SSA: JSFC Sistema: Half-yearly Report UK Regulatory Announcement MOSCOW FOR IMMEDIATE RELEASE August 30, 2013 UNAUDITED FINANCIAL RESULTS FOR THE SECOND QUARTER ENDED JUNE 30, 2013 Moscow, Russia – August 30, 2013 – Sistema JSFC (“Sistema” or the “Company”, together with its subsidiaries, “the Group”) (LSE: SSA), the largest publicly-traded diversified holding company in Russia and the CIS, today announces its unaudited consolidated US GAAP financial results for the second quarter ended June 30, 2013. SECOND QUARTER HIGHLIGHTS *Consolidated revenues up 6.7% YoY to US$ 8.5 billion *Adjusted OIBDA^1 up 9.4% YoY to US$ 2.1 billion, with an adjusted OIBDA margin of 25.1% *Consolidated net income attributable to the Group significantly increased YoY to US$ 527.9 million. Adjusted net income attributable to the Group^2 amounted to US$ 345.1 million. *Net debt^3 at the Corporate Holding level amounted to US$ 1.4 billion as of June 30, 2013, compared to US$ 1.5 billion as of March 31, 2013. KEY CORPORATE HIGHLIGHTS IN 2Q 2013 AND POST REPORTING PERIOD *Sale of 49% in RussNeft for US$ 1.2 billion. The transaction was completed in July 2013. *Sale of 70% of Sistema’s shares in SG-trans to Financial Alliance^4 for RUB 12.0 billion. The price of the deal is based on the valuation of SG-trans excluding SG-trading. *Sale of 15% of Sistema’s shares in SG-trans to Unirail for RUB 2.5 billion. The transaction was completed in July 2013. *Sistema’s AGM approved annual dividends of RUB 0.96 per Sistema’s ordinary share for the twelve months ended December 31, 2012, amounting to a total of RUB 9.264 billion. The dividends were paid in full in August 2013. *New appointments to Sistema’s Management Board: Vsevolod Rozanov as Senior Vice-President and Chief Financial Officer; Alexey Buyanov as First Vice-President, Portfolio Manager; and Alexey Chupin as Vice-President, Portfolio Manager. Mikhail Shamolin, President and Chief Executive Officer of Sistema, commented: “We are pleased to announce another strong set of quarterly results with excellent year-on-year revenue and OIBDA growth. Our numbers were largely driven by solid operating performance across our entire investment base and consistent execution of Sistema’s strategy. The key highlights for the period include continued growth of data services resulting in higher OIBDA and OIBDA margins at MTS; improved production and higher oil product sales at Bashneft; substantially narrowed OIBDA loss at SSTL and excellent double digit revenue and OIBDA increase at Detsky mir, where a combination of new stores, improved product range and reduction in operating costs led Detsky mir to outperform seasonal weaknesses. Importantly, over the course of the last few months, we also achieved an impressive amount of cash inflows as a result of several announced deals. The restructuring of our transportation assets delivered over US$ 430 million while in our energy holdings, Sistema divested its investment in RussNeft for a US$ 1.2 billion cash consideration. Such deals serve to underline our track record of sourcing unique investment opportunities in Russia, securing them at attractive valuations, contributing our value added insight and monetising investment with substantial return. Combined with the expected dividend flow, Sistema is on track to deliver record cash generation in 2013. This will provide us with the opportunity to further deleverage the holding centre, strengthen our M&A capabilities and increase rewards to shareholders”. Conference call information Sistema’s management will host an analyst conference call today at 11 am (London time) / 12 pm (CET) / 2 pm (Moscow Time) to present and discuss the second quarter results. The dial-in numbers for the conference call are: UK/ International: +44 20 8515 2313 US: +1 480 629 9835 And quote the conference call title: “Sistema Second Quarter 2013 Financial Results”. A replay of the conference call will be available on the Company’s website www.sistema.com for 7 days after the event. For further information, please visit www.sistema.com or contact: Investor Relations Public Relations Evgeniy Chuikov Ekaterina Tsukanova Tel: +7 (495) 692 11 00 Tel. :+7 (495) 228 1536 firstname.lastname@example.org email@example.com FINANCIAL SUMMARY Year-on- Quarter-on- 2Q 2013 2Q 2012 Year 1Q 2013 Quarter Change Change (US$ millions) Revenues 8,472.7 7,941.2 6.7% 8,345.5 1.5% Adjusted OIBDA 2,130.2 1,947.5 9.4% 1,970.7 8.1% Operating income 1,671.2 1,187.7 40.7% 1,157.3 44.4% Adjusted operating 1,325.1 1,187.7 11.6% 1,157.3 14.5% income Net income/ (loss) attributable to 527.9 (162.8) - 349.8 50.9% Sistema Adjusted net income attributable to 345.1 375.6 (8.1%) 349.8 (1.3%) Sistema GROUP OPERATING REVIEW Sistema’s consolidated revenues increased by 6.7% year-on-year and by 1.5% quarter-on-quarter in the second quarter of 2013, largely as a result of solid operating performance at Bashneft, MTS’ growing income from data services, and Detsky mir’s increased profitability from new store openings. The year-on-year revenue increase also reflected the consolidation of NVision Group in the second half of 2012. Selling, general and administrative (SG&A) expenses increased by 11.3% year-on-year, but were down 0.8% quarter-on-quarter to US$ 1,056.1 million in the second quarter of 2013. Depreciation, depletion and amortisation expenses increased by 6.0% year-on-year to US$ 805.1 million. The Group’s adjusted OIBDA increased 9.4% year-on-year and by 8.1% quarter-on-quarter, resulting from growth of the high-margin data services segment at MTS, higher sales of oil products at Bashneft and reduced loss at SSTL. The Group’s adjusted OIBDA margin was 25.1% in the reporting quarter, compared to 24.5% in the