Georgia Healthcare Group PLC Announces Half-Year Report

2nd Quarter and Half-Year 2019

Results

LONDON, UK / ACCESSWIRE / August 14, 2019 / GHG announces today the Group’s 2Q19 and 1H19 consolidated results, reporting 12.7% y-o-y growth in half-year revenues to GEL 472.9 million (US$164.8 million/GBP 130.0 million) and a 70 basis point improvement in adjusted ROIC1. The Group posted half-year profit of GEL 31.3 million (US$10.9 million/GBP 8.6 million) and earnings per share (“EPS“) of GEL 0.15(US$0.05 per share/GBP 0.04 per share), both excluding IFRS 16 lease accounting impact.

In order to permit meaningful comparisons between reporting periods, in the table below Net Profit, EBITDA, EBITDA margin and EPS data, for GHG as well as for each segment, exclude IFRS 16 financial impact. For the same reason, the discussions throughout this report of 2019 quarterly and half-year results for the Group and each business line also focus on the numbers excluding the IFRS 16 impact. Each financial table, on the other hand, shows both – the results with and without IFRS 16 impact. We are adopting this convention for 2019 only because 2018 figures have not been restated on an IFRS 16 basis.

GEL million; unless otherwise noted

2Q19

2Q18

Change,

Y-o-Y

1H19

1H18

Change,

Y-o-Y

Revenue, gross

237.7

211.8

12.2%

472.9

419.5

12.7%

EBITDA excluding IFRS 16

37.4

31.2

19.6%

74.8

62.6

19.4%

Net Profit excluding IFRS 16

13.0

12.4

5.2%

31.3

28.4

10.2%

EPS adjusted1, GEL excluding IFRS 16

0.09

0.06

51.0%

0.19

0.14

33.1%

ROIC adjusted2 (%)

14.4%

13.8%

0.6 ppts

14.4%

13.7%

0.7 ppts

Hospitals business

Revenue, gross

74.2

67.8

9.5%

149.0

132.1

12.8%

EBITDA excluding IFRS 16

18.8

17.4

8.1%

38.0

34.5

10.1%

EBITDA margin (%) excluding IFRS 16

25.4%

25.7%

-0.3 ppts

25.5%

26.1%

-0.6 ppts

Net Profit excluding IFRS 16

4.2

4.5

-7.9%

10.1

10.5

-4.0%

Clinics business

Revenue, gross

10.9

10.0

9.2%

22.0

19.4

13.3%

EBITDA excluding IFRS 16

1.9

1.4

38.6%

4.0

2.8

44.8%

EBITDA margin (%) excluding IFRS 16

17.5%

13.8%

3.7 ppts

18.1%

14.2%

3.9 ppts

Net Profit excluding IFRS 16

(0.4)

(0.9)

-54.4%

(0.6)

(1.5)

-62.1%

Pharmacy and distribution business

Revenue

149.4

127.3

17.4%

295.2

254.2

16.1%

Gross profit margin (%)

24.1%

24.7%

-0.6%

25.2%

24.7%

0.5%

EBITDA excluding IFRS 16

15.3

11.9

28.8%

30.9

24.6

25.8%

EBITDA margin (%) excluding IFRS 16

10.3%

9.4%

0.9 ppts

10.5%

9.7%

0.8 ppts

Net Profit excluding IFRS 16

8.2

8.5

-2.6%

20.4

19.3

5.7%

Medical insurance business

Net insurance premiums earned

18.9

13.7

37.7%

36.4

27.0

34.7%

Loss ratio (%)

82.6%

82.4%

0.2 ppts

83.9%

83.4%

0.5 ppts

Combined ratio (%) excluding IFRS 16

94.5%

97.6%

-3.1 ppts

96.1%

98.8%

-2.7 ppts

EBITDA excluding IFRS 16

1.2

0.5

138.9%

1.8

0.7

149.3%

Net Profit/ (Loss) excluding IFRS 16

1.0

0.3

218.7%

1.5

0.2

512.7%

Diagnostic

Revenue

1.1

0.7

65.8%

2.3

1.4

65.8%

Gross profit margin (%)

