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Edited Transcript of GHG.L earnings conference call or presentation 14-Aug-19 2:00pm GMT

Half Year 2019 Georgia Healthcare Group PLC Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Georgia Healthcare Group PLC earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nikoloz Gamkrelidze

Georgia Healthcare Group PLC - CEO & Executive Director

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Conference Call Participants

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* Andrew Mark Whitney

Investec Bank plc, Research Division - Analyst

* Maria Kolbina

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

* Sally Anne Taylor

Numis Securities Limited, Research Division - Director & Healthcare Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's 2Q and first half 2019 results call. (Operator Instructions) I also must advise you this conference is being recorded today, 14th of August 2019.

I'll now hand you over to your speaker, Nikoloz Gamkrelidze.

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [2]

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Thank you. Good afternoon, everybody, and thanks for dialing in. I'll try to update you on the progress we have made in the first half as we are starting to capture the benefits of our last year's investment, and then I will open the line for questions.

So the group has continued to build on our recent significant investment program and seeing -- have seen each businesses achieve many of the key milestones. From the earnings perspective, the grouping has a significant FX loss of GEL 4.2 million, mainly due to the revaluation of the foreign currency denominated payables balances in pharmacy and distribution business, following more than 6% devaluation of the lari in the second quarter. I'll talk a little bit more about this later.

And now looking at our business results for the half year, double-digit revenue growth in each of the business lines and 13% at the overall group level, which together with the strong cost management led to positive operating leverage and around 20% growth in EBITDA to GEL 75 million. Earnings per share adjusted for the FX growth increased by 33%. We generated strong operating cash flow increasing by 25%, reaching EBITDA to cash conversion of 74%, while the cash used in investing activities has more than halved for the same period as it was anticipated. Also, our ROIC has improved significantly to 14.4%.

From the balance sheet perspective, our borrowings balance has decreased by 6% from the December 2018 level, which is also anticipated to further decline as we continue to pay down our debt in line with our repayment schedules.

I believe this result shows strong progress in all of our growth areas having completed our period of significant investment. In addition to this, we see double-digit revenue growth opportunities going forward without requirement of the significant CapEx. We continue to build out growth opportunities in developing medical tourism, our retail lab, diagnostic services, adding new pharmacies and new products, such as private label products, and we expect to continue to grow strongly, improve our operating cash flow, reduce balance sheet leverage and increase our return on invested capital.

Now if we go to segment by segment, starting with hospitals. Overall revenues from the hospitals have increased 13% to GEL 150 million. EBITDA increased by 10% to GEL 38 million; and EBITDA margin, excluding the impact of the ramp-up of the 2 new hospitals, was around 28%. The impact of the rollout of the 2 new hospitals is now -- is much less and less significant and less and less significant as anticipated, and overall EBITDA margin was 25.5%.

We continue to make significant progress in 2 of our new showcase facilities. In Tbilisi Referral Hospital, we achieved almost 50% occupancy rate in first half. In Regional Hospital, the occupancy rate was almost 40%. We are benefiting here from the early recruitment of the number of specialists in elective medical teams. And as a result, 60% of the Regional Hospital's revenues are coming from elective services, and more than 40% is out of pocket. Both of these new hospitals are posting EBITDA margins for more than 17% already.

So in clinics, we delivered 13% revenue growth during the first half also in polyclinics blended with clinics and community clinics, polyclinics and community clinics. While in polyclinics, we had a growth of 20%. And we have increased the number of customers from 115,000 to more than 170,000 over last 12 months, adding around 15,000 new customers in the last quarter, and that has been supported by opening of 8 dental clinics in our different polyclinics since December last year.

Another very important milestone for the group is the launch of the full-fledge EMR, electronic medical records, in all of our Tbilisi polyclinics that will help us -- that is already helping us to manage our customers more efficiently and deliver a better care to them. We have increased the throughput by more than 35%, and electronic medical ordering system in most of our referral hospitals was another key milestone, which we implemented in the second Q. GHG is the first healthcare company in the country that is implementing fully integrated health information system across the board.

And the pharmacy and distribution business was approximately 30% market share -- more than 30% market share. We are the undisputed leaders in the market. Revenues in the first half continued to be very strong, 16% up last year, reflecting a combination of the strong wholesale distribution as well as the expansion of our retail chain with now total of 279 pharmacies and which we intend to increase to 300 over next couple of years.

I also want to mention that the part of the growth relates to the transfer of our hospitals' centralized medicines procurement entity to our pharmacy and distribution business. Wholesale segment in 2019 excluding this, the total pharmacy and distribution business revenue grew by 10%. We have significantly improved EBITDA margin, which now stands at 10.5%, which is comfortably ahead of our updated target of 9%.

I also want to highlight the progress we are making with our private label and foreign parapharmacy products, which we expect to deliver strong EBITDA growth going forward. Our first private label personal care product is already on our shelves and under the name Attirance to supplement the 37 private label medicines already sold in our pharmacies. So overall, the pharmacy and distribution business continues to excel and has grown its EBITDA by 26% to GEL 31 million in the first half.