corresponding period of 2012 and 23.6% in the first quarter of 2013. Adjusted consolidated net income attributable to Sistema fell by 8.1% year-on-year and 1.3% quarter-on-quarter, mainly due to foreign exchange losses in the amount of US$ 175 million. Consolidated net income attributable to Sistema increased significantly to US$ 527.9 million, reflecting MTS’ recognised gains from settled disputes related to Bitel LLC. OPERATING REVIEW^5 MTS Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 3,082.4 2,989.3 3.1% 3,053.1 1.0% Adjusted OIBDA 1,402.4 1,305.6 7.4% 1,302.6 7.7% Operating income 1,153.1 770.5 49.7% 718.4 60.5% Net income/ (loss) attributable to 426.5 (360.0) - 225.0 89.5% Sistema MTS reported a 3.1% year-on-year increase in revenues in the second quarter of 2013 as a result of the growth in its data services consumption. MTS’ revenues were up 1.0% quarter-on-quarter, reflecting the seasonal increase in roaming services. MTS’ subscriber base totalled 97.5 million^6 customers as of June 30, 2013, demonstrating a 6.5% year-on-year increase as a result of the resumed its operations in Turkmenistan. MTS’ OIBDA in the second quarter of 2013 reflected a recognised gain from compensation related to the settlement of the disputes over Bitel LLC. Adjusted OIBDA was up 7.4% year-on-year and 7.7% quarter-on-quarter in the reporting period due to continued revenue growth from high-margin data services. The adjusted OIBDA margin was 45.5% in the reporting period, compared to 43.7% in the second quarter of 2012 and 42.7% in the first quarter of 2013. The average monthly service revenue per subscriber (ARPU) in Russia grew by 3.0% year-on-year to RUB 306 in the reporting quarter. The quality of the Russian subscribers’ base continued to improve with monthly minutes of use (MOU) increasing by 7.4% quarter-on-quarter to 332 minutes. In the fixed broadband business, the number of households passed expanded by 1.7% and reached 12.1 million at the end of the second quarter of 2013. The pay-TV customer base totalled 2.8 million subscribers at the end of the reporting quarter, while the number of broadband Internet subscribers stood at 2.3 million. In June 2013, MTS’ AGM approved annual dividends of RUB 14.6 per ordinary MTS share (approximately RUB 29.2 per ADR) for the 2012 fiscal year, amounting to a total of RUB 30.2 billion. In June 2013, MTS, Altimo, Nomihold Securities Inc. and other associated parties reached an agreement to settle all disputes that have arisen from investing in Bitel LLC, formerly the leading mobile telephony operator in the Kyrgyz Republic. In May 2013, MTS was named as one of the BRANDZ™ Top 100 Most Powerful Brands, a ranking published by the Financial Times and Millward Brown Optimor, a leading global market research and consulting firm. In April 2013, MTS’ Board of Directors approved a new dividend policy, which stipulates that for the calendar years 2013-2015, MTS aims to pay out a minimum dividend distribution of an amount equal to at least 75% of Free Cash Flow for the relevant financial period or, if greater, RUB 40.0 billion per year. The Board also recommended that MTS begins to pay out dividends on a semi-annual basis using interim and full year financial results. Bashneft Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 4,269.4 4,081.3 4.6% 4,128.8 3.4% OIBDA 725.0 704.3 2.9% 689.8 5.1% Operating income 578.5 545.9 6.0% 547.3 5.7% Net income attributable to 333.9 278.8 19.8% 307.3 8.7% Sistema Bashneft’s revenues increased by 4.6% year-on-year and by 3.4% quarter-on-quarter, mainly as a result of higher sales of oil products in the domestic market, as well as an increase in exports. In the reporting quarter, Bashneft’s OIBDA was up 2.9% year-on-year and 5.1% quarter-on-quarter, reflecting revenue growth, as well as a decrease in export duties. The OIBDA margin slightly declined year-on-year to 17.0%. Following the introduction of horizontal drilling at the Arlanskoe and Afanasiev oil fields in Bashkortostan, Bashneft’s oil production increased by 3.0% year-on-year to 3.9 million tonnes. The company sold 5.1 million tonnes of oil and petrochemical products in the second quarter of 2013, a 7.3% year-on-year increase, with exports amounting to 1.0 million tonnes of crude oil and 2.5 million tonnes of oil products. Refining volumes were up 6.7% year-on-year to 5.3 million tonnes of crude oil following extensive maintenance works in 2012 and growing demand in 2013. In the reporting quarter, the average refining depth increased to 86.0% and light-product yield grew to 61.2%. As of June 30, 2013, Bashneft owned and operated a total of 481 petrol stations. In June 2013, the AGM of Bashneft’s shareholders approved the 2012 dividend payment of RUB 24 per ordinary registered share and per preferred registered share. In August 2013, the dividends were paid in full. In addition, the Board of Directors will consider paying interim dividends for the nine months of 2013 in October 2013 based on Bashneft’s performance. In June 2013, Bashneft sold 832,082 of its ordinary and 4,730,528 of its preferred shares, which were bought back as part of the reorganisation in 2012 and account for 2.45% of Bashneft’s authorized share capital, to United Platform S.A. (Luxembourg), a financial investor, for US$ 257 million. This price was based on the market value of Bashneft’s shares. Under the approved terms of the transaction, United Platform S.A will grant Bashneft the right to buy back this block of shares within six months after completing the transaction under the terms agreed upon by the parties. Bashkirian Power Grid Company (BPGC) 2Q 2Q Year-on-Year 1Q Quarter-on- (US$ millions) 2013 2012 Change 2013 Quarter Change Revenues 91.9 88.2 4.2% 112.7 (18.4%) OIBDA 27.7 38.9 (28.8%) 50.0 (44.7%) Operating income 14.8 28.0 (47.2%) 36.8 (59.8%) Net income attributable 14.6 8.6 70.0% 23.1 (36.6%) to Sistema Bashkirian Power Grid Company’s revenues grew by 4.2% year-on-year, largely due to an increase in new customers, higher electricity output and tariffs indexation effective from July 2012. The company’s revenues were down 18.4% quarter-on-quarter, reflecting a seasonal decline in consumption. In the second quarter of 2013, OIBDA decreased year-on-year and quarter-on-quarter as a result of maintenance works carried out at the facilities, as well as the planned increase in labour costs. Distribution grid losses decreased by 0.06 p.p year-on-year to 5.3% in the second quarter of 2013, following the installation of highly accurate electricity meters. Transmission grid losses decreased by 0.2 p.p. year-on-year to 1.3%. Sistema Shyam TeleServices Ltd. (SSTL) Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 51.9 77.2 (32.8%) 65.0 (20.2%) OIBDA (39.3) (83.8) - (39.0) - Operating loss (56.0) (102.2) - (55.9) - Net loss attributable to (83.3) (125.1) - (45.0) Sistema SSTL’s revenues decreased by 32.8% year-on-year and 20.2% quarter-on-quarter in the reporting period, as a result of the company closing its operations in 13 circles. The company’s revenues from the nine circles it continues to operate in were up 2.4% quarter-on-quarter in local currency. The OIBDA loss narrowed year-on-year reflecting SSTL’s cost optimisation programme and strict control over marketing and other expenses. Quarter-on-quarter OIBDA remained stable mainly due to depreciation of the local currency against the US dollar. The company’s SG&A decreased by 41.6% year-on-year and by 1.3% quarter-on-quarter. SSTL’s total wireless (voice and data) subscriber base declined by 41.0% year-on-year to 9.8 million customers as of June 30, 2013. Blended mobile ARPU amounted to US$ 1.6. The overall decrease in the subscriber base resulted from the closure of circles, although the subscriber base and its quality continued to increase in the nine circles the company operates in. Subscribers’ monthly minutes of use (MOU) increased by 11.0% quarter-on-quarter to 328 minutes. Non-voice revenues from both data and VAS accounted for 34.4% of the company’s total revenues in the reporting period. In April 2013, Dmitry Shukov was appointed CEO of SSTL. Dmitry formerly held senior management positions at Tele2 Russia and MTS. Sistema Mass Media^7 Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 22.9 20.0 14.7% 10.7 114.9% OIBDA 4.6 1.6 190.5% (2.9) - Operating income/ 0.02 (8.2) - (5.7) - (loss) Net loss attributable to (2.1) (9.9) - (4.9) - Sistema Sistema Mass Media’s revenues grew by 14.7% year-on-year and more than doubled quarter-on-quarter, mainly as a result of revenues generated from Stream.ru’s^8 VAS services. SMM’s OIBDA demonstrated a significant year-on-year and quarter-on-quarter increase, reflecting the growth in revenues, the optimisation of administrative expenses, as well as the success of a new management incentive programme aimed at improving business efficiency. In the second quarter of 2013, the Stream-TV subscriber base increased by 25.0% year-on-year reaching 8.5 million subscribers. From April 1, 2013, all Stream-TV channels were added into MTS’ “Mobile TV” package offering. The RWS content library grew by 7.0% year-on-year and amounted to 1,616 hours as of June 30, 2013. In June 2013, Vladimir Khanumyan was appointed as the new Chief Executive Officer of SMM. Mr. Khanumyan was previously a member of the company’s Management Board and held the positions of First Vice President and Managing Director at the company. RTI Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 479.6 365.7 31.2% 505.6 (5.1%) OIBDA 17.3 6.6 163.4% 2.9 495.6% Operating loss (8.3) (12.8) - (20.9) - Net loss attributable to (29.9) (16.0) - (12.6) - Sistema RTI is comprised of four principal business units (“BU”) – Defence Solutions BU, Comprehensive Security Systems BU, Microelectronics Solutions BU and System Integration BU. RTI revenues increased by 31.2% year-on-year, mainly as a result of growing revenue in Defence Solutions BU, the work completed under the Intelligent Transportation System project, R&D work done in Microelectronics Solutions BU, and the consolidation of NVision Group in the third quarter of 2012. NVision accounted for 43% of RTI’s revenue in the second quarter of 2013. The increase in year-on-year and quarter-on-quarter OIBDA mainly resulted from revenue growth, as well as the sale of a 3% stake in a Greek subsidiary INTRACOM TELECOM in 2012. In May 2013, NVision completed modernising the underlying IT infrastructure and installing modern video monitoring systems at the Moscow stadium “Locomotive”. In April 2013, RTI consolidated 97.18% of ordinary shares of JSC Research Institute of Long-Range Radio Communication (NPK “NIIDAR”) as part of the mandatory offer made to the company’s shareholders for the buyout of voting ordinary shares. Binnopharm Year-on-Year 1Q Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 2013 Quarter Change Revenues 27.6 15.6 77.2% 19.9 39.1% OIBDA 7.6 3.5 115.8% 4.1 86.0% Operating income 5.9 2.4 145.3% 2.2 163.0% Net income attributable to 6.6 0.7 829.0% 1.4 357.2% Sistema Binnopharm’s revenues grew by 77.2% year-on-year and 39.1% quarter-on-quarter, mainly as a result of active development of the distribution segment by expanding its product line and regional footprint, as well as increasing its shipments of the Regevak vaccine in the reporting quarter. Binnopharm’s OIBDA grew year-on-year and quarter-on-quarter with the OIBDA margin reaching 27.5%. In April 2013, Binnopharm completed the merger with Alium