ROSTELECOM PJSC: Rostelecom announces its IFRS financial and operating results for the second quarter and half year 2020

rostelecom announces its ifrs financial and operating results

for the second quarter and FIRST half year of 2020

Q2, 2020 Revenue growth of 13%; 15% increase in OIBDA[1]; net revenue up 32%

Moscow, Russia - August 5, 2020 - Rostelecom PJSC (MOEX: RTKM, RTKMP; OTCQX: ROSYY), the largest digital integrated service provider in Russia, today announces its consolidated financial results for the second quarter and first half year of 2020 prepared in accordance with IFRS[2].

In accordance with the accounting policy of the Group, the acquisition of Tele2 Russia has been recognized as a business combination under common control. According to this method the merger of businesses arising from a transfer of entity stakes under common control of the Group's shareholders, is presented as if the merger took place in the earliest period of the statements, or, if later, effective from the date that common control was put into effect; for this purpose comparatives are revised. Rostelecom's consolidated financial statements for 2019 have therefore been revised to incorporate Tele2 Russia's performance as if the acquisition had been completed on 1 January 2019.

Q2 2020 KEY ACHIEVEMENTS

Q2 2020 FINANCIAL HIGHLIGHTS

Key figures for 2Q 2020, RUB mln

FIRST HALF YEAR 2020 FINANCIAL HIGHLIGHTS

Key figures for 1HY 2020, RUB mln

Mikhail Oseevskiy, President of Rostelecom, commented:

"Our strong financial and operating results for the second quarter of this year evidence our resilience and successful passage through a difficult spring and early summer period, where the general population and business as a whole have faced unprecedented challenges relating to quarantine measures, the widespread transition to online and severe economic uncertainty.

"The strategic direction provided by Rostelecom's digital transformation has enabled us to embed digital services into our DNA. Our market offer is therefore sustainable and has significant potential based on the need to meet the demands of a new modern reality.

"Completing the consolidation of Tele2 Russia's mobile business was timely. The transaction has made us a truly integrated digital provider, which is a unique position to be in both in terms of the breadth of services assembled under the Rostelecom brand and the opportunities open to Rostelecom to serve the needs of clients in the 21st Century with new digital services.

"I therefore consider our second quarter achievements in terms of growth in revenue, OIBDA and net profit in the second quarter by 13%, 15% and 32% respectively, as a great achievement by the entire Rostelecom team. We are seeing the first signs of recovery in economic activity for our clients, many of whom are projecting a return to growth in the coming quarters. This will lead to an expansion of work being carried out to digitize various industries and aspects of people's daily lives. By the year-end we plan to go to the board of directors and present to the market an updated strategy that will set more precise goals, taking into account the inclusion of Tele2 Russia as a fully consolidated member of the group, and illustrate new initiatives that can create additional value for shareholders. "

Vladimir Kirienko, First Vice-President of Rostelecom, said:

"In the second quarter, top-line growth accelerated to 13%. The double-digit growth rates were achieved thanks to the expansion of the mobile segment and the rapid growth of digital services. Some service categories, such as, information security services, continue to show exponential growth: in the reporting quarter, revenues in this area grew 2.5 times, in part due to the active development of mass cybersecurity services.

"Our cloud services, data centre services, smart solutions in the field of urban infrastructure management and state electronic services remain in demand. The popularity of the Rostelecom Key solution and converged packages is also growing. Rostelecom's solid growth trajectory is the fruit of hard work from a professional team that has built high levels of trust from our customers. Customers have appreciated how quickly Rostelecom has been able to adapt to changes and put customers first by offering convenient and useful services in a timely manner. We have managed to support our clients in recent months both by adapting the terms of service provided within the framework of current contracts and by creating new popular digital services. We have as an example developed a new product that remotely screens the temperature of employees using thermal imaging, our products typically integrate themselves seamlessly into clients' existing corporate systems. This service has already been used by a number of companies such as ALROSA and LUKOIL. Another unique digital solution recently offered to the market is "Retail Hub", a product that uses algorithms and AI to enable retail chains to update information on electronic displays and to help focus the attention of buyers on the right products online, thereby expanding the range of purchases and increasing the average ticket. Our Tele2 colleagues have also gone to great lengths to provide subscribers with a large range of convenient remote services and remote ways of connecting to them. Our main priority is to remain close to clients, surround them with important and useful services, while remaining reliable and trusted partners when it comes to meeting their digital needs both in the present and future.

