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Edited Transcript of CGEO.L earnings conference call or presentation 15-Aug-19 2:00pm GMT

Half Year 2019 Georgia Capital PLC Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Georgia Capital PLC earnings conference call or presentation Thursday, August 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Giorgi Alpaidze

Georgia Capital PLC - CFO

* Irakli Gilauri

Georgia Capital PLC - Chairman & CEO

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Conference Call Participants

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* Andrew Martin Howell

Citigroup Inc, Research Division - Director, Analyst and Emerging Markets Strategist

* Maria Kolbina

VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst

* Owen Callan

Investec Bank plc, Research Division - Head of Financials Research & Banking Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Georgia Capital First Half 2019 Analyst/Investor Call Conference Call. (Operator Instructions)

I must advise you that this conference is being recorded today, Thursday, 15th of August 2019. I would now like to hand the conference over to your first speaker today, Irakli Gilauri. Please go ahead.

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [2]

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Thank you. Thanks, everybody, for joining our first half earnings call. I will talk about the -- today about the demand and brief overview of macro, GCAP performance in terms of the [NAV G] announcement. I'll talk about the capital allocations and profit and cash flow generation at GCAP level. Giorgi, our CFO, will talk about the performance of our portfolio companies and the valuation of our individual portfolio companies. And in the end, I will update the outlook going forward.

On macro side, the world looks choppy, but what we are observing is, basically, the Georgia macro is performing well. And actually, the IMF upgraded this region for the GDP growth. It is only region which was upgraded recently by IMF. All the other world was basically cut in terms of the growth. So we are pleased with that. And Georgian GDP demonstrated 5% GDP growth in first half. But at the same time, what is more pleasing is that current account deficit seems to be declined, even though we don't have the first half numbers. Q1 numbers is very encouraging. It declined to 6.4%, the current account deficit in Q1 compared to 2008 (sic) [2018] Q1 of more than 11%. So the magnitude of decline is big, but the headline numbers are also very, very strong. So you have -- the exports have grown in first 6 months by 12% while imports are down 4.5% and basically, the trade deficit has declined by 14%. But if we go even farther and include the touring revenue, money transfers to this trade data, we will see that the total decline of the -- in negative foreign currency outflow was from $1.1 billion in the first 7 months to $0.6 billion. So we had a $0.5 billion of decline in outflows. And we are actually -- because that stronger inflow at CI especially we expect the stronger balance of payment for full year, and we expect the current account to decline substantially. As you know, last year, our current account was -- stood at 7.2%. The initial indicators by the National Bank is that it may go down below 5% this year due to the strong performance of exports, strong performance of the tourism revenue, even though there was a ban on the progression side on the slide, we still observe the increasing tourist numbers in July, and we observed the overall growth of the tourist in the 7 months.

So the -- in terms of the foreign currencies loss, it seems like we are in a strong position. Currently, the market -- Georgia market was little bit in panicky mode during the Russia analysis ban. And that's why the Lari was moved from 2.8 to 2.91. We feel that rare data is very strong. So we think that we will see appreciation of Lari in the second half of the year, given the fundamentals are pretty strong.

Now in terms of the budget, budget deficits kind of this year are below 3%. And what is very good that the revenues are stronger than budgeted, and we are observing that most likely, we'll end up with even lower budget deficit than it was planned and planned is 2.6 percentage basically.

So in terms of the performance of the GCAP, GCAP performance was much stronger than the macro performance so that the net asset value has increased, the per share has increased by 21.6%. It was driven mainly by 2 factors. Factor number one is the value creation what has happened in the listed portfolio as well as private portfolio. We had nearly GEL 350 million growth of the value in our portfolio. But on top of that, we had a buyback and cancellation program which is -- basically added another 7.5% growth in NAV per share. So these 2 factors were the key drivers. And let me talk about the value creation first, from where it was coming. So out of GEL 347 million, GEL 240 million was due to the publically listed companies, BoG and GHG, but private companies was around GEL 110 million, which was up 15% in the first half, and that was driven by the -- that was driven by mainly the revaluation of the good performance of the Water Utility, P&C Insurance, we also did our first time revaluation of our PTI business. Our PTI business is doing extremely well. And we also revalued our hotel project, Kempinski, where we signed the management agreement, and we have launched the renovation of the building.

Now in terms of the net debt, we saw that it was widened by GEL 108 million, and it was driven by the buyback of GEL 60 million and capital allocations of GEL 45 million investment which was made in first half. Investments were mainly made into the -- in beer where we booked the most recognized Georgian brand, which owned only 5% of the market. And now we see that we nearly doubled the market share with that brand. And it turned out to be a very good acquisition, and Giorgi will talk about the performance of the beer business later on, which is doing quite well. We also went into the car service business, we acquired the Amboli, the second largest -- a small acquisition of car service company, and as we want to cap the whole car ecosystem, for us it was an important milestone to enter this sector.

