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Edited Transcript of GHG.L earnings conference call or presentation 13-Nov-19 2:00pm GMT

Full Year 2019 Georgia Healthcare Group PLC Earnings Call

Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Georgia Healthcare Group PLC earnings conference call or presentation Wednesday, November 13, 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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* Nikolay Kovalev

VTB Capital, Research Division - 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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Ladies and gentlemen, thank you for standing by, and welcome to today's quarter 3 2019 results conference call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 13th of November 2019.

And I would now like to hand the conference over to your first speaker today, Mr. Nikoloz Gamkrelidze. Please go ahead, sir.

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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 be updating you on the progress we have made in the third quarter as we are starting to capture the benefits of our last year's investments, then I'll talk about recent changes in the Universal Health Care Programme before I open the line for some questions.

So the group has continued to build in on our recent significant investment program and has seen each businesses achieve many of the key milestones. I was particularly pleased to see the double-digit year-to-date revenue growth in each of the business units and 13% overall group level growth, which supports 17% EBITDA growth to 11 -- GEL 111.5 million, this translated in a pretty robust EPS growth of 23% in the first 9 months and 53% in -- for the third quarter. We continue to generate strong operating cash flow, and we improved our return on invested capital by 50 basis points to 14.3%.

I believe this result show pretty strong progress in all of our areas, having completed our period of significant investments. In addition, we see double-digit revenue growth opportunities over the medium term without requirement of significant CapEx, and CapEx has almost halved year-over-year. We will continue to build out growth opportunities in developing medical tourism, lab diagnostic retail services, adding new pharmacies and new products in the private label line, and we expect to continue to grow strongly, improve further our operating cash flow, reduce balance sheet leverage and continue to increase our ROIC.

Now if we go segment by segment. I'll start with hospitals. Overall, revenue for the Hospital business increased by 11% to GEL 218 million, EBITDA increased by 8% to GEL 55 million and the EBITDA margin, excluding the impact of the ramp-up of 2 new hospitals, increased to 28%. The impact of the rollout of these 2 showcase hospitals is now much less significant as the overall EBITDA margin is over 25%, and both of these hospitals are posting double-digit margin, one of them is under 20% and another even exceeded 20% margin already. So -- and this happened despite the new pension reform that has reduced our margin by 100 bps from the beginning of 2019.

We have continued to make progress in our 2 new showcase facilities despite Q3 being the quietest period for the hospitals. Both of new hospitals are now delivering strong revenue growth and, again, posting double-digit margin. In Tbilisi Referral Hospital, we achieved 46% occupancy in first 9 months, and in Regional Hospital, which we now are calling Caucasus Medical Center, we achieved a bed occupancy of 36%. CMC revenues are almost 50% up quarter-by-quarter, mainly due to the elective services.

We also make -- we're also making significant progress with our medical tourism efforts, although base is low, but still we have 37% growth in revenues year-over-year.

One more issue to highlight with regard to the Hospital business, and which we have fully disclosed in our Q3 results, is last week, the Georgian government introduced some changes in the Universal Healthcare, which will become effective by the end of November. In short, as a result of the recent oversupply of beds in large cities, mainly for Tbilisi and Kutaisi, the government has equated certain tariffs on intensive care and cardiac services in Tbilisi and Kutaisi. And these tariffs are kind of -- became the same as in the rest of the country. So our initial estimate is that this revised tariffs may lead to a reduction of hospital revenues by approximately GEL 12 million and gross profit of GEL 7 million in 2020, but it won't have much of the impact in 2019. We will, of course, work to mitigate this impact, and one of the potential impact is that the change may drive more rapid consolidation in the market in the big cities, which have seen the startup of a number of small hospitals in recent years.

Now moving to the Clinics business. In clinics network, we delivered 15% revenue growth, while the polyclinics themselves have been growing over to -- around 25% and community hospitals around 10% in the first 9 months, and we have increased the number of registered customers in Tbilisi to 183,000. This has been supported by opening of 8-plus dental clinics in different of our polyclinics. I mean as a bottom line, the results are also significant. Our EBITDA in our Clinics business has grown more than 45% year-over-year. We expect to continue to pursue our polyclinics rollout strategy with more dental offices to enable us further consolidate our position in, what remains, a highly fragmented market.

