting the foreign exchange risk of the portfolio, Sistema has considerably improved its debt maturity profile to 3.5 years. We also used favorable funding environment to substantially reduce our average cost of debt, which should result in a decrease of interest expenses in 2020. Notably, during the secondary placement of ruble bonds in February 2020, the group achieved a record low coupon rate of 6.85%, confirming strong investor confidence in the Sistema’s investment story.

Having faced unprecedented market volatility earlier this year, we focused on maintaining a healthy liquidity position. In March 2020, Sistema raised RUB 16.5 billion under bank credit lines to mitigate any potential liquidity risks. Funds raised fully cover our repayment needs for 2020, which totaled RUB 13.6 billion, including November put option on a ruble bond in the amount of RUB 6.4 billion, which can be rolled over. Overall, diversification of our portfolio and enhanced financial position at the end of the reporting period gives us sufficient comfort during the global COVID-19 emergency. Over 75% of the group revenue and 97% of the OIBDA is generated in noncyclical businesses resilient to economic upheaval in most notably, MTS and BPGC, while potential long-term devaluation of the ruble will benefit our export-oriented portfolio companies including Segezha and Steppe.

At the same time, as a result of portfolio derisking in 2019, I think ruble will have limited impact on our debt liabilities, both at the group and the Corporate Centre level. As the situation evolves, we will continue to update investor community on developments in our portfolio companies, cash flows at the Corporate Centre and our financial valuation.

And thank you. And now I will pass the floor back to Andrey.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [5]

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Thank you, Vladimir. One of Sistema’s subsidiaries that demonstrated outstanding performance in 2019 and established itself as a global leader was Segezha Group. It’s my pleasure to welcome a familiar voice on this call, Segezha Group’s CEO, Mikhail Shamolin, who will present the group’s 2019 full year results and talk about the market trends. Please, Mikhail.

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Mikhail Valeryevich Shamolin, Sistema Public Joint Stock Financial Corporation – Non-Executive Director [6]

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Thank you, Andrey. I’m pleased to take this opportunity to speak on behalf of Segezha Group and outline our achievements at this core Sistema asset. Since Sistema acquired Segezha in 2014, Segezha’s story has been Sistema’s story: a clear example of how Sistema can create value for shareholders by acquiring undervalued assets in sectors with a high potential for growth, deploying its expertise and investment resources to create a platform for growth and generating returns by enhancing operations and profitability.

Segezha was acquired by Sistema in 2014 as a distressed asset. Heavily indebted with a poor operational record, Segezha Group underwent a large-scale transformation. Since 2014, we’ve made investments of over RUB 35 billion, which have yielded a 40% increase in paper output and doubling production of plywood and sawn timber. Over the years, Segezha has established itself as a leading player in the global paper and pulp industry as the world’s third largest producer of sack paper, 1 of the 2 largest producers of paper bags in Europe and the biggest producer of sawn timber in Russia.

With benefit of these investments, Segezha’s revenue more than doubled to RUB 58.5 billion in 2019. Adjusted OIBDA has quadrupled since 2014 to reach RUB 14 billion. A net loss of RUB 5.2 billion in 2014 has transformed into an adjusted net profit of RUB 5 billion in 2019. In 2019, the group delivered one of the strongest dynamics in revenue and OIBDA in its international peer group despite dramatic decline in the global and Russian pulp and paper market. We actually increased the production volume and sales of almost all products and expanded sales geography.

In 2019, international markets were impacted by the overproduction and oversupply across the industry. Excess stocks have forced many of the large market players to lower their prices. Meanwhile, at Segezha, we have introduced a number of initiatives that have improved our financial and operational performance. Some of the key measures included: the adoption of a more aggressive pricing policy enabled by competitive production costs, increase of transparency in the relationship with customers and clients, increase of direct sales volume and agile redistribution of product flows to more marginal markets during the year.

Our constant focus of driving efficiency gains enabled us to achieve adjusted OIBDA margin of 23.9%. This is an increase of 1.5 percentage points from 2018 and one of the highest margins in the global pulp and paper industry. Acquisition of additional forest resources totaling 300,000 cubic meters contributed to an increase in logging by 9.4% year-on-year, while the share of own logging in our production has increased from 59% in 2018 to 69.5% in 2019. This is a major factor contributing to curbing a rise in production costs on the back of increasing market shortage in raw materials, mostly due to mild winter.