Sergey Anokhin, Senior Vice-President and Chief Financial Officer, added:

"We have comfortably made it through the first half of this year in terms of our financial performance and we have continued to implement our strategy. However, despite the noticeable relaxation of quarantine restrictions and the first signs of recovery in economic activity, there remains significant uncertainty about the future development of the pandemic and macroeconomic indicators. Based on this, the management team maintains a conservative view when it comes to forecasting growth rates for 2020. We expect an increase in consolidated revenue of at least 5%, an increase in OIBDA of at least 5%; and we expect to keep СAPEX within 100-110 billion rubles excluding state programmes."

KEY OPERATING HIGHLIGHTS

Fixed-line business

Mobile business

KEY EVENTS RELATING TO 2Q 2020 AND AFTER THE END OF THE REPORTING PERIOD

Business news

The high quality of Tele2's services have been recognised by the industry for the second consecutive year with an "Oscar" for client relationship management, and the "Silver Mercury" award in six nominations for creative marketing communications.

Other news

OPERATING REVIEW

Revenue analysis

Revenue structure by services

Revenue structure by customer segments

In the second quarter of 2020, revenue increased by 13% to RUB 127.3 billion, compared to the second quarter of 2019, as a result of the following factors:

During the first six months of 2020, revenue increased by 11% to RUB 248.9 billion, compared to the first six months of 2019, as a result of the following factors:

Operating income analysis

Operating expenses structure

In the second quarter of 2020, operating expenses increased by 12% compared to the corresponding period of 2019 and amounted to RUB 108.7 billion, largely due to the following factors:

During the first six months of 2020, operating expenses increased by 11% compared to the corresponding period of 2019 and amounted to RUB 211.4 billion, largely due to the following factors:

Operating profit in the second quarter of 2020 increased by 16% year-on-year to RUB 18.6 billion and by 14% to RUB 37.5 billion in the six months of 2020, compared to the corresponding periods of 2019.

OIBDA for the second quarter and six months of 2020 increased by 15% year-on-year to RUB 48.8 billion and by 14% to RUB 95.9 billion respectively. OIBDA dynamics were driven by revenue growth and the above-mentioned factors, affecting operating expenses. The OIBDA margin increased by 0.8 p.p. to 38.3% in the second quarter of 2020 compared to the corresponding period of 2019. The OIBDA margin increased by 0.7 p.p. to 38.5% during the first six months of 2020 compared to the corresponding period of 2019.

Net Income Analysis

In the second quarter of 2020, profit before tax increased by 28% to RUB 10.0 billion, compared to the corresponding period in 2019. During the first six months of 2020, profit before tax increased by 16% to RUB 20.1 billion, compared to the corresponding period in 2019. These dynamics were mainly influenced by higher operating profit in the corresponding periods of 2020.

Income tax in the second quarter of 2020 was RUB 2.3 billion compared to RUB 1.9 billion in the second quarter of 2019. Income tax in the six months of 2020 was RUB 4.6 billion compared to RUB 3.8 billion in the six months of 2019.

Net profit in the second quarter of 2020 increased by 32% and totalled RUB 7.7 billion, compared to the corresponding period last year, and in the six months of 2020 - by 14% to RUB 15.4 billion versus the six months of 2019.

Financial review

Net operating cash flow in the second quarter of 2020 decreased by 52% to RUB 15.8 billion, compared to the corresponding period of 2019. The decrease in net operating cash flow in the second quarter of 2020 was mainly due to the change in the working capital, which was mainly driven by an increase in accounts receivable. This was caused by a lower base in the second quarter of 2019 due to the receipt of one-off repayments for the provision of high-speed Internet connection to healthcare centres in Russia. These dynamics in working capital also reflect a decrease in accounts payable as well as replacement of  short-term liquidity management measures with long-term financial instruments. Net operating cash flow in the six months of 2020 decreased by 33% to RUB 32.8 billion, compared to the corresponding period of 2019. The decrease in net operating cash flow during the first six months of 2020 was driven by the factors affecting the dynamics of net operating cash flow in the second quarter of 2020.

Cash outflow for investments in non-current assets, excluding state programmes, increased by 35% to RUB 24.7 billion (19.4% of revenue) in the second quarter of 2020. Including state programmes this indicator grew by 25% to RUB 27.6 billion (21.7% of revenue). During the first six months of 2020, cash outflow for investments in non-current assets, excluding state programmes, increased by 6% to RUB 46.7 billion (18.7% of revenue) while remaining flat at RUB 53.6 billion (21.5% of revenue), state programmes included.