In pharma and distribution business with approximately 32% market share, we are the clear leaders on the market and largest purchasers of the products -- pharmaceutical products in the region. Revenues in first 9 months continued to be very strong, up 17%, reflecting a combination of strong wholesale distribution, together with further expansion of our pharmacy chains, which now totals 285 pharmacies. We added around 18 pharmacies in the last 12 months and which we increase to -- continue to grow over 300 pharmacies in the next couple of years.

Excluding the impact of the revenue from our centralized medicine procurement entity that was transferred to GHG pharmacy business in 2019, the pharmacy and distribution business has also posted strong headline growth of 12%. So 12% was an organic growth of our pharma business. We have significantly improved our margin, which is now 10.4% and increased around 60 basis points over the last year.

I also want to highlight the progress we are making with our private label in the para-pharmacy products, which we expect to deliver improved gross margin. Going forward, our first private label is already on shelves, and we, in last 3 months -- it's not very significant, but we already managed to sell around GEL 0.5 million of these products with 70% plus gross profit margin. So -- and we are continuing to add some other products under our brand name Attirance.

So overall, the pharmacy and distribution business continues to excel and has grown EBITDA by 20% plus to GEL 46 million.

One other developed information, which is in the part of our strategy that we got a franchise agreement with The Body Shop, which is -- which we signed last month, and we hope we'll obtain the right to operate the brand for another 10 years in Georgia, and we will be opening several encore shops, and most importantly, we will be doing 50-plus shop in shops within our pharmacies. So we are opening 2 encore shops already in December and 10-plus shop in shops by Christmas of 2019. And this will enable us to significantly upgrade the range of personal care products and also upgrade our pharmacies more into the beauty concept and beauty segment, which we announced as a part of our expansion strategy on our last Investor Day in June.

Now turning to the medical insurance business, which continues to deliver very strong performance. The team has delivered on all of their key objectives, and Q3, as you know, is the strongest one for our health insurance business. We are the largest medical insurers in the country with 230,000 insured clients. We just -- the group retention rate is also improving, it's 42%. And profitability was also very strong, it's up by 55%, and we also managed to improve the combined ratio of the business.

And now moving to our fifth segment, which is diagnostic business. As you know, in December last year, we completed and launched our Mega Lab, the largest lab -- diagnostics lab in whole regions. Good thing is that the diagnostic business has already reached the breakeven EBITDA, with only captive business centralized there. And we've done over 0.5 million tests in the first 9 months, and most importantly, also won another project, which we announced as our CapEx-light expansion project is the opening of branches of blood collection centers within our pharmacies, which we call health hubs. We already have 7 hubs within our prior pharmacies, and we plan to increase this further to 50 plus over the next few years. We will be opening another 5 or so within 2019. And we're already seeing pretty significant interest from the retailers and we already served couple of thousands of retail clients within our health hubs, which is very promising.

As you all know from our recent Investor Day, we have also -- now we have a number of pretty important quality and IT development projects in the course of delivery. So we have made strong progress in the implementation of our digital health care systems, launching comprehensive EMR system in all of our polyclinics and already in community hospitals. So our polyclinics and community hospitals are 100% paperless right now, and we have successfully implemented our medical ordering system within our referral hospitals, covering 60% of EMR functionality. And in next couple of months, we will be rolling out a full-fledged EMR in all of our referral hospitals.

Our innovative new digital consumer health care platform EKIMO, which we presented on the last Investor Day, is complete. The Version 2 is complete, and we will be launching it by the end of this year. So we are -- therefore, we are very well advanced in our plan to provide fully consolidated customer journeys throughout the full health care ecosystem.

So now macroeconomically, Georgia has continued its pretty strong growth despite the Russian flight ban, which we got in July. The GDP continues to grow pretty strongly at 5%, but Q3 was 5% plus. Overall 9 months, we are growing 9.5% in real tariffs. So -- and the expectations are -- remain strong. Tax receipts are pretty strong, and current account deficit over the country is all-time low and it's almost half, it's less than 5% in first 9 months. So all of this, we expect, should stabilize the local currency in next few years.