Now turning into the medical insurance business that has delivered a very strong business performance in last 12 months. The team has delivered on all key objectives for the stabilizing its earnings with the acquisition of a new large client. We have also become the largest insurer in the country with more than 230,000 clients insured. As a result, net insurance premiums increased by 35% during the first half. The group retention rate also continues to improve, increasing to more than 40% in the first half. And as a result, business delivered net profit of GEL 1.5 million, up more than 6x in comparison with last year, and the combined ratio also improved by almost 300 bps compared to the last year.

Diagnostics business. As you know, in December last year, we completed the construction of Mega Lab, the largest diagnostic lab in the country and region. The diagnostics business has already reached breakeven EBITDA, with the cost of the lab services at the group healthcare facilities having been maintained in the same level, which is important. So this is a significant achievement, we think. At the moment, 90% of diagnostic business revenue comes from contracts mainly from our existing hospitals and clinics. We have, however, started to develop a retail network for the lab, which we presented on our Capital Markets Day in end of June.

We launched our first blood collection point in June, back in June. Now we already have 3 collection points, 3 retail branches for our lab, and we are opening 5 more, adding 5 more by September, and our plan is to increase the number of branches to more than 50 over the next few years.

As I mentioned earlier, so overall, all of the business segments have performed pretty well in the first half. As I mentioned earlier that I would discuss the overall macro and foreign exchange loss in more detail. Spillovers from the recent regional tensions crossed more than 6% devaluation of our currency during the second quarter. As a result, we had revalued the foreign currency denominated payable balances mainly with the Pharma business, and this has led to FX loss of GEL 4 million, excluding IFRS 16 impact, being reported in the second quarter.

In July, the national currency depreciated further 3% against the dollar. But on August 1, the Central Bank of Georgia, which has, by the way, accumulated record high reserves of $3.7 billion as it was buying dollars almost nonstop last 24 months, has intervened into the market to curb the depreciation expectations with $40 million, which they could not sell totally. And since August 1, the lari has strengthened around 2%.

So overall, macroeconomically, Georgia remains in a very good shape with real GDP growth in first 7 months of 4.9%. In the first half, the tax rate has continued to increase. Stronger external demand and the declining pressure on imported goods and double-digit growth in exports led to current account deficits to almost half in the first quarter of 2019. FX inflows, including the tourism, are expected to remain strong despite the Russian flight cancellation. And in July, numbers are out for the tourism, and we still have an almost flat to slight growth. And overall in numbers, what we have lost, 25,000 air travelers from Russia, which is not kind of a catastrophe. And we expect it to stabilize overall and which will lead to stabilization of the local currency.

To finalize, overall, the group has continued to deliver on its key strategic priorities and is now starting to see the benefits of the recent investments throughout all business lines to materialize, and I'm pleased with the progress we have made in the first half.

As I mentioned at our recent Investor Day in Tbilisi, the business has reached a clear inflection point with regard to our major capital investment requirements, and now we are benefiting from these recent investments. Each business continues to achieve strong operational performance, and the group overall is delivering excellent revenue momentum; strong cash generation, which is very important; balance sheet deleveraging; and improvement of return on our invested capital. We have significant new growth opportunities in the areas such as medical tourism, which is growing very nicely; outpatient services; dental services; lab diagnostics; and many other. And our clear focus now will be to benefit from these opportunities while continuing to deliver strong organic growth.

Perhaps now I could open the line for the questions. Thank you. Operator?

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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 Andrew Whitney.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [2]

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Just on the -- the pharmacy and distribution business looks to be doing really well. I think you said in your piece it was about 10% organic growth. I mean, in the release, I see you talked a little bit about the number of bills and the size of the bills. I mean is that size of bill piece, is that pricing? Or is that cross-selling other products to customers? That's my first question. If you could just help us understand what's driving the growth there.

And then my second question was just on the Tbilisi Referral Hospital. I saw there was temporary discontinuation of some services. I just wondered how big an effect that was and whether that could happen again in the future?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [3]

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Thank you. So what we see basically, why I highlighted that, basically, headline growth is 16%, but the -- it was kind of [trim one] by putting our general hospital's procurement entity within our pharmacies, and the apple-to-apple growth was 10%. But within this 10%, retail has outgrown the wholesale, which has grown. And retail growth was 11%. Now coming back to your question. So yes, our number of bills have increased by 200,000 per month. So now we are standing at 2.4 million customer interactions per month, and the check size also increased. It was not driven by pricing because the lari deval has -- as you know, basically, we have -- we are having kind of a natural hedge. So because we are having this kind of unhedged position, which is the payable towards the suppliers, which has been -- have been nominated mainly in the foreign currency. But if the local currency moves, we are passing this to the customer. So as long as the main movement in the local currency has happened in the second half of the July, so we did not -- I mean the effect of the pricing is very, very limited. It's almost immaterial there because we increased the prices somewhere in July, not in the rest in the second Q. So in Q3, potentially, you will see some impact of the pricing on the number of bills, so -- and to the -- and on the check size itself.