The commissioning of a new multi-fuel boiler at Segezha mill has helped to decrease heat and electricity costs as well as reduce greenhouse emissions at the facility by about 40%. We have also stepped up our environment production efforts at the Segezha mill and across our operations and obtained certification of our forest resources by international industry bodies.

In 2019, we pressed ahead with several investment projects. We launched a new paper sack line in Salsk with a capacity of 18 million sacks a year. Segezha also increased output of pellets at the Lesosibirsk sawmill. During the year, we also began construction of a plywood mill in Galich with an annual capacity of 125,000 cubic meters of birch plywood and started work on a cross-laminated timber panels facility in Sokol.

While we continued implementing our large-scale investment program, Segezha Group has reduced its net debt-to-OIBDA ratio to a more comfortable level of 2.8. We also took steps to optimize our loan portfolio and improve financial terms, which was reconsidered by RAEX rating agency that assigned Segezha ruA- rating. A stronger balance sheet was the underlying factor behind the success of our recent debut in the Russian debt market. In January 2020, we placed a RUB 10 billion issue with a coupon rate of 7.1%.

The paper and pulp market is inherently cyclical, but structural growth drivers for the industry will remain. Trends like urbanization, growth of the construction industry in Asia and in Middle East, rapid rise of e-commerce and sustainability trends driving demand away from plastic to paper bags will ensure the sector remains attractive.

In early 2020, we noted signs of improvement in our key markets, but the coronavirus outbreak creates unprecedented uncertainty for our business. Currently, our facilities, both in Russia and in Europe, remain fully operational, and we are taking every possible step to protect the health and well-being of our employees.

We intensified sales to China after local factories resumed operations, but the future demand in Europe and other export regions is hard to assess at this point. Nevertheless, we believe that the operational and financial improvements we realized at Segezha will allow us to take advantage of the new opportunities. Because we primarily serve export markets, our ruble cost base allows Segezha to handle downturns more effectively. We have more freedom on pricing than our European peers while our production footprint allows us to serve markets both in the East and the West. Given the ample wood resources Russia can offer, we believe that such a time may allow Segezha to emerge as an even stronger player in the global market.

With that, I will return the call to Andrey.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [7]

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Thank you, Mikhail. Obviously, our outlook for 2020 is now subjected to the unprecedented challenges and uncertainty of the business environment that the COVID-19 has created. For the most part, we can only make assumptions. However, the diligent implementation of our strategy in 2018 and 2019 has put us in a much stronger position to handle this situation.

Faced with the outbreak of COVID-19, we have promptly taken measures to protect our employees, clients and partners. As of early April 2020, we have invested approximately RUB 1 billion to combat the spread of the virus, ensure safety of our employees, clients and communities and all the social and economic consequences of COVID-19. Our portfolio of companies have focused on adjusting their operations to ensure the provision of uninterrupted services.

Internet traffic increasing, MTS is taking all necessary measures to expand its network capacity. To support its customers, MTS has launched a number of special promotions and free services that help subscribers organize their lives and leisure time in self-isolation. However, MTS is also affected by reduced business activity and sharp decline in international roaming. At the same time, for understandable reasons, people have to rely more on mobile and digital communications. The company is rescheduling some of its lower priority OpEx, but it remains committed to its RUB 90 billion CapEx for 2019. We don’t anticipate any changes to MTS shareholder distribution policies.

Talking about Detsky Mir, we saw a major spike in sales for 2 weeks preceding the lockdown. In some categories such as baby food and diapers, sales increased three to sevenfold as consumers have been panic buying goods in anticipation of tougher currency regime, a shortage in basic goods and the weakening of the ruble. Currently, over 700 stores across Russia remain open as Detsky Mir has been recognized by the authorities as essential retail. The vast majority of consumers choose to stay at home. This explains the surge in online platform usage with share of online sales increasing up to 25% and continuing to grow. Detsky Mir is a constituent of the Russian government’s list of systematically important companies. That means that the government will be monitoring the situation and will consider providing state support to the company if required.