31.6%

17.4%

14.2 ppts

29.8%

21.8%

8.0 ppts

EBITDA excluding IFRS 16

0.0

(0.0)

NMF

0.1

0.1

29.3%

EBITDA margin (%) excluding IFRS 16

4.3%

NMF

NMF

4.2%

5.4%

NMF

Net Profit/ (Loss) excluding IFRS 16

(0.0)

(0.1)

NMF

(0.0)

(0.0)

NMF

1 Adjusted for non-recurring items and foreign currency losses

2 Return on invested capital (“ROIC”) adjusted to exclude newly launched hospitals and polyclinics that are in roll-out phase

CHIEF EXECUTIVE OFFICER’S STATEMENT

During the first half of 2019, the Group continued to deliver strong core earnings momentum, improved cash generation and a significant improvement in the Group’s return on capital invested. Each of its businesses made important progress on their strategic goals. Our first half performance demonstrates the value we have begun to capture from our investment in the business over the last few years, with double-digit revenue growth in each business. Going forward, we expect to continue this double-digit growth throughout the business by leveraging the strength of our existing franchises without having to make significant further investment capital expenditure. We are actively building out a number of growth opportunities, such as in medical tourism, retail laboratory diagnostic services, outpatient clinics and dental service expansion, new pharmacies and new products such as private label personal care products. As a result, we are well positioned to grow the business over the medium-term, improve our operating cash flows, reduce debt and balance sheet leverage and continue to improve returns on invested capital.

With effect from 1 January 2019, the Group adopted IFRS 16 “Leases”. For comparison purposes, the commentaries in this report and statement exclude the impact of IFRS 16, however the financial statements (pages 32-63) show the full statutory reporting position.

The Group. In the first half of 2019, Group revenue increased by double digits (13%) to GEL 473 million on the back of strong organic growth. EBITDA grew 19% to GEL 75 million reflecting both the revenue growth and effective cost management, which led to positive operating leverage despite the impact of new pension system (that became mandatory in Georgia from January 2019, explained in detail below on page 8), which increased our salary expense in 1H19 by more than GEL 2 million.

The Group incurred a significant foreign currency exchange loss in the second quarter, mainly due to the revaluation of foreign currency denominated payable balances of pharmacy and distribution business, after more than 6% devaluation of the Georgian Lari against both the US dollar and the Euro, driven by spillovers from regional tensions including the Russian government decision to cancel all air connections with Georgia which had a negative effect on tourism and fed depreciation expectations.

The Group delivered a profit of GEL 31 million in the first half of 2019, an increase of 10% compared to the first half of last year. We made strong progress in both revenues and bed utilisation in our two flagship hospitals, as they execute their utilisation programmes. The roll-out and patient number growth in our polyclinic network also continues to deliver a strong revenue uplift. Further sales growth in pharmacy business drove continued EBITDA margin expansion and earnings growth. The medical insurance business continues to improve profitability.

The Group’s robust balance sheet strengthened further during the half year, with borrowings declining by GEL 21 million from their December 2018 level. Earnings per share, excluding the FX loss and non-recurring expenses increased by more than 33%. The Group improved its adjusted return on invested capital, from 13.7% to 14.4%, and posted improved operating cash in 1H19, translating into a 74% EBITDA to cash conversion ratio. On top of improved operating cash, being up 25% in 1H19 y-o-y, the cash used in investing activities more than halved during the same period, another significant achievement for the year. Operating cash net of outflows from investing activities swung from negative GEL 11.2 million in 1H18 to positive GEL 32.0 million in 1H19.

Hospitals business. Our hospitals business delivered GEL 149 million revenue in 1H19, an increase of 13% y-o-y. This growth was driven by both the continuing ramp-up of our newly launched hospitals, and good momentum in our existing facilities where occupancy rates increased by 250 basis points from 63.1% in 1H18 to 65.6% in 1H19. At Regional Hospital, our early recruitment of a number of specialist elective care medical teams has ensured that initial utilisation rates have been very strong, and the occupancy rate was nearly 40% in the quarter. The bed occupancy rate of Tbilisi Referral Hospital stood at 47% in the same period. Both Regional Hospital and Tbilisi Referral Hospital are now delivering EBITDA margins in excess of 17%, and we expect these to continuing increasing as we work over the rest of the year to build both hospitals towards maturity. EBITDA margin of the overall hospitals business remained strong and stood at 25.5% in 1H19 (27.7% excluding the roll-out impact).