We also added for -- investments into our renewable project that we are stepping up the construction of the hydros. We also added some EUR 8 million in our hospitality business. And we also bought the land for our education business.

What's most -- internal capital allocations, what is most pleasing for me is that the next -- after the June 30, we bought 3 schools. We've been working on these acquisitions for more than a year. And we think that we got the prices -- were pricing right and we got the school price, I'm speaking of both the 3 schools in 3 different segment. In high-end segment, we bought the British-Georgian Academy, which is the top school in the country. And some of you who attended the Investor Day, you probably visited it. We bought it at 6.4x EBITDA which is 70% acquisition, 70% of the company was bought. We also bought the 80% of the Buckswood which is a mid-end school at -- also at 6.4x EBITDA. And we also entered the affordable school segment, and we bought 80% of the Green School at 5.6x EBITDA. Total capital allocation for these 3 acquisitions was GEL 41 million, and we also had a -- we were also part of the agreement we are investing for the expansion of our preschools. We'll be investing an additional GEL 73 million in the next 3 years to do the expansion. Current capacity which is the fiscal for all of them are operating on almost full capacity. And we will be increasing the current capacity of nearly 3,000 learners to 12,000 learners. That's kind of -- and we are well on our way to aim the GEL 70 million EBITDA by 2025, and that is -- that would be our -- according to our calculations, will be -- by 2025, we will be at 60% utilization rate. So more to come there.

In terms of the P&L and cash flow statement, we saw the interest income which we are aiming on the loans to mainly to our portfolio companies and unrealized gain on our liquid funds, it offset the interest expense on our Eurobond. That is a good milestone to reach. We also saw the strong cash flow generation. On the GCAP level, we generated GEL 52 million of cash at GCAP level, which is -- comfortably covers our interest expense and we were also within the -- our target of 2% of expense ratio.

What is also the one number to highlight is that consolidated cash flow from operating activities was up by 53% in the first half from our late-stage companies which was -- which is an indicator of where the value creation is going and where -- what we should expect in terms of the declared value creation going forward. And we see -- and at the same time, we have a GEL 560 million of firepower for additional acquisitions and expansions going forward. So we are in a good position to continue our investment business.

Now let me turn to Giorgi to talk about the performance of our portfolio company and also talk about the valuations.

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Giorgi Alpaidze, Georgia Capital PLC - CFO [3]

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Thank you, Irakli. Hello, everyone. Starting from the listed investments that we have. As you know, our valuations of the listed investments are at the closing share prices on London Stock Exchange as of June 30.

From GHG, we had GEL 145 million value creation that was driven by the share price increase in the first 6 months as well as by the dividends that we received from GHG of GEL 4 million. To comment on their performance, as you may have seen in their published results yesterday, their first half revenues were up by 13%, and EBITDA was also up by a strong 20%. Cash conversion was very strong at 74%, and operating cash flow was up by 25%, while their CapEx has now reduced by 53% as they benefit from the investments that they have made over the last few years.

Bank of Georgia delivered GEL 101 million value creation to the group which was a combination of the share price increase in the first 6 months as well as the GEL 25 million dividend that we received from Bank of Georgia in the first half. In terms of the performance, which was also published yesterday, we highlighted their ROE remained strong at 23.7% in the first half, and they also had a 19% constant currency growth in their loan portfolio for the last 12 months.

Now going into the late-stage businesses, which we value based on the different valuation methods, and I'll touch each of them separately.

Starting from the Water Utility. We had 6.7% growth in the revenues at the Water Utility company where we want to highlight about 75% growth in the energy revenues. This year, the energy revenue in the first 6 months were GEL 8.2 million while last year for the full year, energy revenues at Water Company where GEL 9 million. With that, we believe the water company is on track to deliver their forecasted GEL 20 million-plus revenues in the energy space this year, and that's on the back of the higher generation as well as the benefits from the deregulation of the electricity market in Georgia which has resulted in higher selling prices for the Water Utility business. In addition, Water Utility has a positive operating leverage which drove EBITDA up by 8.4% with the operating efficiencies coupled with the very high collection rates, which resulted in 85% growth in the operating cash flows. Development CapEx was down by 64%. As the business has -- had elevated CapEx last year due to the privatization obligations, now these obligations have been fulfilled. And in May 2019, we have received a clean title on Water Utility assets, which means the Water Utility business has been discharged of these liabilities. The last 12-month EBITDA is up by GEL 3 million. When we looked at the valuations, we use the same peer group that we used in the past. We noted that the multiple has enhanced from 8.82 to 9x, and as a result of the growth of the EBITDA and increase in the multiple, we had GEL 29 million value creation in our Water Utility business, during the first 6 months.