Group of Companies, a producer of infusion solutions and blood substitutes. The company is now finalising technical upgrades to modernise production of infusion solutions, which will position it as the most advanced factory in Russia. New equipment will help it to produce high-quality products meeting GMP requirements by 2014. In April 2013, Pavel Medvedev was appointed as the new Chief Executive Officer of Binnopharm with immediate effect. Mr. Medvedev previously held the position of Deputy CEO at the company. MTS Bank Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 202.9 170.1 19.3% 206.7 (1.9%) OIBDA (20.0) (6.6) - (10.7) - Operating loss (24.9) (11.4) - (15.6) - Net loss attributable to (14.0) (7.7) - (14.0) - Sistema In the second quarter of 2013, MTS Bank’s revenues were up 19.3% year-on-year, as a result of an increase in interest and commission income following the development of the bank’s retail business. The loan portfolio from joint projects with MTS grew by 26.4% quarter-on-quarter to US$ 363 million. The bank also reported a 13.1% growth in the loan portfolio to individuals for the second quarter of 2013. The OIBDA loss is mainly due to an increase in loan provisions and recognised loss from the revaluation and sale of debt securities. In the second half of 2013, MTS Bank’s management plans to compensate losses with the growing scale of its retail business. MTS Bank’s loan portfolio, excluding leases, increased by 14.7% year-on-year to US$ 6,444 million. The interest income from retail and corporate client transactions grew by 25.6% year-on-year and by 2.6% quarter-on-quarter to US$ 171.0 million. In the second quarter of 2013, MTS Bank, in partnership with CJSC RTK, launched a SIM-card with a built-in “MTS Money” function, based on the contactless technology PayPass. In addition, during the reporting quarter, MTS Bank opened six additional offices in MTS retail outlets. Detsky mir Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 238.5 173.7 37.3% 222.3 7.3% OIBDA 10.0 (0.9) - (15.1) - Operating income/ 5.1 (5.4) - (20.1) - (loss) Net income/ (loss) attributable to 0.9 (5.8) - (14.7) - Sistema Detsky mir’s revenues increased by 37.3% year-on-year and by 7.3% quarter-on-quarter, mainly as a result of store expansion, changes in the company’s commercial policy, and an improved product offering and marketing approach to attract more visitors. Detsky mir reported positive OIBDA in the second quarter of 2013, reflecting revenue growth, optimisation of headcount in the new stores and a new incentive programme for the sales division. The network of retail outlets amounted to 224 stores, including 22 Early Learning Centre (ELC) franchised stores, located in 99 cities across Russia and Kazakhstan. The aggregate retail space was 297,000 sq.m. as of June 30, 2013. In the second quarter of 2013, Detsky mir opened four new stores and one ELC store. In June 2013, the AGM of OJSC Detsky mir – Centre’s shareholders approved dividends for 2012 in the amount of RUB 420 million. Intourist Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 24.4 23.0 6.5% 16.3 50.2% OIBDA 5.2 1.8 185.4% 0.6 748.3% Operating income/ 4.4 (0.4) - (1.4) - (loss) Net income/ (loss) attributable to 0.3 (6.9) - (2.7) - Sistema Intourist’s revenues grew by 6.5% year-on-year despite a reduction in the number of rooms owned following the sale of Oktyabrskaya hotel in Nizhny Novgorod, as well as depreciation of the Russian rouble against the US dollar. Revenue growth was supported by positive market trends, increased tourist flow and management’s efforts to strengthen the hotel business. The company reported a 50.2% quarter-on-quarter increase in revenues as a result of positive seasonality effects and growing occupancy in the spring holiday and summer period. In the second quarter of 2013, Intourist demonstrated strong year-on-year and quarter-on-quarter OIBDA growth, mainly as a result of an increase in revenues and reduction of the company’s expenses, achieved by outsourcing of certain functions. The number of rooms owned, managed and rented in the reporting quarter remained at the level of the first quarter of 2013. Medsi Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change Revenues 72.4 46.9 54.5% 74.8 (3.1%) OIBDA 5.2 5.6 (6.9%) 10.0 (48.1%) Operating income 3.3 2.1 (54.8%) 5.0 (33.1%) Net (loss)/ income attributable to (0.3) (0.9) - 0.6 - Sistema In the second quarter of 2013, Medsi’s revenues increased by 54.5% year-on-year, as a result of integrating its assets with the Medical Centre for the Mayor and Government of Moscow (SUE), as well as an increase in number of visits and the average bill. Revenue fell by 3.1% quarter-on-quarter mainly due to rouble depreciation against the US dollar. The company’s OIBDA decreased year-on-year and quarter-on-quarter, largely due to the costs associated with the increased number of fixed payment contracts in the newly acquired in-patient facilities. In the reporting quarter, the number of patient visits and services provided increased by 19.0% and by 53.0% year-on-year, respectively, as a result of the integration with SUE assets. The average bill in rouble terms grew by 32.0% year-on-year to RUB 1,560, following an increase in market prices for medical services and the development of a hospital care segment. As of June 30, 2013, Medsi’s network consisted of 30 medical clinics, 3 hospitals and 79 first aid stations with the total floor space of healthcare facilities exceeding 173,000 sq.m. In May 2013, Alexei Chupin was appointed President of the Medsi Group of companies. CORPORATE Year-on-Year Quarter-on- (US$ millions) 2Q 2013 2Q 2012 Change 1Q 2013 Quarter Change OIBDA^9 (30.1) (31.6) - (33.8) - Net (loss)/income (149.6) 106.4 - (68.6) - Indebtedness 1,746.8 1,640.0 6.5% 1,789.5 (2.4%) The Corporate segment comprises the companies that control and manage the Company’s interests in its subsidiaries. The dividends declared by Sistema's subsidiaries in the second quarter 2013, which are assigned to the Corporate and Other category, amounted to US$ 588.6 million. The Corporate segment’s SG&A decreased quarter-on-quarter by 9.6% to US$ 33.9 million. In June 2013, the AGM of Sistema’s shareholders approved the payment of annual dividends of RUB 0.96 per ordinary share for the twelve months ended December 31, 2012, amounting to a total of RUB 9.264 billion. The dividends were paid in August 2013. In June 2013, Sistema signed two binding Sale Purchase Agreements with Bradinor Holdings Limited (“Bradinor”) and Cromeld Management Limited (“Cromeld”) for the sale by the Company of 25% and 24% stakes in OJSC Oil and Gas Company RussNeft, respectively, for US$ 1.2 billion. The sale was completed in July 2013. In May 2013, the Board approved the following new appointments to Sistema’s Management Board with effect from June 1, 2013: Vsevolod Rozanov as Senior Vice-President and Chief Financial Officer; Alexey Buyanov as First Vice-President, Portfolio Manager and Alexey Chupin as Vice-President, Portfolio Manager. In May 2013, in line with the Company’s Long-Term Incentive Programme, approximately 0.3% of ordinary shares of Sistema’s charter capital was granted to certain members of Sistema’s management and its Board of Directors. In April 2013, Sistema completed another stage of the planned reorganisation and strategic integration of its transportation assets – SG-trans and Financial Alliance LLC. At this stage of the reorganisation, Sistema sold 70% of its shares in SG-trans to Financial Alliance for RUB 12.0 billion. The price of the deal is based on the valuation of SG-trans, excluding SG-trading. FINANCIAL REVIEW Net cash provided by operations decreased by 17.7% year-on-year and increased by 17.3% quarter-on-quarter to US$ 1,385.2 million. Net cash used in investing activities totalled US$ 878.3 million in the reporting quarter, compared to US$ 1,680.8 million in the corresponding period of 2012. The Group’s capital expenditure decreased year-on-year by 21.6% to US$ 805.2 million due to reduced CAPEX at MTS. The Group received US$ 389.0 million from sale of SG-Trans, net of cash disposed, including US$ 338.0 million from the sale of 70% of SG-trans to Financial Alliance and US$ 51.1 million from the sale of 15% of SG-trans to Unirail as an advance payment. The Group also spent US$ 525.0 million on increasing banking assets and US$ 496.8 million on increasing short-term investments and investments in affiliates, whereas proceeds from sale of short-term investments totalled US$ 484.2 million. Net cash inflow from financing activities more than doubled year-on-year and amounted to US$ 474.8 million. The Group’s proceeds from borrowings in the reporting quarter totalled US$ 1,012.1 million, whereas the principal payments on long-term and short-term borrowings amounted to US$ 1,188.6 million. The Group also received US$ 683.0 million from the decrease in banking liabilities. The Group’s cash balances of continuing operations nearly doubled year-on-year to US$ 2,056.7 million as of June 30, 2013 (excluding an amount of US$ 1,809.2 million which comprises the Group’s banking activities). The Group’s net debt (short-term and long-term debt less cash and cash equivalents and highly liquid deposits) decreased by 2.9% year-on-year to US$ 12,716.5 million as of June 30, 2013. SIGNIFICANT EVENTS FOLLOWING THE END OF THE REPORTING PERIOD MTS In August 2013, the Uzbek authorities, having failed to dispose of the assets of Uzdunrobita, MTS’s wholly owned subsidiary in Uzbekistan, by way of two rounds of auctions, have reached out directly to Uzdunrobita creditors offering to purchase Uzdunrobita’s assets. MTS understands that the liquidation administrator has now proposed that the creditors of Uzdunrobita purchase these assets. Should this proposal not succeed, the liquidation administrator may transfer all of Uzdunrobita’s assets to the local authorities. The Uzbek operation is presented as discontinued in the reporting quarter, with all Uzdunrobita assets fully provided, and corresponding losses recognized, in the income statement for 2012. In August 2013, MTS’ Board of Directors set the date for the company’s the EGM for September 30, 2013. The Board also recommended that the EGM approves semi-annual dividends of RUB 5.22 per ordinary MTS share (RUB 10.44 per ADR) amounting to a total of RUB 10.8 billion on the basis of the company’s first half of 2013 financial and operating results. In July 2013, MTS and Nokia Siemens Networks (“NSN”), one of the world’s largest suppliers of telecommunications equipment, announced an agreement to jointly develop telecommunications infrastructure and build 4G networks in the Moscow region and Russia’s Central Federal District. Bashneft In August 2013, Bashneft’s EGM approved the sale of a 98% stake in United Petrochemical Company to Sistema for RUB 6.2 billion. The transaction value was determined based on an independent appraisal made by one of the Big Four audit firms. The transaction forming part of Bashneft’s strategy for divesting its non-core assets, is expected to be completed before the end of the third quarter of 2013. Corporate In July 2013, Sistema completed the sale of a 49% stake in OJSC Oil and Gas Company RussNeft, for a total cash consideration of US$ 1.2 billion. In July 2013, Sistema completed another stage in the reorganisation of the Group’s transportation assets under the SG-trans brand: Sistema sold a 15% stake in SG-trans to