Clinics business. Our polyclinic network continues to grow. These polyclinics clearly stand out from their competition as new, modern facilities that provide a diverse range of high-quality services in one location. We continue to improve the overall patient experience, and the number of registered patients in Tbilisi has grown to c.172,000, up c.55,000 patients since June 2018. In December last year, we entered the Georgian dental market and we now have dental clinics in eight polyclinics in Tbilisi and other large cities in the regions. In 1H19 clinics overall (which also includes community clinics) posted a 13% growth in revenues (with the polyclinics part growing by 20%), EBITDA grew by 45% and EBITDA margin increased by 390 basis points y-o-y, up to 18.1%.

Pharmacy and Distribution business. Our pharmacy chain and distribution business posted record half-yearly revenues of GEL 295 million, with 16% year-on-year growth supported by strong organic growth, the transfer of our hospitals’ centralised medicine procurement entity to the distribution part of the business and the further expansion in the number of pharmacies – which now total 279 in major cities. Excluding newly transferred entity, the business y-o-y revenue growth was at 10%. The first private label para-pharmacy products were introduced in our pharmacies in March, under the brand name “Attirance”, to supplement the 37 private label medicines already sold through our pharmacies. The growth in the business’s EBITDA reached 26% driven by the revenue growth and cost discipline maintained, notwithstanding the increased costs following the Georgian pension system reforms, and this supported positive operating leverage of 490 basis points. The business EBITDA margin continues to exceed our expectations, increasing by 80 basis points year-on-year to 10.5%. This is an extremely strong performance and 150 bps in excess of our targeted “more than 9%” margin.

Medical insurance business. Our medical insurance business has made substantial progress over the last 12 months and continues to increase its client base and is now contributing to the profitability of the Group. Net insurance premiums earned increased by 35% in 1H19, supported by the acquisition of a single large client in the first quarter, and the combined ratio improved by 270 basis points to 96.1%. More importantly, we continue to improve the level of medical insurance claims retained within the Group and, in the first half of 2019, 41% of medical expense claims were retained within the Group. We expect this ratio to continue to increase further over the next few years.

Diagnostics business. In December 2018, we completed the construction of and opened Mega Lab, the largest diagnostics laboratory in Georgia and the Caucasus region. The diagnostics business has already delivered break-even EBITDA, with costs of our lab services at Group’s healthcare facilities having been maintained at the same level. Over 350,000 tests were performed in the first half – a significant achievement.

We have already started to develop a retail network for the lab by capitalising on the scale of our pharmacy and distribution business. We launched the first blood collection point in one of GHG pharmacies in June and currently have three such points, with the plan to increase that number to around 50 in coming years. The business will also work on additional external contracts, serving healthcare facilities outside the Group.

****

I am pleased with the Group’s progress made during the first half, and the Group also marked a significant milestone in July with the payment of our first shareholder dividend. Each business continues to achieve strong operational performance, and the Group overall is delivering excellent momentum in its earnings growth, internal cash generation, balance sheet deleveraging, and improving return on invested capital priorities. As our business matures, our focus is not only on growth. We are also steadily improving our management of risk.

Another key milestone for the Group is the launch of electronic medical record (EMR) in all our Tbilisi polyclinics, that will help us manage our customers more efficiently and deliver a better care to them, and electronic medical ordering system in most of our referral hospitals. GHG is the first healthcare company in the country implementing fully integrated health information system. To improve the quality management process, in 2019 we have established clinical boards which endorse standards of practice at hospitals level by measuring clinical quality with a recently implemented key performance indicator monitoring system, further contributing to quality enhancement in our healthcare facilities.