Steppe is seeing strong growth in revenue due to increased prices for grain on the international market. So far, the company has not encountered any disruptions on its operational activities. Almost 80% of Steppe’s revenue is denominated in foreign currencies or generated under contracts linked to international prices. Because its cost is based on predominantly in rubles, Steppe stands to benefit from the ruble devaluation. This puts Steppe in the position similar to Segezha. And as a Sistema subsidiary, it is operating on international market out of its production based in Russia as we have just showed on Mikhail Shamolin’s presentation.

Medsi has found itself at the forefront of the fight against the spread of the virus. Our medical chain has repurposed its hospital in the Pyatnitskoye Highway to treat COVID-19 cases. Last week, the facility began admitting patients with suspected and confirmed coronavirus infection. At the first stage, over 200 hospital beds have been made available, but the number will be increased. It has also launched tests for COVID-19 in its clinics. In addition, Medsi and MTS have started offering free online consultations by Medsi physicians through SmartMed, the jointly operated telemedicine app. In the long run, SmartMed is set to benefit from the expected change in telemedicine regulation to be considered at the State Duma. This may enable doctors in some cases to make a diagnosis and issue prescriptions online, which will reduce the need to visit clinics during the virus outbreak while also boosting telemedicine.

Ozon is experiencing a sharp increase in the number of customer orders. The company strengthened its network of couriers to ensure timely delivery of orders to customers and promoting safe, contactless manner of delivery. In the second half of March, Ozon saw number of items per order double year-on-year. The fastest-growing categories are sports goods, entertainment, books, household goods and DIY. Sales are expected to grow, of course, as many more people are staying at home. This situation gives Ozon a unique chance to grow and develop its customers.

Our pharma assets remain fully operational to service heightened demand for antiviral drugs and antibiotics, and Sistema-Biotech has developed a quick test for COVID-19, which takes only 2 hours to deliver results. Unlike other existing tests, ours employs reverse transcription analysis followed by real-time polymerase chain reaction, PCR, using fluorescent probes, which should guarantee accuracy of almost 100%. Obtaining a registration certificate for the test system is expected this week, which opens the door for broad implementation. The next step is to submit the express test for registration, which will determine the virus through a saliva sample in 30 minutes.

Returning to Sistema’s results. As Vladimir elaborated, Sistema is now in a much stronger position financially vis-à-vis its balance sheet, which further enhanced our ability to withstand uncertainty at this time. In sum, Sistema uniquely benefits from its portfolio structure, which includes assets in sectors resilient in the face of the deteriorating economic situation such as telecommunications, children’s goods retail, power grid market, export-focused businesses that benefit from the weakening of the ruble and as well as companies that gain unique opportunities during the current crisis to scale up their client base and strengthen their market position.

It’s difficult to assess the full gravity or the duration of the crisis, the potential impact on the operational and financial performance of our portfolio of companies. However, I am confident that at this time of uncertainty, there is a source of strength in our diversified business lines. Thank you for your attention.

And over to Nikolai again.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [8]

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Thank you, Andrey. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ll go ahead and take our first question.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division – Equity Analyst [2]

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It’s Slava from Goldman Sachs. Two questions. So firstly, what is your outlook on the headquarter leverage progression throughout this year? Do you think that crisis delays certain monetizations potentially or you are still aiming to reduce the headquarter leverage by the end of this year? And secondly, what are your thoughts on the dividend policy [restoration]? Do you aim to return to this matter throughout the year or it’s not a priority currently?

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Vladimir Travkov, Sistema Public Joint Stock Financial Corporation – VP, Chief of Financial & Investment Department and Member of Management Board [3]

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As you know, we already achieved a substantial reduction of debt to below RUB 190 billion. And of course, the situation in macroeconomic has substantially changed, but we are still planning to continue to deleverage on the Corporate Centre level. But when distribution returns to normal, we will be able to better assess our financial position and provide you with more clarity with regards to the leverage and structure.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [4]

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And talking about the second question about the dividends, of course, we remember about the situation. And currently, that is based on a little bit much more stronger changes ahead. And I think it will be better if we will talk about some kind of changes in our dividend policy a little bit later. And thank you for your patience.

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Operator [5]

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And we will now take our next question.