Unirail Holdings Limited for RUB 2.5 billion. In July 2013, in line with the remuneration structure for the members of Sistema’s Board of Directors, shareholdings in the Company of six members have been increased by 121,010 shares and by 115,691 shares for each of five other board members (three of whom received shares for the first time). Each allocation represents approximately 0.0013% of the 9,650,000,000 total shares issued. Based on the closing GDR price on the London Stock Exchange as of July 11, 2013 of US$ 20.65 per GDR, this equates to an indicative value of approximately US$ 1.347 million. In July 2013, Sistema’s Detsky mir-Centre, through its wholly owned subsidiary signed an agreement with Sberbank of Russia to buy back a 25% + 1 share stake in Detsky mir for RUB 4.5 billion. This transaction was financed by Detsky mir’s own resources and debt. As a result of this transaction, Sistema now owns (directly and indirectly) 100% of Detsky mir. *** For further information, please visit www.sistema.com or contact: Investor Relations Public Relations Evgeniy Chuikov Ekaterina Tsukanova Tel: +7 (495) 692 11 00 Tel.: +7 (495) 228 1536 firstname.lastname@example.org email@example.com Sistema is the largest publicly-traded diversified holding company in Russia and the CIS, which invests in and is a major shareholder of 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$ 8.5 billion for the second quarter of 2013, and total assets of US$ 44.4 billion as at June 30, 2013. Sistema’s global depository receipts are listed under the symbol “SSA” on the London Stock Exchange. Sistema’s ordinary shares are listed under the symbol “AFKS” on the MICEX-RTS Stock Exchange. Sistema was ranked number 315 in the 2011 edition of the Fortune Global 500 list. Website: www.sistema.com The Company is not an investment company, and is not and will not be registered as such, under the U.S. Investment Company Act of 1940. 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 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2013 AND 2012 (Amounts in thousands of U.S. dollars, except per share amounts) Six months ended Three months ended June 30, June 30, 2013 2012 2013 2012 Sales $ 16,426,551 $ 15,426,582 $ 8,284,536 $ 7,779,758 Revenue from banking 391,682 311,837 188,162 161,413 activities TOTAL REVENUES 16,818,233 15,738,419 8,472,698 7,941,171 Cost of sales, exclusive of depreciation, depletion and (6,323,239) (5,966,040) (3,163,336) (2,876,217) amortization shown separately below Cost related to banking activities, exclusive of depreciation (264,201) (169,421) (121,834) (94,186) and amortization shown separately below Selling, general and (2,121,022) (1,891,831) (1,056,145) (949,179) administrative expenses Depreciation, depletion and (1,618,463) (1,539,590) (805,068) (759,789) amortization Transportation (461,393) (387,077) (239,129) (207,461) costs Impairment of long-lived assets other than goodwill (53,767) (88,836) (37,579) (23,906) and provisions for other assets Taxes other than income (3,448,711) (3,262,399) (1,721,023) (1,758,176) tax Other operating (86,062) (13,449) (38,165) (34,382) expenses, net Equity in results of 41,057 (38,234) 34,711 (50,190) affiliates Gain on Bitel 346,100 - 346,100 - resolution OPERATING 2,828,532 2,381,542 1,671,230 1,187,685 INCOME Interest 122,975 149,057 71,318 74,869 income Change in fair value of (1,315) (1,218) (665) (616) derivative instruments Interest expense, net (643,255) (703,493) (317,406) (352,858) of amounts capitalized Foreign currency (205,076) (1,132) (175,069) (152,700) losses Income from continuing operations 2,101,861 1,824,756 1,249,408 756,380 before income tax Income tax (545,334) (519,906) (304,981) (204,533) expense Income from continuing 1,556,527 1,304,850 944,427 551,847 operations Loss from discontinued operations, (8,588) (999,191) (4,513) (1,019,554) net of income tax effect NET INCOME $ 1,547,939 $ 305,659 $ 939,914 $ (467,707) Noncontrolling (670,262) (86,959) (412,061) 304,948 interest NET INCOME attributable $ 877,677 $ 218,700 $ 527,853 $ (162,759) to Sistema JSFC Income per share, basic 9.52 2.34 5.72 (1.74) and diluted, U.S. cent SISTEMA JSFC AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2013 AND DECEMBER 31, 2012 (Amounts in thousands of U.S. dollars, except share amounts) June 30, 2013 December 31, 2012 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,056,725 $ 1,859,217 Short-term investments 1,540,742 1,214,869 Assets from banking activities, current portion (including cash 4,794,047 4,342,984 and cash equivalents of $1,809,224 and $769,411) Accounts receivable, net 2,459,774 2,261,159 VAT receivable 551,089 610,975 Inventories and spare parts 1,893,062 1,812,776 Deferred tax assets, current 357,408 348,773 portion Assets related to discontinued 82,598 476,681 operations Other current assets 1,900,033 1,673,010 Total current assets 15,635,478 14,600,444 NON-CURRENT ASSETS: Property, plant and equipment, 19,118,680 20,843,125 net Advance payments for non-current 210,447 230,773 assets Goodwill 1,602,044 1,753,233 Other intangible assets, net 2,404,267 2,149,983 Investments in affiliates 1,845,902 1,482,721 Assets from banking activities, 2,297,127 2,255,709 net of current portion Debt issuance costs, net 95,534 155,895 Deferred tax assets, net of 342,028 314,210 current portion Long-term investments 250,339 269,180 Other non-current assets 606,307 599,135 Total non-current assets 28,772,675 30,053,964 TOTAL ASSETS $ 44,408,153 $ 44,654,408 SISTEMA JSFC AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2013 AND DECEMBER 31, 2012(CONTINUED) (Amounts in thousands of U.S. dollars, except share amounts) June 30, 2013 December 31, 2012 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 