So as for the Tbilisi Referral Hospital, it was a temporary kind of revisiting of some of the services, which we are kind of -- which in the newly opened hospital, we have not done. And it was a couple of months just discontinuation, and the services are fully up and running right now, and we don't expect any -- and the change, it was not really material basically. The services, again, are fully up and running now.

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Operator [4]

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Your next question is coming from the line of Maria Kolbina.

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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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A few questions from my side. First of all, where do you see the bed occupancy rate for your referral hospitals and community hospitals in particular for like [pharmacos] Daka -- Deka and Sunstone by the end of the year. So that's the first question.

My second question is, as you were talking -- as you mentioned like currency and depreciation, so can you quantify which share of costs are backed to dollar?

And my third question is what plans do you see in the third quarter, particularly in July? Has the political noise somehow impacted your business and in which way?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [6]

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So I did not get your first question. So it was -- I didn't get your first question.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail and Real Estate & Equities Analyst [7]

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The first question was on occupancy rate that looks back to your 2 facilities. (inaudible)

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [8]

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So in the new hospital -- I mean in the newly opened hospitals we are expecting them to mature next kind of 6 to 9 months' time as it was anticipated. In terms of the Sunstone Hospital, Tbilisi Referral Hospital, we are more or less -- more looking there at the occupancy levels, and we expect them to go somewhere towards 60s. For the Deka, for the Tbilisi, it was a regional hospital. So again, we are looking, as long as there is a different mix of the revenues, we are looking at more on the revenue side, basically and not -- less on the occupancy side and -- because the revenues have already bypassed significantly the Sunstone revenues.

So -- and overall, I mean, in terms of the maturity, we are expecting them to deliver, I mean, 25% plus EBITDA margins. That's what we are looking at: one with the occupancy, another one with the number of surgeries and number of elective treatments.

Now going to the second question, which was on the currency...

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Unidentified Company Representative, [9]

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(inaudible)

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [10]

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Ah, which was on the company, I mean. So in terms of the payables, the biggest position we have, again, is the inventory and payables to our suppliers in the pharma and distribution business, which if you look to the total, so 70% is denominated in euro and dollar, so out of the payables. That's a major position. Rest of the costs, what we have is largely denominated in the local currency. From the political standpoint, basically, we had some noise here back in June, which kind of settled down. So there is no kind of a noise right now from the macro -- it has not impacted, I mean, as much in our business other than this FX movement, and we don't anticipate this to impact our business anyhow going forward. And we again -- so from the political standpoint, it's not -- there's no much tension. So from the macro standpoint, it was a little bit painful, but again, so what we see fundamentally, local currency is heavily oversold now because of the panic. And we expect going forward this currency to stabilize because the impact of the ban was not as significant as the currency moves.

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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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Okay. Just a small remark. Do I get it right that you said that the price increase in your hospital business happened at the end of June? So it's increasing like compared to your...

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [12]

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By increasing our hospital business? No, no, no. Price increase in the hospital business did not happen because, again, hospital costs are lari denominated. So price increase has happened in the beginning of July in pharma and the same in retail pharma, mainly retail and wholesale pharma, which we passed to the customers.

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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. And what were like average checks increase in the hospital business, if any? And what was the key driver for that? Was it just inflation, it was opening of the regional hospitals at the end of the first quarter? So (inaudible)...

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [14]

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Opening of the regional hospital increased average ticket size in general. I don't have that number here right now. But it has some impact because in Tbilisi, when you are opening the new hospital, it's already because the pricing is a little bit higher than the historic pricing, 10%, 15% higher. So I don't have this impact right now, what was it on our overall hospital business, but there was a slight impact as well.

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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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I see. So that it should drive. But on a like-for-like basis, what was like an average check increase? Or it was insignificant?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [16]

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It was a not significant. It was (inaudible).

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Operator [17]

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Your next question comes from the line of Sally Taylor.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [18]

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It's Sally Taylor from Numis Securities. At your Capital Markets Day, you highlighted you had a near-term focus on those 2 underperforming hospitals that you highlighted. Are you able to update us on the turnaround progress there, please?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [19]

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So basically, there are no -- I mean it's only 1 month -- 1.5 months past. We don't have much of the news out of there, but we are strongly working towards that. So there is no material news to update you. We are calling that the team is sitting and working on them and once we have a progress -- there's a slight increase overall in the EBITDA margin of these 2 underperforming hospitals. So -- but it's not enough for us. So we're continuing to work.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [20]

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And then I appreciate it's fairly early in the year still, but do you have expectations around the potential increase in the Universal Health Care budget for 2020, please?

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [21]

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Not yet. What we anticipate is basically the nominal growth again what was the last year, but it's early to judge. In September, we will have a better view on that as long as the government will be passing the first draft of the budget of 2020 to the parliament. So -- and once we have it, we will update you.

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Operator [22]

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We have no further questions. (Operator Instructions)

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Nikoloz Gamkrelidze, Georgia Healthcare Group PLC - CEO & Executive Director [23]

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If there are no further question, then thanks for dialing in and looking forward to see you in coming months in -- on the road shows. Thank you. Operator?

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Operator [24]

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Thank you, ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may all disconnect. Speaker, please standby.