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Alexander Vengranovich, Renaissance Capital, Research Division – Analyst [6]

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This is Alexander Vengranovich from Renaissance Capital. So I have a couple of questions on your M&A strategy. So basically, first, can you please describe your approach to new M&A opportunities this year? Do you feel that you might be involved more in the acquisition of new assets on the back of the more affordable pricing environment? And if yes, can you please outline the areas for potential acquisitions if you consider them? And the second question here, what happens and whether there are any changes to your plans with regards to Real hypermarket chain acquisition in Germany? As far as I remember, there are some plans to attract an additional investor who might co-invest together with you into this company. So I’m just wondering whether the current environment and the outbreak of coronavirus across the globe changes your plans with regards to this acquisition, and that will be helpful.

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [7]

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Thank you for your question. And talking about some kind of changes in our M&A policy, that fully depends on the area which we are talking about. Of course, we are ready to talk about, for example, increasing the land bank in Steppe and some activities in Segezha and some activities in Medsi because currently we’re integrating in these businesses and it’s such a little good combination for us strategically. But of course, we are not ready to create strong approach for the other industries which we are not present at right now. And maybe it will be interesting for you, currently, we are radically increasing our land bank in Steppe, and it’s a good exercise to how we can create our M&A policy in Sistema. And your second question was about — could you please…

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [8]

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About Real project.

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Alexander Vengranovich, Renaissance Capital, Research Division – Analyst [9]

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Yes. About Real hypermarket chain, whether you still consider this acquisition? And are there any changes to your plan on the back of the recent coronavirus outbreak?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [10]

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Thank you. So our investment into Real is simply an opportunistic transaction. And the market has known for some time that METRO has wanted to exit this business. And our experience working in German real estate market gave us insight into how to make this type of deal happen. And of course, currently, we are talking about some changes of our approach into this deal. But at the same time, we think it’s a good opportunity for us to increase our presence in Europe, Germany market. And sooner or later, the crisis will be — disappear. And in that situation, we will be ahead of our competitors. And of course, we are looking for the good benefits from this market. But right now, I’m not ready to talk about the Real steps in this project and maybe we will be able to talk about a little bit later. And the third question, could you please remind me?

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Alexander Vengranovich, Renaissance Capital, Research Division – Analyst [11]

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No. That’s everything I got, 2 question at a time.

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Operator [12]

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And we’ll now take our next question.

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Dilya Ibragimova, Citigroup Inc, Research Division – VP & Analyst [13]

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This is Dilya Ibragimova from Citi. I had a couple of questions, please. One is on maybe more of a confirmation how operating companies, Segezha, Steppe, Medsi are planning to fund the expansion? As you mentioned in the release and in the presentation, Steppe is buying and renting new land banks as Segezha continues to invest, and Medsi also has been buying some of the hospital facilities in St. Pete and also in regions of Russia, whether it’s going to be all from their own balance sheet or Sistema plans to coinvest from the Corporate Centre? And the second question is to Mr. Shamolin on Segezha, whether the — over the investment plans, whether the current slowdown, a global slowdown potential would delay any of the investment plans that the company has in the pipeline. And also, you have mentioned the structural change on the market with the growth in online and the potential demand for pulp and paper production from online players. Is there currently any products that Segezha produces that could cater that segment? Or is it something new that you are planning to do?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [14]

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Dilya, thank you for your question. No doubt, the — all operating expansions, it’s fully responsible for our assets. Of course, we are not going to increase our debt based on Sistema. And for example, if that’s going to increase their land bank, it’s the deal which will be implemented by Steppe. The same policy in Segezha, the same policy in Medsi, and this is a strategy of Sistema to reduce our debt as soon as possible.