2,592,986 $ 2,470,565 Liabilities from banking 4,568,725 4,131,390 activities, current portion Taxes payable 749,310 763,301 Deferred tax liabilities, 226,661 139,842 current portion Subscriber prepayments, current 508,366 606,856 portion Accrued expenses and other 3,214,452 2,633,032 current liabilities Short-term loans payable 319,438 292,260 Current portion of long-term 2,686,969 2,862,264 debt Liabilities related to 59,678 444,487 discontinued operations Total current liabilities 14,926,585 14,343,997 LONG-TERM LIABILITIES: Long-term debt, net of current 11,931,733 12,447,374 portion Subscriber prepayments, net of 100,357 112,805 current portion Liabilities from banking activities, net of current 613,752 1,057,072 portion Deferred tax liabilities, net of 1,981,173 2,005,990 current portion Asset retirement obligation 226,543 228,627 Postretirement benefits 80,649 89,038 obligation Property, plant and equipment 77,267 88,380 contributions Other long-term liabilities 621,443 250,599 Total long-term liabilities 15,632,917 16,279,885 TOTAL LIABILITIES 30,559,502 30,623,882 Commitments and contingencies - - Redeemable non-controlling 747,661 731,661 interests SHAREHOLDERS’ EQUITY: Share capital (9,650,000,000 shares issued; 9,234,619,148 and 9,209,574,962 shares outstanding 30,057 30,057 with par value of 0.09 Russian Rubles, respectively) Treasury stock (415,380,852 and 440,425,038 shares with par (472,525) (501,109) value of 0.09 Russian Rubles, respectively) Additional paid-in capital 2,783,461 2,882,819 Retained earnings 7,651,375 7,111,088 Accumulated other comprehensive (1,018,185) (325,571) loss Total Sistema JSFC shareholders’ 8,974,183 9,197,284 equity Non-redeemable noncontrolling 4,126,807 4,101,581 interests TOTAL EQUITY 13,100,990 13,298,865 TOTAL LIABILITIES AND EQUITY $ 44,408,153 $ 44,654,408 SISTEMA JSFC AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (Amounts in thousands of U.S. dollars) Six months ended June 30, 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,547,939 $ 305,659 Loss from discontinued operations 8,588 999,191 Income from continuing operations 1,556,527 1,304,850 Adjustments to reconcile net income to net cash provided by operations: Depreciation, depletion and amortization 1,618,463 1,539,590 Equity in net income of investees (41,057) 38,234 Deferred income tax expense/(benefit) 235,027 (40,762) Foreign currency transactions losses 205,076 1,132 Gain on Bitel resolution, net of cash (221,100) - received of $125,000 Impairment of long-lived assets other than 53,767 88,836 goodwill and provisions for other assets Loss on disposal of property, plant and 6,669 13,115 equipment Amortization of connection fees (15,438) (14,565) Allowance for loan losses 133,426 30,689 Dividends received from affiliates 29,884 24,972 Non-cash compensation to employees 11,014 - Other non-cash items 64,314 31,829 Changes in operating assets and liabilities, net of effects from purchase of businesses: Trading securities (182,261) 11,088 Accounts receivable (472,218) (399,576) VAT receivable 37,402 141,827 Inventories and spare parts (329,121) 54,314 Other current assets (233,167) (170,257) Accounts payable 74,300 68,125 Subscriber prepayments (49,935) (74,498) Taxes payable 46,699 88,551 Accrued expenses and other liabilities 54,717 (9,844) Net cash provided by operating activities of 2,582,988 2,727,650 continuing operations Net cash (used in) / provided by operating (17,288) 205,870 activities of discontinued operations Net cash provided by operating activities $ 2,565,700 $ 2,933,520 SISTEMA JSFC AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (CONTINUED) (Amounts in thousands of U.S. dollars) Six months ended June 30, 2013 2012 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of property, $ (1,283,727) $ (1,618,046) plant and equipment Payments for purchases of intangible (202,447) (158,542) assets Proceeds from/(payments for) purchases of businesses, including/(net of) cash 42,188 (60,541) acquired Purchase of investments in affiliated (304,388) - companies Payments for purchases of long-term (27,011) (397,274) investments Payments for purchases of short-term (839,090) (1,997,819) investments Payments for purchases of other (7,568) (162,396) non-current assets (Increase) /decrease in restricted cash (15,049) 37,863 Cash disposed on loss of control of the - (49,238) subsidiary less consideration received Proceeds from sale of subsidiaries, net 389,011 - of cash disposed Proceeds from sale of property, plant 46,874 24,889 and equipment Proceeds from sale of long-term - 192,223 investments Proceeds from sale of other non-current 1,863 18,919 assets Proceeds from sale of short-term 676,507 235,341 investments Net decrease/(increase) in loans to 54,740 (629,628) customers of the banking division Net cash used in investing activities (1,468,097) (4,564,249) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings, net 25,205 54,664 Net increase in deposits from customers 371,897 531,211 of the banking division Proceeds from sale of treasure stock - 73,083 Proceeds from long-term borrowings 2,326,315 1,748,403 Debt issuance costs (4,690) (10,860) Principal payments on long-term (2,482,583) (2,154,881) borrowings Acquisition of non-controlling interests (27,073) (627,108) in existing subsidiaries Proceeds from capital transactions with 8,623 73,987 shares of existing subsidiaries Purchases of treasury shares - (33,352) Net cash provided by / (used in) 217,694 (344,853) financing activities Effect of foreign currency translation (77,294) (54,953) on cash and cash equivalents Net increase/(decrease) in cash and cash 1,238,003 (2,030,535) equivalents Cash and cash equivalents at the beginning of the period (including