We had to absorb the impact of the weakening Lari in 1H19, and in July the national currency depreciated a further 3% against the dollar. On August 1 the National Bank of Georgia, which had accumulated record high reserves at US$3.7 billion as of June 2019, intervened in the market to curb the depreciation expectations, and since August 1 the Lari has gained around 2%. The Georgian macro outlook remains strong with real GDP growth of 4.9% in 1H19, backed by improved net export and fiscal stimulus. Strong external demand and declining pressure on imported goods led current accounts deficit to shrink significantly to 6.2% of GDP in 1Q19 compared to 11.9% of GDP in 1Q18. FX inflows, including from tourism, are expected to remain strong despite the Russian flight cancellation. Barring further negative external factors, we expect the macro-economic fundamentals to support further stabilisation of the national currency in the near to medium term.

Nikoloz Gamkrelidze,
CEO of Georgia Healthcare Group PLC
13 August 2019

DISCUSSION OF GROUP RESULTS

GHG overview

Georgia Healthcare Group is the largest and the only fully integrated healthcare provider in the fast-growing, predominantly privately-owned Georgian healthcare ecosystem with an aggregate annual value of c.GEL 3.8 billion. Georgia Healthcare Group PLC is the UK incorporated holding company of the Group and is listed on the premium segment of the London Stock Exchange.

Starting from 2019 the Group has updated its business structure and the healthcare services business was divided into the following two segments: clinics, which include polyclinics and community clinics, and hospitals, which include referral hospitals. Now GHG comprises five business lines: hospitals, clinics, pharmacy and distribution, medical insurance and diagnostics. Each business line has its own chief operating officer reporting to the Group CEO, pursuing significant growth, profit and ROIC opportunities and concentrating on a clearer strategy. Each business line also has its own finance and back office function overseen by the Group CFO.

GHG is the single largest market participant in the healthcare services industry in Georgia, accounting for more than 23% of the country’s total hospital bed capacity, as of 30 June 2019. Our healthcare services business offers the most comprehensive range of inpatient and outpatient services targeting virtually all segments of the Georgian market, through its vertically integrated network of hospitals and clinics. Currently:

  • hospitals business operates 18 referral hospitals with a total of 2,967 beds, providing secondary or tertiary level healthcare services, located in Tbilisi and major regional cities.
  • clinics business operates 34 healthcare facilities, out of which:
    19 are community clinics with a total of 353 beds, providing outpatient and basic inpatient healthcare services, located in regional towns and municipalities.
    15 are district polyclinics, providing outpatient diagnostic and treatment services, located in Tbilisi and major regional cities.

GHG is the largest pharmaceuticals retailer and wholesaler in Georgia, with a c.30% market share by revenue. Our pharmacy and distribution business consists of a retail pharmacy chain and a wholesale business, selling pharmaceuticals and medical supplies to hospitals and other pharmacies. The pharmacy chain operates under two separate brand names, Pharmadepot and GPC, with a total of 279 pharmacies, of which 21 are located within our healthcare facilities. The pharmacy and distribution business is the country’s largest retailer in terms of both revenue and number of bills issued.

GHG is also the largest provider of medical insurance in Georgia, with a 31.1% market share based on 1Q19 net insurance premiums. Our medical insurance business consists of private medical insurance operations in Georgia. We have a wide distribution network and offer a variety of medical insurance products primarily to the Georgian corporate sector and also to retail clients. We have c.230,000 persons insured as at June 2019. The medical insurance business plays an important role in our business model, as it is a significant feeder for our polyclinics, pharmacies and hospitals.

GHG recently opened the largest diagnostics laboratory in Georgia and the entire Caucasus region. In December 2018, we added diagnostics business under GHG, an important new business line for the Group, by opening Mega Laboratory (“Mega Lab“). The multi-disciplinary laboratory, equipped with latest infrastructure and state-of-the-art equipment, covers 7,500 square metres. High-capacity automated systems enable GHG to provide accurate, high-quality results to the entire population of the country. In addition to basic laboratory tests, the new laboratory allows us to offer complex tests for oncology and a molecular lab. Some of the lab tests offered by Mega Lab have never been available in Georgia – in the past blood samples had to be sent abroad.

For a copy of the full press release, click on the link below:
http://www.rns-pdf.londonstockexchange.com/rns/9441I_1-2019-8-13.pdf

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SOURCE: Georgia Healthcare Group PLC

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