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Mikhail Valeryevich Shamolin, Sistema Public Joint Stock Financial Corporation – Non-Executive Director [15]

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Yes. On Segezha, the short answer is no, we don’t have any plans to reduce our investments at this point. And that is because about 80% of our investment program, current investment program is targeted towards improving the operational performance of our main assets, which is Segezha Pulp and Paper Mill, and specifically, to reduce the cost — per unit cost by about 30%. And the reason we can reduce the unit cost by such a significant margin is because the current energy consumption at the Segezha Pulp and Paper Mill is outside of the international benchmarks by a very large number. We consume about 70% of the energy used in the Segezha mill from outside. We’re buying electricity from Russian electricity providers as opposed to generating this electricity in the mill itself, which is the case with most of the modern Finnish, Swedish and other mills. So basically, we want to invest in certain pieces of equipment, renew some of the process at the mill to make it more energy efficient, and therefore, generate those kind of savings. And given that we — even with today’s inefficient production, we have one of the lowest cost per unit globally. Further reduction by 30% will translate directly into EBITDA and value. And there are no market-involved risks because we are simply replacing other competitors’ products with our products in all the key markets. And we may see some decline in consumption in 2020 in Europe and some other markets where the industry is being slowed down by the coronavirus crisis, but we don’t believe that this will impact our sales volume, and our margin increase is almost guaranteed in 2021 and beyond. So we will keep with this investment program so far.

And the rest, we have one main project going simultaneously, which is building a new plywood mill in the city of Galich. And that investment is done as a project finance in which Sistema’s — or in which Segezha’s investment is limited to around less than $50 million, about $35 million, and the rest is provided by partners and banks as equity and debt financing with the risks exposed only on this project and not on Segezha, and the debt is not consolidated on the Segezha level. So for us, it’s a relatively small equity investment. And the biggest project that we’re considering so far is building a new pulp and paper mill in Segezha with a capacity of around 1 million tonnes, and that will be a new product, a bleached pulp, Nordic pulp from softwood, which is an entirely different product from the one we are producing now with the much bigger market of about $40 billion globally. And that will allow us to move into new production lines, including tissue, for instance, and some other applications. And this project has an attractive investment case. Again, if we are to start this endeavor, the debt will not be consolidated on Segezha. It will be financed as a project finance with equity in [performing] Segezha and partners and only consolidated with Segezha 2 or 3 years later once the mill is launched. Therefore, for the year 2020, 2021, 2022, Segezha will remain within its operational parameters, steadily growing EBITDA numbers and keeping the debt-to-EBITDA ratio lower than 3. At least that’s the objective.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [16]

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And there was additional question on the impact of e-commerce and whether Segezha is doing any products to service the rise in e-commerce?

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Mikhail Valeryevich Shamolin, Sistema Public Joint Stock Financial Corporation – Non-Executive Director [17]

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Well, we’re doing packaging, which is not directly impacted by e-commerce, but increasing e-commerce is impacting the global demand for pulp and pulp products. And once the demand for pulp goes up, pretty much all the pulp applications go up besides maybe newsprint.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [18]

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Dilya, have we answered your question?

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Dilya Ibragimova, Citigroup Inc, Research Division – VP & Analyst [19]

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Yes, that’s very helpful.

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Operator [20]

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(Operator Instructions) And we will now take our next question.

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Ivan Kim, Xtellus Capital Partners, Inc., Research Division – Equities Analyst [21]

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This is Ivan Kim from Xtellus Capital. Two questions, please. Firstly, on Ozon. So what kind of growth, if you can provide, that Ozon’s experience — revenue growth, like Ozon is experiencing in March or the past few weeks, which show metric is [linear] for you? And what is the sort of infrastructure bottleneck? So what is the capacity growth you think as of right now?

And the second question on Segezha. So the pulp prices remain at around current levels fairly depressed. Plus, you always see your demand down quite a bit because a lot of it is coming from the European construction. So what sort of revenue range do you foresee for 2020?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [22]

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So it’s Andrey Dubovskov and talking about Ozon. As you know, the results of 2019 is the best results during last 10 years. I’m talking about the 92% growth of the JV, and currently, based on the much strong growth, based on the market growth and based on the very popular service by Ozon. And talking about the infrastructure of Ozon, currently, Ozon operating more than 7,000 pickup points, automatization — automated pickup points, and approximately 15,000 pickup points is done by other partners, like MTS, like other retailers. And Ozon works as a logistics platform, which entails collaboration with delivery services businesses and self-employed individuals. And the model enables the company to scale the number of deliveries rapidly in case of surge in demand and to manage it effectively. And Ozon collaborates with sterile packing services and plans to extend these collaborations to obtain additional capacity. And talking about 2020, of course, we are looking for much more strong results than in 2019. And I’m absolutely sure that Ozon in that period will demonstrate much bigger revenue against the competitors. And no doubt, Ozon will be the one of 2, 3 major players in Russian e-commerce market. And I think that the benefits from Ozon to Sistema will be very sizable. Talking about the potential leverage in Ozon, in the first quarter this year, we — Sistema shared with Baring Vostok the cost amount approximately RUB 3 billion. And talking about the potential financing for the 2020, we estimate this around RUB 10 billion.

