Summary of the annual performance results and work of management in the context of strategy implementation

The first stage of implementation of the current Customer Lifetime Value 2.0 (CLV 2.0) strategy was dedicated to MTS transformation from a mono-industry (telecommunications) player into a multi-industry company operating in several markets that develops the diversified business areas at different stages of maturity and with different scales and dynamics. At this stage, the Board of Directors and the top management of MTS concentrated on forming the optimal format of the management system of the Group’s business directions and ecosystem core.

In 2021, the management structure was formed, the efforts of the verticals were aimed at developing product lines and developing local competencies, and the ecosystem core was focused on the tasks of collecting and managing knowledge about customers, data processing methods, developing the mechanics of applying this knowledge in product areas and ensuring mutually enriching links between them.

From that moment on, the main long-term strategic task of the corporate governance bodies and the top management of MTS became the search for and adjustment of mechanisms for translating the increasing cost of product filling into an increase in shareholder value. We see the solution to this problem in the decentralization of product lines, in the transfer of greater responsibility and independence to them, in the motivation for market leadership in their product area with the potential to transform into independent businesses evaluated by the market on fair industry multipliers, different from conservative estimates of telecom. At the same time, the importance of parallel evolution of the ecosystem core is obvious to us — a link that interacts with product verticals on the basis of mutually beneficial and fair contractual relations will allow verticals to generate greater value and achieve a synergistic effect.

During 2022, the Board of Directors considered and made all necessary decisions as part of the process of withdrawing MTS ADRs from circulation on the New York Stock Exchange and converting depositary receipts into shares of the company. Recall that due to the suspension of trading of MTS ADRs on the New York Stock Exchange on February 28, 2022 and the subsequent adoption by the Government of the Russian Federation in April 2022 of the law on delisting depositary receipts of Russian companies from a number of foreign trading platforms, the company took the necessary actions to withdraw MTS from the ADR program on the New York Stock Exchange. In May 2022, the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation, at the request of MTS, decided to extend the circulation of MTS ADRs outside Russia until July 12, 2022 inclusive. On July 13, 2022, the procedure for completing the MTS ADR program began (the last day of the guaranteed conversion period is January 12, 2023).

ADR holders are entitled to receive dividends after converting receipts into MTS shares, in accordance with Russian law and taking into account existing regulatory restrictions. The right to claim dividends remains with the holders of shares for 3 years from the date of the issuer’s decision to pay dividends.

It should be emphasized that, despite the delisting of the MTS ADRs from the New York Stock Exchange, we still adhere to the principles of openness and transparency of doing business. We intend to continue to comply with the highest international standards of corporate governance, provide the investment community with access to information about our business, and expand our activities in the field of sustainable development and ESG.

Our strategic focus on the development of digital services based on a strong position in telecom has demonstrated effectiveness in the face of environmental pressure and a high level of general uncertainty. New digital trends have made an independent contribution to the formation of value and at the same time had a positive impact on the results of the telecommunications component, stimulating consumption and providing a higher level of loyalty of ecosystem customers. The number of MTS ecosystem customers by the end of 2022 increased by 52.7% and amounted to 13.5 million.

As a result, revenues from telecommunications services in 2022 increased by 4.6% compared to 2021 and reached RUB 435.6 billion. The Board particularly notes the efforts of management in relation to the implementation of the capital expenditure program, which was carried out despite limited access to high-tech equipment in 2022.

Our retail business is under serious pressure due to a partial reduction in the supply of subscriber equipment. In this regard, revenues from the sale of phones and accessories decreased by 36.7% year-on-year and amounted to RUB 43.6 billion. We hope that in the future, as the market supply is restructured and logistics chains are reconfigured, the situation in this area will stabilize.

Among the digital areas, fintech made a significant contribution to the Group’s results, demonstrating an increase in revenue from financial services at the level of 40.4% year-on-year to RUB 68 billion. At the same time, the share of sales of basic products (consumer loans and credit cards) through digital channels exceeds the level of 80%.