Jumping to the Housing Development business. We -- the Housing business has received the permit to build its -- their largest ever project of Digomi, which will -- which started in July 1 -- on July 1, 2019. As a result, the revenue recognition from the Digomi project started in July. So we will see that in the second half of 2019, the revenue recognition will pick up. As of today, the business has presold about 6,400 square meters, which is roughly worth $6.5 million of Digomi project sales in about 29% of the total available space that they plan to sell within the first phase of the project.

Given that there has been a permit issued, we also looked at the deferred cash flows as we value this business based on the DCF, discounted cash flow method, and we noted GEL 12 million value creation in this business. To close on the Housing Development, we had GEL 18 million capital reallocation into the hospitality business, which represents the finished commercial properties within the Housing Development business's existing residential projects that are now ready to be rented out, and this will be going forward, including under the Hospitality & Commercial Real Estate business.

Property & casualty insurance, while the last 12-month net profit was flat at GEL 7.7 million, we noted as part of the valuation that the peer group's multiple has increased from GEL 7.4 million to GEL 9.1 million, which resulted in an increased valuation for the group. At the same time, P&C Insurance paid GEL 8 million dividend in the first half on the back of the strong cash flow generation and the stable operating performance. As such, in aggregate, we had GEL 39 million value creation from the P&C Insurance.

Coming into the early stage businesses, as you know, we launched the first hydropower plant in the first half of 2019, Mestiachala hydropower plant, which generated 28 million kilowatts in the first half of 2019 and recorded about GEL 12 million EBITDA. This hydro was damaged due to the flooding in July 2019, and it's currently off-line. However, we're currently in progress and estimating together with the insurance company, where we expect the expenses to be -- losses to be substantially reimbursed.

The Renewable Energy business continued to be valued at cost, but we expect to be valued when the hydro comes back online over the next few months.

Hospitality & Commercial Real Estate business, as Irakli mentioned earlier, we revalued the Kempinski hotel. During the first 6 months, we had the minority shareholder in this business that we bought out. We also signed an agreement with the Kempinski that we'll be managing this hotel going forward. At the same time, we have made very good progress to reach our 1,000 operating hotel room target. We continued the construction of the Kutaisi hotel. We acquired the land in Zugdidi to develop a mid-scale internationally branded hotel with about 130 rooms. We also acquired the land in Shovi in Russia to develop about 92-room hotels under our Amber group brand. As you know, we renamed our hospitality group under the Amber group during the first half.

We also expanded the commercial real estate portfolio, primarily as a result of the reallocation of GEL 18 million finished commercial properties from the housing business. In terms of the performance of these commercial properties, we had occupancy rate of close to 90% and the gross yield of 8.6%. Now going -- we value this business based on NAV. So the value creation in this business was GEL 7 million, primarily driven by the Kempinski hotel in the first half of 2019.

Going into the Beverages, I'll talk separately both wine and beer. Wine had an outstanding first half as a result of the strong growth. Its revenues were up by 75% in the first half. This outstanding top line growth, coupled with the positive operating leverage, resulted in the 87% growth in our wine EBITDA. We continue to value Kindzmarauli, which is the large winery that we acquired last year at cost based on our valuation methodology, but expect to revalue that in the second half of '19, which will drive the value creation. In the first 6 months, the multiple enhanced from 9.1 to 9.9, and that resulted about GEL 2.6 million value creation together with the EBITDA performance in wine business.

Going into the beer business where we have successfully launched 4 new brands in the first half of '19, including all Heineken brands that -- all 3 Heineken brands. As a result, the strong year sales in June and July led to 100% utilization of our brewing capacity at the factory. In July, in fact, the business had a positive GEL 600,000 EBITDA which we think is a starting point for the turnaround path, and we expect to see the positive impact from beer business operating performance in the second half of 2019.

Our beer business valuation, which you may recall was reduced to 0 in the first quarter, now stands at GEL 10 million on the back of the capital allocation that was used to acquire the Kazbegi brand during April of 2019.

Lastly, I will talk about our periodic inspection business, which is part of the auto services business. As you know, we fully launched this business in March 2019. We have allocated GEL 5 million to this business. The rest was the leverage used for the investment. We -- this business serviced more than 140,000 cars in the first half, following the launch in March and generated GEL 500,000 EBITDA in June and GEL 600,000 EBITDA in July. So they're doing extremely well. They have reached 35% market share already, and they continue to capture more market share as the year progresses.