cash 2,629,544 4,320,423 of discontinued operations) Cash and cash equivalents at the end of the period (including cash of 3,867,547 2,289,888 discontinued operations) Cash and cash equivalents of discontinued operations at the end of (1,598) (271,379) the period Cash and cash equivalents of continuing $ 3,865,949 $ 2,018,509 operations at end of the period * CASH PAID DURING THE PERIOD FOR: Interest paid, net of amounts $ (650,300) $ (700,043) capitalized Income taxes paid (286,146) (562,554) * Cash and cash equivalents at the end of the period comprised of the following: Non-banking activities $ 2,056,725 $ 1,133,291 1. Banking activities 1,809,224 885,218 $ 3,865,949 $ 2,018,509 SISTEMA JSFC AND SUBSIDIARIES UNAUDITED SEGMENTAL BREAKDOWN FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (Amounts in thousands of U.S. dollars) For the six Total months ended MTS Bashneft SSTL MTS Bank RTI Corporate reportable Other Total June 30, 2013 segments Net sales to external 6,125,868 8,394,627 116,868 391,682 750,035 22,037 15,801,117 1,017,116 16,818,233 customers ^(a) Intersegment 9,638 3,483 - 17,908 235,189 19,040 285,258 73,659 358,917 sales Equity in results 22,495 4,602 - - (4,406) - 22,691 9,640 32,331 of affiliates Net interest - - - (29,551) - - (29,551) - (29,551) expense ^(b) Depreciation, depletion and 1,152,150 289,045 33,600 9,676 49,421 7,907 1,541,799 76,664 1,618,463 amortization Operating 1,898,972 1,144,162 (111,866) (40,444) (29,214) (71,774) 2,789,836 58,144 2,847,980 income/(loss) Interest income 48,228 82,685 5,022 - 16,993 43,393 196,321 7,047 203,368 Interest expense 273,370 156,786 68,246 - 68,374 80,046 646,822 56,958 703,780 Income tax 2. 323,787 239,367 - (8,224) (16,327) 3. 2,114 540,717 4,617 545,334 expense/(benefit) Segment assets 16,012,426 14,756,183 917,573 7,520,115 3,569,388 3,203,095 45,978,780 3,986,727 49,965,507 Indebtedness ^(c) 7,531,759 3,223,608 692,743 - 1,441,156 1,746,834 14,636,100 302,040 14,938,140 Capital 841,282 460,413 9,575 11,991 46,219 68,224 1,437,704 48,470 1,486,174 expenditures ^(d) For the six Total months ended MTS Bashneft SSTL MTS Bank RTI Corporate reportable Other Total June 30, 2012 segments Net sales to 4. external 5,884,218 7,998,686 158,131 311,837 601,645 18,828 14,973,345 765,074 15,738,419 customers ^(a) Intersegment 3,266 5,666 - 15,356 241,273 15,906 5. 281,467 15,489 296,956 sales Equity in results 9,729 (42,225) - - (2,751) - (35,247) (5,076) (40,323) of affiliates Net interest - - - (3,656) - - (3,656) - (3,656) expense ^(b) Depreciation, depletion and 1,069,122 306,250 36,008 9,562 43,534 5,500 1,469,976 69,614 1,539,590 amortization Operating 1,433,558 1,233,148 (191,851) (4,243) (15,552) (66,694) 2,388,366 3,564 2,391,930 income/(loss) Interest income 58,655 90,710 4,224 - 4,254 64,451 222,294 60,936 283,230 Interest expense 309,299 176,185 88,073 - 35,000 78,449 687,006 54,257 741,263 Income tax 6. 230,784 277,646 - 559 4,794 (3,478) 510,305 9,601 519,906 expense/(benefit) Segment assets 15,098,554 14,321,568 866,396 7,028,732 2,062,221 4,338,747 43,716,218 4,383,152 48,099,370 Indebtedness ^(c) 7,292,959 3,881,451 1,402,713 - 1,046,447 1,639,995 15,263,565 327,643 15,591,208 Capital 1,124,127 440,122 29,790 14,980 58,847 11,651 1,679,517 97,071 1,776,588 expenditures ^(d) (a) Interest income and expenses of the MTS Bank are presented as revenues from financial services and cost of financial services, correspondingly, in the Group’s consolidated financial statements. (b) Represents the net interest result of banking activities. In reviewing the performance of MTS Bank, the chief operating decision maker reviews the net interest result, rather than the gross interest amounts. (c) Represents the sum of short-term and long-term debt. (d) Represents purchases of property, plant and equipment and intangible assets. 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 businesses 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. OIBDA can be reconciled to our consolidated statements of operations as follows: Operating income and OIBDA reconciliation 2Q 2013 2Q 2012 1Q 2013 Operating Income 1,671.2 1,187.7 1,157.3 One off items 346.1 - - Adjusted operating income 1,325.1 1,187.7 1,157.3 Depreciation, depletion 805.1 759.8 813.4 and amortization Adjusted OIBDA 2,130.2 1,974.5 1,970.7 Net income reconciliation 2Q 2013 2Q 2012 1Q 2013 Net income/ (loss) 527.9 (162.8) 349.8 One off items 182.8 538.4 - Adjusted net income 345.1 375.6 349.8 ^1 See Attachment A for definitions and reconciliation of adjusted OIBDA to GAAP financial measures. The adjustment includes recognised gains from settled disputes related to Bitel LLC. ^2 See Attachment A for definitions and reconciliation of adjusted net income attributable to the Group to GAAP financial measures. ^3 Including highly liquid deposits. ^4 Sistema owns 50% stake in Financial Alliance ^5 Here and from hereon, the comparison of period to period revenues are presented on an aggregated basis, excluding revenues from 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 results due to certain reclassifications and adjustments. ^6 Excluding Belarus subscribers ^7 Financial results of Stream.ru are included into SMM segment for all periods presented. ^8 Stream.ru is under the operational management of SMM and is owned by Sistema (55%) and MTS (45%). For reporting purposes, Stream.ru’s financial results were allocated to SMM’s segment. ^9 Here and further, OIBDA and net income (loss) of the Corporate & Other category are shown without an effect of intragroup dividends. Contact: JSFC Sistema
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SSA: JSFC Sistema: Half-yearly Report
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