So to finalize, we are now starting to see the benefits of the recent investments throughout the business to materialize, and I'm pretty pleased with the progress we have made during the third quarter and overall in 2019. The business has reached the clear inflection point with regard to our major capital investment requirements, and now -- we are now benefiting from these investments. This is already evident in the growth of net profit and EPS being considerably higher than the double-digit growth in the EBITDA. So the group continues to deliver good revenue momentum, strong cash generation and balance sheet deleveraging and improving ROIC. We have significant new growth opportunities in areas such as medical tourism, outpatient services, dental, lab diagnostics, et cetera. Again, low CapEx -- less CapEx-intensive exercises, and our clear focus will be to benefit from these opportunities while delivering the strong organic growth.

Perhaps, now I can open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nikolay Patel (sic) [Nikolay Kovalev].

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [2]

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Yes, Nick. It's Nikolay from VTB. Basically, I have a couple of questions. The first one is on the change in premiums that you commented before. So would it be fair to assume that the guided loss of gross profit of GEL 7 million will be fully translated to the EBITDA level for next year or somehow you plan to mitigate it? And my second question is on the CapEx. I see that your maintenance CapEx doubled in the last couple of quarters to GEL 7 million. And my question is, like, why it went up so much? And also, what is your CapEx guidance for next year?

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

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Sure. Thanks, Nikolay. So in terms of the UHC, you are right. So that the decree came out on exactly a week ago. So basically, we will be -- we've been calculating the impact. So -- and that's what we kind of calculated. The gross profit impact will be -- may be almost fully translated into the EBITDA. Although again, we are working on some mitigations and we -- it may decrease. That's the first kind of -- that's what we see on the first glance.

As for the CapEx, I didn't quite get your question. Our maintenance CapEx is GEL 9 million for the first 9 months, which is pretty in line with our guidance, and the development CapEx was GEL 20 million. So basically, we are still within the guidance of GEL 30 million to GEL 35 million for this year, and around the same -- around the range of GEL 30 million for the next several years per annum, which will include both maintenance as well as some small developments.

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Operator [4]

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Our next question comes from the line of Sally Taylor.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [5]

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Nick, I just wanted to ask if you had any thoughts on UHC or the government spends going into sort of 2020 and what that trend might look like. And whether we're thinking around sort of flat budgets for 2020 in light of the proposals around critical care and cardiology? Have you got any thoughts on that? Or when we might hear any indication on that, please?

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

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The budget is still -- thank you, Sally. The budget is still not approved. By these changes, what they have done in the big cities, there will be probably overall, including within the system, we will be saving around GEL 40 million per year throughout the whole system. So -- and what the indication is that they may leave the budget for 2020 the same as it was in 2019. So that incremental increase will be the GEL 40 million, just to say so.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [7]

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Yes. Understood. And I think -- I guess, in terms of what your sense is now, so we did see a cut in intensive care tariff a couple of years ago. And what's your sense as to how quickly some capacity will come out of the market? And another question around -- I think you talked previously around sort of ROIC on certain of your hospitals and thinking about portfolio managing some of those in the lower range. Just a few thoughts on both the market and your own sort of portfolio, please.

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

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So this equalizing the tariffs in big cities, especially Tbilisi and Kutaisi, which have been oversupplied with beds, I think it will kind of move out some small players from the market. Especially on the back of this equalization, the government started to talk very openly on the selective contracting of the decent providers, who have more than 150 beds in the city. So if -- that's only talks yet. If this will happen, that will kind of reshuffle the market pretty significantly, which will be in our favor. But that's only talks.

About the some poorly kind of -- poor ROIC generating assets, we are still working on them. I think we are pretty close to make some changes there, and we will be updating you as soon as we will have some progress, which is announceable.

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Operator [9]

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(Operator Instructions) Okay. Sir, there are no further questions at this time, please continue.

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

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Thank you. If there are no more questions, then looking forward to see you on the road in the next couple of months. Thank you.

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Operator [11]

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That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.