In terms of the valuation, we value this business using the peer group that we identified for the group, and we use EV/EBITDA multiple of 10.1, which resulted in value creation of about GEL 16 million, and in aggregate, this business is now valued at GEL 20 million, which translates into an unrealized MOIC of 4x.

The entire auto services business also includes Amboli, that we acquired earlier in the year, and in aggregate, we have a GEL 24 million valuation for the auto services business.

With that, I would go back to Irakli?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [4]

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Thanks, Giorgi. So basically to wrap up, we had a very strong quarter with GEL 345 million of value creation. We also -- that translates into our net profit of GEL 305 million what we had for the first half. We have a very strong pipeline in terms of the expected value to come from different businesses, including the renewables, including the Water Utility is expected to have a much stronger second half than the first with -- they're stepping up the energy production as well as the prices of energy are going up. We will have also the stronger value creation coming from the -- more value creation coming from PTI business. We will -- we have hit the real bottom for the beer business, and we are rebounding there. As Giorgi mentioned, we already see the positive EBITDA in July, and we see the second half of 2009 (sic) [2019] to be a positive territory in terms of the EBITDA with the beer business that you also more actively see and we are turning the corner there. The wine business is also extremely stronger with the 75%-plus revenue growth. And we are seeing also the revaluations to come from the hotels, which we have with these -- now in parallel to the 4 different hotels in different regions.

So the car services business, we will be expanding as we see strong demand there.

So to summarize, the NAV per share is up 21%, consolidated operating cash flow in the first half is up more than 50%. We have a very strong value creation pipeline coming in, and most importantly, we have a very strong pipeline in terms of expanding -- in terms of deploying the capital into the education business.

So with this one, I would ask for the Q&A session for operator to start. Operator, can you please start the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of [Nicolai Collin]

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Unidentified Analyst, [2]

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I have 2 questions. The first one is on your growth strategy. We basically saw since March, new acquisitions every single month and I would like to ask like how's your active pipeline for M&A at the moment? And the growth next will be also driven by newly acquired companies or your organic expansion? And the second, just to clarify on your individual stand-alone assets, which recorded rapid advance in hospitality NAV. As I understand doing book analysis here, so can you comment why hospitality business made such progress through the half of the year?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [3]

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Thanks for questions. I mean, we've probably saw -- we are quite not very active in terms of the M&A in 2018, and we've been working on a number of deals. And now as I mentioned in -- on the different slide, our pipeline for M&A is very strong, and also, we have -- we may have some acquisitions in different areas. We are at the same time mindful where the Georgia Capital share price is trading and our main idea is to acquire -- for us the GCAP share price is a guidance at what discount, we should be buying the companies. And we're watching carefully where Georgia Capital share price is trading and that's despite of our guidance where we are talking about whether we buy back more, kick up shares or redeploy and we need -- it is in a way we see a balancing act, and it's more like a art than the science, I guess.

In terms of the growth of the hospitality NAV, this is mainly driven from capital reallocation from the residential business which is basically is not on hospitality but Hospitality & Commercial Real Estate. So basically, some of the commercial real estate what was created in the residential business line is also reallocated to the Hospitality & Commercial Real Estate Business line. So you should see that growth because of that reallocation.

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Operator [4]

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Your next question comes from the line of Maria Kolbi from VTB Capital.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [5]

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The question from me what is the current cost of debt in Lari in Georgia for you? And what is the cost of debt in dollar sense as well? And my second question is, can you remind me of what share of Georgia Healthcare Group that is denominated in dollar terms?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [6]

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Thanks. I mean, for this update, currently bonds are trading around 7% level, that's dollar bonds. I guess, Lari is around 10%, as I would say. The GHG debt -- Giorgi, maybe you remind me what is the percentage denominated in dollar. Most of them are here in Lari, I guess.

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Giorgi Alpaidze, Georgia Capital PLC - CFO [7]

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Yes. Majority is in Lari.

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [8]

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There is some portion which is in dollars.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [9]

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Okay. And the debt that we see at the company level, not attributed to m2 but the dollar debt, what is the nature of it? Which asset is it attributable?

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Giorgi Alpaidze, Georgia Capital PLC - CFO [10]

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What company level are you referring to, Maria?