In the Media area, we note a steady increase in the number of OTT platform users to 6.6 million (by 63.4% year-on-year) and the number of pay-TV subscribers to 11.1 million (by 32.6% year-on-year). We also note the development of the KION streaming platform, the product offer of which has a unique value for customers due to original content and exclusive partnerships, as well as the customization of the interface and the improvement of personalized recommendation mechanisms.

More detailed information on the annual performance results by the MTS principal business directions is available in the section “Ecosystem transformation overview”.

In the past year, the Board of Directors focused on issues related to sustainable development and ESG practices. The bulk of the work was carried out by a combination of the Corporate Governance, ESG Committee (Environmental and Social Responsibility Committee) of the Board of Directors and the MTS ESG Center and the MTS ESG Center, responsible for systematization and expansion of the company’s activities in this area. Particularly important decisions were made directly at the level of the Board of Directors.

More information about the results of this work can be found in the section “ESG and sustainable development”.

To ensure the continuous progressive development of the Group’s business, we also use the capabilities of M&A. During 2022, activity in this area was quite high due to the increased propensity of business owners and individual projects to search for a strong stable co-investor and partner. In this regard, the Board of Directors reviewed and made decisions on participation in a number of companies, which allowed us to strengthen our positions in the areas of Telecom, Fintech, Travel and Auto. We expect that in 2023 the potential for activity in this area will not decrease, and such issues will occupy a significant place in the work of the Council.

As part of the function of protecting the rights and interests of shareholders, the Board of Directors has prepared the basis for the adoption by the Shareholders’ Meeting of decisions concerning the payment of dividends. In June 2022, at the annual general meeting of shareholders, it was decided to pay dividends based on the results of the company’s work in 2021 at the level of 33.85 rubles per ordinary share (in the amount of RUB 66.3 billion). Due to the ongoing general macroeconomic uncertainty, the Board of Directors is considering various options regarding the dividend policy, while respecting the interests of investors is an absolute priority for us.

The following can be noted among other issues considered by the MTS Board of Directors in 2022 and the respective decisions made.

• The Board of Directors reviewed and adopted decisions regarding the overall strategy of the MTS Group and the strategies of individual business areas. Furthermore, promoting MTS right to build its position as a shareholder, the Board of Directors reviewed reports on performance results and strategies of subsidiaries and affiliated companies.
• Following the best corporate governance practices, the Board of Directors considered a number of issues related to functioning of the internal audit, control and compliance system, as well as the risk management system in MTS.
• Necessary decisions were made regarding the composition of the corporate management bodies of MTS PJSC.
• An assessment was made with regard to the achievement in 2021 of the target KPIs by President and members of the Management Board of MTS, and the target levels of KPIs for 2022 were approved.
• The results of execution of the MTS 2021 budget and the capital expenditure program, as well as the MTS 2022 budget and capital expenditure program, were considered and approved.
• Exercising the right to form the position of MTS as a member of subsidiaries, the Board of Directors ensured the formation of corporate management bodies of MTS subsidiaries, as well as MTS positions on issues submitted to the corporate management bodies of such companies.
• Within the framework of ensuring MTS shareholders’ rights and interests, all necessary procedures for convening general meetings of shareholders were carried out by the Board of Directors; the data and materials were prepared and recommendations were submitted on all issues requiring shareholders’ approval.
• A program of motivation and long-term material incentives for MTS employees was adjusted by the Board of Directors in order to ensure a high level of personnel motivation and the quality of company management.
• In order to ensure the continuity of financing of MTS PJSC’s activities and optimal debt management, issues related to programs for issuing and repurchasing securities in the form of exchange-traded and over-the-counter bonds and other financing instruments were considered.
• In order to maintain a high level of efficiency of the operational management system, the necessary decisions have been made regarding the adjustment of the management structure of a number of MTS business verticals.