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Mikhail Valeryevich Shamolin, Sistema Public Joint Stock Financial Corporation – Non-Executive Director [23]

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Yes. And on Segezha, the lowest point that price has reached at the end of 2019 and beginning of 2020 was around EUR 500 per tonne FCA. FCA is at the gate — the factory gate in Segezha. Since then, the prices have gone up by about EUR 50 to EUR 60. And our April and May prices range around that number, EUR 550, EUR 560 per tonne FCA. We have our order book fully covered for April and May and half of June. We don’t really see any significant weakening in demand so far. And given that our cost at the factory is below EUR 300 per tonne, we have quite a sizable capacity or shift in our price if market price is to go down. But we don’t really foresee that happening very much even though there is some slowdown in Europe construction, but we do have still construction continuing in China. And actually, the government in China keeps on supporting this industry in order to support Chinese economy overall. We don’t see much of a slowdown in the Middle East and Egypt and Africa and some other markets. Europe is just a part of our target markets, so we don’t really see a disaster scenario. However, it’s sort of the — [I’m sure the] price recovery might be slower than we anticipated when making our estimates for 2020. So in other words, we — and of course, with the ruble devaluation, we see actual capacity for revenue and EBITDA increase in 2020 as compared to 2019 rather than decrease for Segezha Group.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [24]

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Ivan, have we answered your question?

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Ivan Kim, Xtellus Capital Partners, Inc., Research Division – Equities Analyst [25]

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Yes.

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Operator [26]

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And we will now take our next question.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division – Senior Analyst [27]

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This is Igor Goncharov from Gazprombank. I just wanted to follow up on the MTS asset, your biggest asset. Can you please elaborate on what trends do you see in March? For example, do you see a bit of pressure on the revenues, looking to migrate to cheaper bundled tariffs? Do you see a reduction in the mobile traffic in favor of fixed traffic? What kind of trend do you see in March, which can be calculated to the huge amounts over the COVID restrictions?

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Andrey Anatolyevich Dubovskov, Sistema Public Joint Stock Financial Corporation – Chairman of the Management Board, President, CEO & Director [28]

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Thank you. Sure. They are very short periods if you are really going to talk about the March because the — talking about the trends in MTS and telco, it’s much more bigger trends. And for example, currently based on the unique situation for us, I’m talking about roaming revenue. As you know, roaming dramatically decreased during previous some months. But of course, it’s a little bit sizable amount for MTS. But at the same time, we see dramatically increase in traffic in Moscow, in the biggest cities in Russia, more than 30%. I’m talking about voice traffic, talking about the Internet traffic. There is more significant. And as a result, we are looking for the more lately growing of revenue in 2020 for MTS in compare with same situation in 2019. But of course, I’m not ready to talk about the second half of this year because all propositions will be more speculative in the current situation. And in addition, I just want to say that the Russia is very unique country against the Europe, for example, and the Asian countries. The cost of Internet traffic and the voice in Russia is very, very low. It’s approximately the same like in India, in Eastern Europe, like in Ukraine, for example. And of course, no migrating from the cheaper tariffs currently in the subscriber base. So that’s a very stable situation.

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Operator [29]

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And we have no further questions at this time. Please continue with any further points you wish to raise.

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Nikolai Minashin, Sistema Public Joint Stock Financial Corporation – IR Director [30]

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Thank you, operator. And we’d like to thank everyone for joining us today on this conference call. If you have any questions, please don’t hesitate to contact us at the Investor Relations department. And with that, I would like to conclude our call and wish everyone to stay healthy and safe. Thank you very much.

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Operator [31]

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Thank you. That will conclude today’s conference call. We thank you for your participation. Ladies and gentlemen, you may now disconnect your lines. Bye-bye.