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [11]

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The $300 million of Eurobonds for which asset of Georgia Capital is it attributable to?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [12]

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This is at our holdco level. So basically, these are holding companies -- what you're talking are holding companies is, it should be $300 million debt. So debt is on the holdco level. And we are (inaudible) that money to our portfolio companies.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [13]

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Okay. Got you. So 10% in Lari, as you said and 7% in dollars, did I get it right?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [14]

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Yes, that's kind of right. Yes, 6% to 7% in dollars, I guess and 10% Lari.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [15]

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And what was the change over the last months of the corporate financing?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [16]

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Not much.

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Operator [17]

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Your next question comes from the line of Andrew Howell from Citi.

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Andrew Martin Howell, Citigroup Inc, Research Division - Director, Analyst and Emerging Markets Strategist [18]

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Congrats on the great half year results. So firstly -- and apologies if you may have already said this, but in terms of the share buyback program, could you just clarify what the state of play is on that? How much is left in it? And kind of just what is your thinking on buybacks for the rest of the year and into next year? And then second question, obviously, GHG stakes, GHG share price is off its lows. It's still well below where it was for most of last year. I don't know if you have any updated thoughts on what you plan on doing with that stake.

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [19]

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On buyback basically, our $45 million buyback program is ending, and we have announced the $20 million buyback program for the management's trust. So we will be -- the buyback continues in different form, but same month, I guess. In terms of the GHG stakes, we like GHG.

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Andrew Martin Howell, Citigroup Inc, Research Division - Director, Analyst and Emerging Markets Strategist [20]

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I'm sorry?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [21]

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We like GHG. Those are total (inaudible) we like GHG. We have the 57% and we have very happy shareholders and will continue to be happy shareholders as long as the management delivers the -- with the results they're delivering and GHG had outstanding results in the first half. The EBITDA in Q2 was up 20% and cash flow generation as well as the cash flow was even stronger. So we like -- and they also pay dividend.

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Andrew Martin Howell, Citigroup Inc, Research Division - Director, Analyst and Emerging Markets Strategist [22]

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Understood. So obviously, that's a different strategy from what it was at the time of your own spin-off in the sense that you would -- you were sellers of GHG in order to redeploy some of that capital into other businesses, but that's no longer the case.

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [23]

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We are sitting on a big (inaudible) at Georgia Capital of more than GEL 0.5 billion, and we are happy shareholders with GHG. So whatever (inaudible) and half of those (inaudible).

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Operator [24]

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Your next question comes from the line of Owen Callan from Investec.

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Owen Callan, Investec Bank plc, Research Division - Head of Financials Research & Banking Analyst [25]

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Just 2 quick questions, if I may. Around the time of the Investor Day, obviously, there was the Russia dispute which was just hitting the news at that time, and I think the initial very rough estimates of what impact that might have on the tourism industry in particular was being guesstimated. I think there was a suggestion from the National Bank of Georgia and even from yourself and some other commentaries in Georgia that it might have an impact of the order of maybe 0.5% to 1% of GDP on an annualized basis. I was wondering, if there any feeling whether that outlook is -- feels wise or whether maybe it's slightly less in impact, given that there's been no escalation and certainly, the rhetoric seems to have calmed down a bit in the interims. So how you feel the impact of the economy will be in the second half of this year and into 2020? And then just on the P&C Insurance division. There's obviously a little bit tick up in the combined operating ratio to just over 80% from kind of 75% or high 70s in previous years. Is that a bit of a one-off blip or is that kind of normalization, maybe as the sector becomes a bit more competitive than the last year a bit more whether costs or slightly higher claims ratios going forward in 80% may be the new 75%, so to speak?

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [26]

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Basically, the -- on the GDP side, I think that, as you mentioned, the rhetoric has changed quite significantly, and we don't feel it will be big impact. We saw July through its numbers which were still up just sort of (inaudible) was up by small, by 1%, but still it was up and so we were -- so we don't think that it will be a big impact on GDP. And we are estimating 0.5% to 1%, and probably, this is more towards 0.5 percentage impact on the GDP rather than 1% in second half '18. It seems like that.

In terms of the P&C Insurance, I think a slight pickup what we are talking about. So it's nothing change. We may see repricing from the Bank of Georgia which is through our distribution, and we may see a pickup in the increase in combined ratio there.

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Operator [27]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Irakli Gilauri, Georgia Capital PLC - Chairman & CEO [28]

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Thank you, everybody, for attending the call. As I mentioned, we have a pretty strong pipeline, both in terms of the value to be created going forward and the investments in the education business, and we are looking forward to be in touch with you going forward, in second half of the year. Thank you, once again.

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Operator [29]

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This does conclude our conference for today. Thank you for participating. You may all disconnect. Speaker, please stand by.