Free cash flow in the second quarter of 2020 was RUB (8.8) billion compared to RUB 14.6 billion in the second quarter of 2019. Free cash flow during the first half of 2020 was RUB (14.8) billion compared to RUB (0.9) billion during the corresponding period of 2019.

As at June 30, 2020, the Group's total debt has increased by 23% compared to the beginning of the year and amounted to RUB 444.8 billion, partially driven by the fundraising achieved to help complete the consolidation of Tele2. 100% of the Group's total debt remained rouble-denominated as at June 30, 2020

As at June 30, 2020, the Group's net debt increased by 22% compared to the beginning of the year and amounted to RUB 407.1 billion. The net debt /OIBDA ratio over the last 12 months stood at 2.2x as at 30 June 2020.

OTHER INFORMATION: CONFERENCE CALL

Rostelecom's management will hold a conference call and webcast today at 4.00 PM (Moscow), 3.00 PM (CET), 2.00 PM (UK) and 9.00 AM (NYT). To participate in the conference call, please dial:

UK/ International:  +44 (0)330 336 9411

USA:    +1 323 794 2575

Russia:     +7 495 646 9190

Confirmation Code (ENG):  5636312

Confirmation Code (RUS):  3918926

A webcast of the conference call will only be available in English. To access the webcast please follow the link: https://webcasts.eqs.com/register/rostelecom20200805/en.

A replay of the conference call will be available on the Company's website  https://www.company.rt.ru/en/ir/results_and_presentations/financials/IFRS/2020/2.

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APPENDICES

APPENDIX 1: RECONCILIATION OF OIBDA

OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company defines as operating income before depreciation and amortisation as well as some certain expenses. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital expenditures, acquisitions and other investments and our ability to incur and service debt.

The following indicators are not taken into account in the calculation of OIBDA:

APPENDIX 2: Statement of Comprehensive Income for the six months of 2020

APPENDIX 3: Statement of Cash Flows for the six months of 2020

APPENDIX 5: Statement of Financial Position for the six months of 2020

Rostelecom is the largest integrated digital services and products provider, operating in all segments of the telecommunications market in Russia. The Company serves millions of households, state and private enterprises across the country.

Rostelecom is Russia's undisputed market leader, providing high-speed Internet access and pay-TV. The total number of broadband users stands at over 13.4 mln users, it has more than 10.7 mln pay-TV customers, over 5.8 mln of which are subscribed to Rostelecom's IPTV services. Tele2 Russia, a Rostelecom subsidiary, is a major player in the mobile market with over 44 mln subscribers and the industry-leading NPS, a customer satisfaction benchmark.

During the first six months of 2020, the Group generated RUB 248.9 bln of revenues, RUB 95.9 bln of OIBDA (38.5% of revenue) and RUB 15.4 bln of net income.

The Group is the leading provider of telecommunications services to government bodies and corporates of all levels.

Rostelecom is a key strategic innovator that provides solutions in the following fields: E-Government, cybersecurity, data-centres and cloud computing, biometry, healthcare, education and housing & utility services.

The Group's stable financial position is confirmed by its credit ratings. Rostelecom has been assigned 'BBB-' and 'BB+' international credit ratings by Fitch Ratings and Standard & Poor's respectively, and AA(RU) by ACRA.

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Certain statements in this press release are forward-looking statements within the meaning of the U.S. federal securities laws and intended to be covered by the safe harbours created thereby.

Those forward-looking statements include, but are not limited to:

Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include:

Many of these factors are beyond the Company's ability to control or predict. Given these and other uncertainties, readers are cautioned not to place undue reliance on any of the forward-looking statements contained herein or otherwise. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements (which are made as of the date hereof) to reflect events or circumstances upon the annual report publication or to reflect the occurrence of unanticipated events, except as may be required under applicable laws.

[1] Here and below, please refer to Attachment 1 of this statement for a full definition of OIBDA

[2] International Financial Reporting Standards

[3] Here and below, capital expenditure ("CAPEX") comprises cash spent on fixed assets and intangible assets

[4] Here and below, Free Cash Flow (FCF) is calculated as net cash from operating activity minus CAPEX, plus proceeds from selling fixed assets and intangible assets, plus interest received, plus subsidy from government

[5] Here and below, Net Debt is calculated as total debt less cash, cash equivalents and short-term investments (other financial assets).

[6] Average revenue per user

[7] Blended ARPU includes revenue from broadband, IPTV and digital cable TV

[8] Operator to operator